How Early-Stage Investors Decide Whether to Invest in a Startup

A tenacious and dedicated founder is at the head of every great business. Early-stage investors are looking for exceptional individuals, particularly those who have shown their mettle under difficult circumstances. They have the traits necessary to thrive and succeed despite adversity. Investors are looking to make investments that will foster innovation and help grow the entrepreneurial ecosystem. They do this by recognizing talented founders and embracing diverse sectors. Investors are committed to creating a conducive environment for entrepreneurs to thrive, reach their goals and leave a lasting impact on society.

Sajith Pai, Investment Partner at Blume Ventures stated in a tweet that "We receive 3-3.500 startup pitches per year." The best we can do is fund 10-12 startups per year. We have to reject many great startups. Some startups are not considered because they do not meet our investment criteria or are either too early or too late. Some startups are rejected because we have already invested in similar risk categories or their competitors.

"We reject some very good companies that meet all these criteria because we think there's a better company in front of them on the mental stackrank. We believe this other company is more likely to become a hyperscaled startup. If it's not the top startup in the stackrank, then the startup is rejected. "So being the first in the VC stackrank is important for a startup."

In this article we spoke to some early-stage investors about their investment decision-making processes.

First-mover advantages and a large TAM

Tomorrow Capital prioritizes a few key factors in evaluating potential investments, above and beyond the tenacity and outlook of the founders for the success of their company over the long term. They include a large total addressable (TAM) market and a competitive advantage.

"We are also looking for startups with a competitive advantage or a clear path to achieve one. We prefer those that focus on consumers or facilitate consumption. The founders' ability to execute and build cheaply in the early stages is also important. Since Tomorrow Capital was founded, profitability or a clear path to profitability has been a priority and influenced investment decisions," said CEO Rohini Prakas.

There is less competition when there is a clear fit between the product and market.

Nandini Msinghka is the CEO of Mumbai Angels. She says, "Before selecting an investment, we recommend taking into consideration a number of factors, such as an assessment of the founder team, traction and pre-valuation revenues, valuation divisions, market size and competition." Startups with a product-market fit and in markets where there is less competition are also in a good position.

Focus on the founders and their early levels of traction

DevX Venture Fund only invests in founders that have either experienced a prior exit or who are well-versed in the domain. "We invest early when PMF is already established or on the verge of being established. This gives us confidence in the future prospects of the venture." This helps us to filter out startups as we usually invest at a fundraise level of $1 million with a median valuation between $3 million and $5 million," said Umesh.

The ability to make a good return and see the big picture

Shashank Randev said the 100X.VC Founder VC makes investment decisions based on founders' expertise and experience, the market potential of the company, the moats and intellectual property and the fund’s ability to create wealth to achieve at least a 20% return. Shun is possible if founders moonlight, do not have a vision of scale and don't think about capital preservation.

Capital efficiency capability

IvyCap Ventures believes in supporting startups who can demonstrate their ability to allocate and use capital efficiently, leading to the creation of maximum value. Vikram Gupta, Managing Partner and Founder of IvyCap Ventures, said: "We are committed to promoting responsible and strategic financial planning and actively look for entrepreneurs who share our vision."

Seema Chaturvedi is the Founding Partner at AWE Funds and she says that it's important to determine if a firm addresses a pressing problem or offers a solution. The second question is, does the team have the skills necessary to execute its plan and achieve the desired results. "We would prefer an A-team with a B-business plan over a B-team with an A plan. It is crucial to consider the team composition. Last but not least, is it scalable enough for our investment to appreciate?

How to build a profitable and sustainable business

Jatin Karani, co-founder and partner, Samarthya Investment Advisors said that investors should be concerned when founders appear to be more focused on valuation than value creation. Priority should be given to building a profitable and sustainable business, not inflating valuations. Startups in industries with high levels of competition and many well-funded competitors will find it difficult to gain a significant share of the market, which makes them less appealing for investors.

"We are wary of startups that have unreasonable expectations for valuation, especially when they do not match the startup's metrics and traction. A startup that is overvalued can be a sign of a disconnect between the startup and market reality, which poses significant risks to investors," Karani explained.

Assessment based on five Ts

FAAD Network evaluates startup companies based on 5 Ts - Team, Traction Technology, Ten x Returns and Terms of Investment.

"A startup’s success depends on its team. They must have the necessary skills, passion and resilience to overcome challenges. Traction is a sign of market acceptance and customer adoption. Meanwhile, groundbreaking technology drives innovation and disruption. The possibility of ten-fold returns is a major motivator. This, along with favorable investment terms, play an important role in our decision making process," said Karan Verma, Co-Founder and Director.