Maintaining Startup Momentum: The Growing Need for Clarity in the Indian Investment Community
Not only do investors make much-needed capital available to start-ups, but are also able to draw upon their in-depth industry experience and business networks to give critical business advice and unlock better growth opportunities. Given how it can provide wings to entrepreneurial dreams, the investor community has played
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Innovative startups from across the country have received major backing from all quarters in recent times. Not only has the government created favorable financial policies and initiatives for new ventures, investors have also been enthusiastic in their support of disruptive business models that provide smart solutions to the problems faced by Indian consumers. As a result, several startups have been able to secure massive investments, particularly those belonging to the e-commerce and consumer internet sectors. More than $3.5 billion has already been invested in Indian start-ups between Q1 and Q3 of 2016 at an average investment rate of almost $13 million per day, giving budding entrepreneurs a big reason to rejoice.
This growth of entrepreneurial opportunities, however, has also led to the rise of many ‘me-too’ players who, in a bid to secure a slice of the lucrative start-up pie, enter the industry without concrete plans for the future. Securing investments mostly on projected claims of growth and user traction, these start-ups do not often focus on maintaining their unit economics or creating market differentiation, and have to either scale down operations or entirely shut shop. As a result, investors have begun to be wary of supporting ideas that are too similar to existing businesses in the market or lack a tangible blueprint for profitability and sustainability.
While this apparent dip in investor enthusiasm may seem alarming, it is no more than a word of caution to investee companies, reminding them to concentrate on their long-term end-game. There is a growing need for clarity in the investment process in order to maintain the momentum of the start-up ecosystem, something which can only be achieved if the term sheet between start-ups & shareholders is clear from day one. While investors need to direct emphasis away from grandiose projections and hypergrowth, entrepreneurs need to understand that their proposals have to be backed by financially-sound and thoroughly chalked-out operational blueprints which allow for and focus on sustainable growth.
Given how the people involved with a business can directly affect its chances of success and its future, it is crucial for prospective investors to have clarity about the professional backgrounds of the founders as well as the core team members. It is always more reasonable to invest in a business which is driven by men and women with the relevant industry experience who have proven their ability to manage large teams, successfully overcome market hurdles & gauge the scalability of the product. A meticulous background check of the founders will also help the investors understand the extent to which the former believe in the idea and vision, and whether they have a larger mission with regard to the change their start-up can bring about in the Indian market. It is also equally important for the very first pitch made by an investee firm to spell out the start-up's USP. While this point may seem too obvious to merit a mention, it is, in fact, often ignored. Clarity on an idea’s USP, and the value addition it offers, allows for investors to predict consumer traction and stickiness. With a dedicated focus on differentiation, it is generally the value that a product or service adds for the end-user that serves as the clincher when it comes to securing investments.
More specific requirements for clarity amongst the investor community depend on the nature of the sector in question. For example, if the company under consideration is technology-based, then it is important for investors to look into the intellectual property rights regarding the product. It is advisable for investors to give preference to companies with strong intellectual property strategies, since they have a greater chance of creating monopolies in their target markets. Another important factor for consideration during the funding process is the product development stage of the startup. Heavier investments are required for start-ups with a fully developed product, while those with products in development stages – that is, products that are relatively untested in the market – need immense time and patience. However, if the product is in the pilot stage, investors will find it much easier to accurately predict the market traction that can be gained by the product after a complete roll-out.
Not only do investors make much-needed capital available to start-ups, but are also able to draw upon their in-depth industry experience and business networks to give critical business advice and unlock better growth opportunities. Given how it can provide wings to entrepreneurial dreams, the investor community has played an extremely significant role in the recent success of the Indian start-up landscape. Bringing in greater clarity and understanding about the investment process can unlock greater opportunities for growth and success for all parties involved, and will only contribute in further consolidating the positive atmosphere currently surrounding the Indian start-up industry.
Disclaimer: The views expressed in the article above are those of the authors' and do not necessarily represent or reflect the views of this publishing house
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