Investing in Start Ups

Over a decade or so, the Indian economy has shown unprecedented growth. While the economists calculate the annual GDP growth rate and the global rating agencies assign country ratings; the debate is always centred around few percentage points here or there. In nutshell they all indicate that the growth is positively taking place.

With the growth in the economy, new sectors have opened up and generated further employment potentials. The youth population has started looking at entrepreneurship as career. The mind sets have shifted from secured job opportunities to risk taking abilities. This is a very positive change, as every entrepreneur creates new products or services and adds up new job opportunities.

The start-up  eco-system in India is at the evolution stage. This involves entrepreneurs, the problem they intend to address, the new product & services ideas, regulatory framework, competitive environment, investors, accelerators etc. The word of caution is that every new venture needs a critical analysis. For the potential investors, our recommendations are to assess the start-ups keeping following factors in mind:

  • The Promoters:The commitment of the promoters is the foremost factor to be evaluated. Here we would like to emphasize that the intent of the promoter should be to build the business ‘in the long term’ and not to increase the valuation of the company ‘in short term’. For building the business they need to have clear business objective, business model, market and product / services understanding, competitive scenario etc. The potential investors need to assess this very carefully and focus on sustainable business in the long term.
  • The Product: The product is the centre stage of the business. The business success depends upon how well the product is designed, for what problem areas the product provides the solution, how disruptive is the product in the market place, what features the product offers over and above the competitive products, how easy is to use or operate the product, how long is the product lifecycle envisaged etc. The potential investor should critically evaluate the product offerings.
  • The Market: The market estimation is very important aspect to be considered. The understanding of the product demand, the customer segmentation, the growth of the market, price expectations & competitive scenarios are the factors influencing the market estimation. In case of the disruptive products, the market creation itself is a daunting task. In such cases the product acceptance in the market place can be also be spread over very long duration. The potential investor would like to have in depth understanding of the market aspects.
  • The Business Model: The business models should be sustainable from a long term perspective. They should have clarity about the revenue streams, product manufacturing and deliveries (including logistics), suppliers and vendors, services offerings etc. Different types of businesses would have different business models which are workable and sustainable. Various modules should be scalable and should have mechanism to inter work coherently. It is important to note that it is extremely challenging to change the business model after the business has grown up. Hence the business model should be well thought about before building the business itself. The potential investor should adjudge as to how sound the business model of the start up is.
  • The Business Plan: The business plan focuses on the commercial aspects of the business and takes into account the yearly sales projections, capital expenses, operational expenses thereby leading to the profitability estimations. The business objectives and business model are the driving factors for the business plan framework. Many times the start-ups take the route of buying the market share instead of gradually building up the profitable businesses. The investors need to assess the business plans very critically and evaluate the convergence of the same with their own investment objectives. This would also help them in assessing returns on their investment as well.

In addition to above aspects, the potential investors should also take an independent view about the prevailing government policies and regulatory framework. The start-ups should develop their business in accordance with the requisite government permissions and ensure that they follow the regulations as well.

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