Start-ups: What you look for when betting on them

India has now become a global hub for the start-up ecosystem. It ranks third in the world with over 90,000 start-ups and 107 unicorns,  according to the Economic Survey Report 2022-2023. Many of these companies are emerging from Tier II and Tier III cities. Indian government’s programmes such as “Make in India” and “Start-up India” have provided a support system to them. Equally important to sustaining the growth of this ecosystem are factors such as infrastructure, technical advancement, and access to funding capital. The last one being most vital. It is critical for research and development, scaling up the business, expanding the market as well as building infrastructure.

In the first half of 2023 alone, Indian start-ups have seen an investment of $ 3.8 billion from domestic and international investors as per the detailed report by PricewaterhouseCoopers India Report. This indicates the growing faith, investors are placing in such ventures. 

However, with such a large growth and so many businesses to choose from, it becomes difficult for investors to select which business to fund. These are the top fqualities investors should look for in an entrepreneur before investing in his business.

Business Structure

Investors need to know the drive behind a particular business model. What is the reason for starting a business? Where does the founder see the business headed? Is his vision clear? What is the business plan and how is it going to be achieved? The investors also need to know that the founder believes in his idea and that he is committed to achieve the set goals.

Business Growth

The investors are looking for businesses that have potential scalability. They have to know how a particular business will perform on a large scale and if there is a product - market fit and if their investment can help in the growth of the business. The investors need to know if their investments will give them a profitable return as no one wants to bet on loss making horses.

The management quality

A business is only as strong as its workforce. Investors should look for passionate founders who have skin in the game. They believe in the product and are confident about it. It is the leader’s job to make sure that the goal of the entire team is aligned. If the team’s vision doesn’t match with that of the business, then no matter how great an idea is, it is only an idea. 

Product profile and market fit

Investors want to fund ideas that has a competitive edge and there is something in the product which sets it apart. The product must be sustainable and the markets must need it. It may not be unique. But if there is a demand and the business is helping in the supply through product or service then it’s a viable business. Typically, products catering to a huge addressable market find investor favour. 

Trade barriers and risk factors

Competition in the industry, bargaining power of the company owing to its size, economies of scale, etc. are some of the trade barriers a start-up might be restricted by. They also lack success history. Investors should analyse the factors preventing startup entry into a market and the potential risk in the business before making any investment in any startup. 

In short, profitability, scalability and sustainability should be central to an investor’s decision to invest in a start-up. Investors are looking to invest in companies which have the potential to generate cash flows and are not just cash burning machines. Also,  investors need to know that their investment will give them timely returns with expected profits. For this, the business needs to have a sound revenue model or future pathways drawn where the investors can plan their exit. This can happen through deals, or IPOs. There needs to be a projected plan with an end game for the investors.

(Mahavir Lunawat is the Managing Director, Pantomath Capital Advisors Pvt Ltd)