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An investors’ guide to spotting the next billion-dollar startup

Samarth Masson

The biggest hurdle in launching a startup today is not capital, which is readily available, but the business idea and its potential. If the idea is promising, entrepreneurs can attract ample funding. Yet, this does not suggest every worthy startup idea gets a fair chance to develop, as vetting of business ideas happens in a highly competitive startup landscape.

Deciding which one might stand the test of time is a challenging feat for venture capital and private equity investors. Assessing a startup requires quantitative and qualitative analysis and a bit of precognition.

However, due to limiting frameworks, certain flaws have been inculcated in the system, which must be addressed adequately.

To make a thorough assessment of a startup, investors should also consider the following:

Shift the focus from here and now to the future

Even if a startup has a disruptive idea, it needs some time and resources to build the required infrastructure to implement its vision. Investors must judge the startup on the novelty of the entrepreneurial vision and the frameworks being used to implement it, even if the numbers are lacking. This can help identify high-potential ventures.

For instance, software as a service (SaaS) startups need high-skilled professionals if they seek to create revolutionary products. Proficient software developers are difficult to come by and lead to significant overheads. Additionally, the team requires various tools and software. Finally, as the company starts scaling, maintaining servers and SaaS platforms also add to costs. Keeping these factors in mind while evaluating a startup will help investors make informed decisions.

Induct entrepreneurs and startup veterans

Assessing startups is quite challenging, given the limited visibility of information and the venture’s potential impact. Therefore, industry veterans and entrepreneurs must be roped in. They are more proficient at evaluating the frameworks being used and where the startups are lacking. New startups might not have the numbers, and that’s okay.

A startup that was recently hatched, cannot possibly have generated much market traction or revenue. In the initial stages, the most it could have done is created a roadmap of how it will operate.

Considering this, VC and PE investors can promote innovation by infusing capital in deserving startups. That way, startups will not rush into revenue generation and will get enough runway to spend quality time and resources on product innovation.

This will boost their performance, traction, and the chances of investment.

Use qualitative metrics for better evaluation

 Fancy offices often play an important role in bringing investments to startups. In the current scenario, fancy offices or important contacts often play an important role in bringing investments to startups. This can deny a fair avenue to great business ideas, which don’t have the right network.

To avoid this, VCs can look at transforming the yardstick used to evaluate startups. When they focus on the qualitative metrics of a startup, like the originality of the business idea, the value it envisions, the team’s capabilities, etc, they can make more informed investment decisions, which will give them high returns.

This would also encourage startups all over the country to further refine their ideas and translate them into practical business models. For VC and PE investors, while the road to vetting the right startups is a tough one, the correct approach can ensure better decision making.

Additionally, the government also has a significant role to play in the investment landscape. More initiatives like Startup India can fuel further investments across all sectors. Further, the government can encourage investors by partnering with private VCs for specific sectors and kickstarting fundraising, incubation and co-working facilities for startups.

Opening up the market would also create a much-needed push in investment. Once these measures are put in place, the opportunities for innovative startups will increase rapidly.

 

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