Entrepreneurs often complain, "VCs are not interested in startups. All they want to know about is 'exit'." True, as it stands, VCs certainly are on the lookout of enterprises that have a better future but it wouldn't be correct to say that VCs show no interest in startups. They have certain parameters on which the enterprises have to prove themselves to be seen as a prospective candidate.
Mohanjit Jolly tells us as to what it takes to be on 'accepted' list of VCs.
1.) What are the aspects that VCs look at while assessing a prospective firm?
All investment decisions are effectively based on the following four criteria:
1. Team: Is the team top notch, and have what it takes to execute on the business plan.
2. Technology/Differentiation: Is there something that is truly different about the product, service, approach versus others in the market. The investors have to believe the differentiated story. Being the nth company in a space doing exactly the same thing is usually not something that gets investors excited.
3. Traction: Is there any validation, from customers, partners and even employees that gives some comfort to the investors that the “dogs are willing to eat the dogfood”, or that the product/service actually solves a real problem for which the customer is willing to pay. Often, especially at the early stage when there isn’t a product or service ready to be delivered, then there are other mechanisms such as individual investors, advisors, board members and employees who lend credibility to the venture by associating with it.
4. Market: The biggest reason that DFJ says no to a particular venture is because the partnership does not believe it is capable of reaching scale and size that would be interesting for a large fund like DFJ. The market has to be large and growing, or expected to be large in the near future.
2.) How has the outlook of VCs changed with regard to investment in MSMEs?
In 2009, many VC firms were extremely cautious and did very little if any investments. This year, however, is a completely different story. The year started with a bang, and the pace of investment has been tremendous. My guess is that more investments were made in the first quarter of 2010 than all of 2009. There has been a slight shift in the stage focus for many VCs. Where many VCs entered India on an early stage technology platform, the reality is that they have now become late stage non technology investors, for a variety of reasons.
3.) What should be the minimum valuation of an enterprise to arouse a VC's interest?
There is no hard and fast rule to what specific valuation gets someone excited. Basically, it’s a marketplace with entrepreneurs and VCs being driven by supply and demand. To the extent there is a stellar team that has “been there done that”, they will tend to get a higher valuation (for perceived lower risk) by VCs than a first time entrepreneur. What I can say is that the valuation expectations on part of the entrepreneurs were more grounded in 2009 than they seem to be in 2010. There generally is more capital chasing fewer really high quality deals, and as such stellar entrepreneurs have the leverage and are using it to drive up valuations.
4.) What are the funding challenges MSMEs face while approaching a VC?
Most VCs that I speak with are indicating that there is a definite uptick in terms of number of deals that are getting and evaluating. As a result, it is becoming more difficult for entrepreneurs to be noticed and truly rise above the noise. There is also movement on the part of VCs to doing slightly later stage investing pushing the startups into a prototypical catch-22. They need capital to make progress; and they need to show progress to get capital. Although that gap is being addressed by angel groups that are getting more organized around the country, but still generally speaking the early stage investments are fairly difficult to accomplish.
