India is one of the most thriving startup ecosystems in the world, ranking 3rd globally. And venture capital for startups plays a massive role in it.
Early-stage investors want to explore how startup venture capital works and how they can incorporate it in their portfolio. This blog guides early-stage
investors in learning everything about venture capital, from its benefits to choosing a profitable startup for investment.
What is the role of startup venture capital?
Venture capital is one of the top funding sources for startups at various stages, helping them grow and build a global presence. There are about 1.81K venture capital funding entities with a portfolio of 16.5K companies (source). VC funding provides large-scale funding to the startups for their equity shares. It is ideal for startups that don’t want to get bank loans or need expert support for startup growth.
The role of venture capital for startups is to mentor entrepreneurs, provide valuable networking and growth opportunities, and help them make strategic business decisions. Ideally, early-stage venture capital investors choose promising startups with good traction and comparatively lower valuations to maximize their ROI.
What are the benefits of early-stage startup funding?
Early-stage venture capital funding is a high-risk, high-return type of investment. If you are willing to take the risk, the following are a few benefits of startup venture capital for early-stage investors.
● Long term, early-stage venture capital offers higher ROI.
● Early-stage VC gets you access to the equity at a lower valuation rate
● VCs have a say in making growth decisions for startups
● Access to the next round of investment to increase the number of shares
● Diversify the portfolio with high-risk investments
Process of startup venture capital investment
While everybody knows how to get VC funding, let’s understand how VCs make investment decisions.
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Exploring investment opportunity
The first step of many VC firms is to explore investment opportunities. Most venture capital firms have a list of startups that want to raise VC funding.
However, early-stage venture capital firms might need to take an extra step to find promising investment opportunities.
The early-stage VC investors can attend pitching competitions and networking events such as Global Startup Summit by 21BY72 to explore promising startups. Furthermore, attending industry-specific events helps you identify the trends to diversify your industry-based investment portfolio.
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Evaluating startups
Once you have pitch decks from the startups, you must evaluate their pitches to decide whether the startups are worth investing in. A few factors venture capital firms in India use to filter startups are market scope, business model, financial projections, exit strategy, and entrepreneurial skills.
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Negotiate the investment deal
The shortlisted startups negotiate the investment deal regarding investment amount, equity shares offered to VC firms, governance rights, and the support startups get from the investors.
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Conducting due diligence
Once the negotiation is finalized, a VC firm conducts due diligence on the startup to ensure they have their legal documents and if they have the means to achieve their projections. It helps the investors ensure that the startup aligns with their presented business model.
A few things early-stage investors should verify before VC funding are the authenticity of the financial projections, the founder’s background, legal registrations and IP rights, and real market trends.
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Monitor the startup’s performance
Once you have invested the VC funds, you must provide advice and track the startup’s performance through regular updates and VC meetings.
What VCs look for in startups before investing?
We discussed the process of VC funding from investors’ perspective. But how do they actually make a funding decision? What do VCs look for in startups before investing in them? Most investors check for the following few things when evaluating a pitch.
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Innovation
The startup’s success depends on the innovative solution that sets them apart. Therefore, venture capital firms often prioritize their tangible, innovative ideas.
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Scalability
One of the deal breakers for many promising startups is the scalability of their business model. It highlights the market potential and how well the startups can leverage the growth opportunity. Therefore, the easily scalable startup with a low expansion cost attracts most VC investors.
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Team
Startup isn’t just the entrepreneur and their passion, but a team effort to attain success. Therefore, investors focus on the startup’s core team and their skills. The investors consider the entrepreneur’s skills, vision, leadership skills, and the team he builds to make their vision come to life.
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Traction
Traction is one of the most important factors influencing early-stage investors’ decisions, especially for early-stage venture capital. Traction for startups can be in terms of market research, MVP development, numbers of existing customers, revenue to backup financial projections, and positive market trend analysis. It validates your pitch and makes the investment less risky.
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TAM
Total Addressable Market (TAM) is your startup’s maximum potential to earn revenue by capturing all the possible markets. It indicates the profitability and growth potential of the startup for the venture capital firms.
21BY72 is a dedicated angel investor networking dedicated to helping investors and startups connect and strengthen the startup ecosystem. We organize startup events like the Global Startup Summit to help early-stage investors explore profiting industries and funding opportunities with exhibitions, pitching events, and panel discussions with industry experts. We are coming back with our summit this year as well! Explore our website for more information!
Conclusion
The early-stage investors play a vital role in creating a robust startup ecosystem. This blog discussed startup venture capital and what early-stage
investors should know before diversifying their portfolio with VC funding. Early-stage venture capital provides higher returns, equity at less valuation, and the chance to contribute to innovative startups. The VC firms look for startups’ scalability, innovation, team skills, TAM, traction, financial projections, and due diligence before making the final investment decision. Stay tuned to 21BY72 for more startup-related content and information on our startup summit.
FAQs
1. How to get VC funding for startups?
The first step to secure VC funding is to validate the startup idea and gain traction. It helps you reduce the risk associated with startups and win over VC investors. Create a compelling and engaging pitch highlighting your traction, scalable business model, team, market size, financial trends, and more. Focus on building an engaging story when pitching the startups and highlighting your traction and growth potential. Ensure that your startup has all the legal documents to pass the due diligence of the interested VC investors.
2. What are the startup funding stages?
There are many stages of startup funding, but it can be divided into three main stages. The first is the pre-seed, where the startup uses limited funding to validate its idea through market and target audience research. In the seed stage, the funds are used to create an MVP to test the startup’s viability and gain market traction. The series funding stage includes continuous funding rounds to help the startups grow.
3. What are the everyday challenges of securing startup venture capital?
A few common challenges startups face in securing VC funding are a lack of market validation, small TAM, limited business model scalability, inexperienced teams, lack of vision for expansion, poorly researched projections and trends, and lacking tractions. Focus on being authentic with your traction, valuation, market research, and financial scenarios. Create an engaging pitch to highlight your strengths.
