How To Invest In Startups? A Quick Investment Guide.

By Chaitanya Gundluri | November 3, 2020 | Motivation | No Comments

Yes, the COVID phase is the worst downtime businesses so far witnessed, due to this abrupt global recession, the survival of startups has become sceptical. The purchasing power has fallen down drastically, India’s economy has shrunk and recorded the worst downfall ever in history (23.9% fall-off in the second quarter of 2020), there’s a visible and direct effect on every business. I cannot deny the fact that there’s huge dip even in my personal investments as well apart from my digital marketing ventures, still the optimistic side in me see smart people daring to leap into every opportunity and convert this new need/ gap into a disruptive profit-making business.

Almost all the startups quickly realized this bad phase and came up with add-ons to serve the new needs this pandemic created and that’s a good sign, some classic examples are, NaPanta , a well known Agritech marketplace based out of Hyderabad quickly launched vegetable door delivery app by name nFrez and are able to make stellar returns, RDP, India’s most affordable laptop manufacturer has witnessed massive sales hike in the recent Amazon Big billion sale, these are just a few examples of many success stories, this quick pragmatic approach helped a few to keep their prime business model alive and for many others, these new add-ons brought in loads of good fortunes by surpassing even their prime income.

Surprisingly my inbox is filled up like never before with perfect crisis fitting business Ideas and that’s a positive sign too. Although the size of funding these new startups require is very small, investors must look into many game-changing aspects to take a quick call to go for it or not without wasting anyone’s time.

If you are also an aspiring startup investor like me , here is the quick guide to help you to make the right investments, take a deep dive into the following 5 deciding factors.

Note – Startup founders can consider this as a funding checklist.

1.Trust

The first question that should be asked is do I trust this founding team? If the answer is no stop right there, have a one to one discussion, assess their honesty, passion and long term interest in the business. If the founders’ thoughts connect to your heart and mind consider taking it forward.

2.Product /Idea

How amazing is this idea, how people respond to it is most important, if it sounds a bad idea, no hope, drop it right there.

Product Proof

What level of proof is there that the product actually works, you want it to be validated in some way, test it, ask to prove it.

Pain

Does the product solve any real pain point? Who really needs this product at this point of time?

Is It Disruptive?

Is the product a disrupter and if yes, then maybe market pain doesn’t matter, for instance, Airbnb is a major disruptor I wasn’t facing a lot of pain when I was dealing with hotels but Airbnb brought something new into my life so it wasn’t a fact that I had pain it just disrupted the industry.

Industry Size

What is the industry size and growth is the addressable market? Is it massive or is it limited? go by figures.

Revenue

What is the revenue potential? How complete and compelling are the five-year revenues forecasts, when I work on the valuation of startups, probably 90% of the time is focused on the revenue forecast the founding team must present a compelling revenue forecast.

Intellectual Property

What is actually protected? Is it protectable? Can it be easily copied? Could it be leapfrog with new technology? Get this checked legally.

3.Execution

If the idea is great the question is, can this team execute, talk about the plans, see how thorough is their long-term business plan, had they thought things through, not all the ideas that sound great bring in money, a foolproof execution plan and persistence is what matters the most.

Competitors

Who are the direct competitors and how will they respond if this team arrives on the scene, this is the one area that most startups don’t think about, what Is the response of competitors to the new product/service, dig deep into the plan, rivals often come out with brutal plans to take over, see if the founders have a strong counter plan.

As per a recent Harvard business survey, only 23% of executives learned about the new offerings of competitors. Pay more attention here.

Customer Segmentation

Serving a generalized market is one of the reasons startups fail, in his hot seller “Entrepreneurs On Fire,” John Lee Duma says “The riches are in the niches” niche down and focus on a very narrow segment.

Startup Experience

How many startups have the founders been involved with, in fact, crashes and prior failures in startups is valuable for the startup team, they don’t make those mistakes again.

Founding Team’s Industry Experience

Ninety per cent of business fail because they start it just because someone else is making money out of a similar business model, off late a friend reached me for help to sell online in London, his only intention was to survive the recession and make passive money, he saw one of his neighbours selling home essentials on Amazon and making good money, later when I explained him in detail how the marketplace work, seller panel handling, drop-ship/warehouse charges, pickup charges, commission, returns, taxes, registrations, compliances and so on so forth he became hesitant.

One more good friend of mine started a tech-based finance exclusive placements portal three years ago, but still struggling to launch it as none of the founders carry prior recruitment and IT experience.

Having industry experience is the Key. If the founding team don’t know the industry they may have a very hard time navigating through it, I sincerely advise to invest or start something which falls under your expertise or at least grab a cofounder who carries prior product/industry experience.

Potential Partners/ Customers

See if the potential customers /partners been identified, not every company can be a startup completely on their own, in fact, it may be of an advantage for them to find a partner that could be their first customer and their first investor sometimes, this is a great way to start a business to lower the risk and have income coming from the beginning.

A preschool brand with which I was involved was engaged with a school software developing company who was a startup then, the software worked so well for us and we become an investor in the company, we were their first customer and this gave them credibility and access to the other schools to develop the software perfectly, as we owned a percentage of the company they were able to get all kind of support and captured the market so easily.

Sales Experience/ GTM Strategy

What sales experience does the team have? Are these guys under a shell and they don’t want to go out and present or have they had a good experience with selling. Startup founders should be involved in sales at the initial stage, they should be able to sell their vision. Initial selling experience helps founders to handle the teams when delegated/ outsourced in the future.

How thorough is the marketing plan, this is key because without marketing and the selling plan you won’t sell.

4.Exit

I would ask the team right from the beginning if they have identified their top three potential buyers, forget about IPO and all that fancy stuff focus on who would want this technology, if you could develop your product to be an add on to a particular business then start communicating with that business about what you’re doing so they can see it and as you progress, keep up the communication because one day that company may decide we like what we’ve seen over the years and we want to buy this company and that is a great sale exit.

5.Organic Buzz

No, not the paid reach nor the enthusiasm of the team but I’m talking about how many people will the end-user say about this product, a good example is my Fitbit device, since the day I got Fitbit it changed my life, I’ve told everybody I know about it and that’s because I love the product and I’m excited about the idea, so the question is how much organic reach this product can create through word of mouth endorsement.

Ultimately the objective is to see a no revenue Idea at present progressing into a billion-dollar unicorn, if you could assess businesses on these simple metrics you could easily achieve the billon dollar status and hit the bullseye with perfection.

Biz Innings