As an Entrepreneur, I am quite attached to my business. I will always see the positive side of it. I know this business will succeed and how it will help me achieve all the things that I wish to do.
But will it pass the test of fire? After all, the idea should be first sold to the investors. Even if you are bringing up your business, at some point in time, you would need Private Equity to come in so that you can use the funds to grow.
So what does an Investor, a VC or a Seed Investor look into when they are planning to put in their investment? I read this letter between 2 VC’s (Paul Graham and Fred Wilson) discuss about investing in a new startup. Link for this conversation is available at the end of this article.
Following were some key points that I found from the article.
Team is Everything
Early on in the conversation, the push was to meet with the Team and then decide on the opportunity. This is it. More than anything else, it is what the team that matters. There might be a great idea but with a lousy team, its not going to make it.
So what do the Investors look into the Team? My guess is anybody’s guess but from what I have learned, Investors look for a team that is not afraid go out and do things that dont scale. More on this in my blog post here.
How Big IS the Opportunity?
And how BIG will be the opportunity going forward? Startups or Businesses might initially target a small market and make themselves look to serve a niche.
Investors while looking for investment are looking at the potential in a Business? They try to figure out the kind of Opportunity the business in questions might serve 5 – 10 – 15 years down the line.
If a business is into selling books online, can it sell it in the same state? If the business can do it in same state, can it do across the country? If the business can do across country, can it do electronics? If it can do electronics, can it do apparels? If it can do all this, it becomes Amazon!
Capital Efficiency
Who would like their investment to go into funding someone’s mistakes? Not me. Investors are no different. All said and done, Investors also want their funds to genuinely serve the purpose it was designed to put in the first place.
And this is where Capital Efficiency comes into picture. Capital Efficiency demands judicious use of funds with an eye on growth which is what is expected from a startup.
Initial Opportunity is not Everything
I have seen Entrepreneurs get too much attached to an idea. It comes to a point where it is difficult for them to act on any feedback. However, the two VC’s clearly mention how successful startups often claim that they started with another idea and have metamorphosed into a different one.
I am sure when Paytm started their journey, they would have just wanted to be a payment gateway. But as they went ahead, it made sense for them to add shopping carts and then Airlines and then Bus/Train ticketing. Paytm is currently valued at $16 Billion.
End Note
It was really fun reading the email conversation that ensued between 2 top notch VC’s who are investors in companies such as Etsy, Airbnb, Doordash etc.
I imagined VC’s talking about valuations and returns and what not. But what really matter to them was not valuations or returns (when the startup was at a very nascent stage), it was the team, the opportunity and their ability to create value with the funds.
The Startup in Question was AirBnB which had its IPO last week and is now valued at $87 Billion Enterprise.
Thank you for Reading.
~RG~