When you are an entrepreneur looking for investments, it’s crucial to know what’s hot and what’s not.
In the overwhelming, intimidating and scary world of investing, knowing the investment trends makes the job of getting funded a tad bit easier.
This is not to say that you should draw your business plan around current investment trends.
Since most investors typically invest ahead of the curve, you would invariably end up with the short end of the stick.
Any economic scenario is a sine curve- it begins as an upward trend, reaches the peak and then starts decline to repeat the motion all over again.
Similarly with technology, you have technology in its growth phase, technology in its maturity and technology looking to reinvent itself.
Investors generally choose any one of these phases to invest in.
The early investors, ones who invest in the early stages of a technology cycle, invest before the technology and the early adopters come in.
But do not fear if you are unable to raise money at this stage because investors can be hooked at a later point of time too.
If we take a look at the investments made over the last three to four years in India, we see that it covers a wide spectrum of areas.
Any investor looking to make investments in a company usually looks at a couple of things:
The stage the business is in: early-stage, growth-stage or mature-stage
The team’s ability to execute on the business plan
The robustness of the business plan
The market opportunity
The team’s ability to capture the market opportunity
The team’s ability to capture both mind shares and market shares or market space
Investors are opportunists. They only invest in areas where the possibility of making an oversized return exists.
Investors planning to invest in private enterprises, start-ups or companies that have not gone public look at some interesting benchmarks.
Money put in fixed deposit yields around 10% return.
Debt fund gives a 12% to 15% return on money invested.
Money invested long-term in public markets, which basically means investing in the stock market either directly or through a mutual fund, provides returns between 15% and 20%.
The return is between 18% and 24% annually in the informal money lending market.
So it is only to be expected that any investor looking to invest in a start-up is looking to get returns greater than the numbers quoted above.
This is to be kept in mind when evaluating your business plan and deciding on which investors to approach.
Another key question is- where are you in your business plan.
The stage your business is in decides the kind of investors you should raise money from.
The typical investors out there are: angel investors, venture capitalists and private equity guys.
Angel investors characteristically come in during the early stages of your business when you are looking to prototype or mainstream your product.
VC’s or venture capitalists typically come in when your product/solution is somewhere between the early adopter stage and growth stage.
This does not mean that VC’s do not give early money but that it is rare for them to cut a hundred thousand dollar cheque.
Private equity guys are essentially VC’s but they come in when you are looking to expand the market opportunity of your product.
An angel investor invests anywhere between 25 lakhs and 2 crores.
Sometimes they may go as high as 4 to 5 crores depending on the market conditions, the market opportunities, other investors and the appetite of the angel investor.
Typical investment size for a venture capitalist is anywhere between 2 crores and 50 crores.
Private equity guys typically come in when you are looking at a more than 50 crore rupees ticket size.
The question that most entrepreneurs typically ask is- So, what do investors actually invest in?
The investors invest in a business case; the team’s ability and commitment to execute on that business case; the quality of the opportunity and the opportunity being large enough; and the quality of the plan.
Now that we know what investors invest in, let’s take a look at what investors do not invest in.
Typically investors would not invest in ideas that are without a plan, are not well thought out and do not have ‘what if’ scenarios addressed.
If the team is not robust, cannot work together and has very low aspirations in terms of growth rate and the ability to capture, no investor would be interested.
Concepts addressing very small or niche markets is sometimes a turn off. But this does not mean that no investor would be interested.
It’s just that you have to approach another class of investors- ones that are looking for dividends or other forms of return on capital.
Also with regards to e-commerce businesses, just having a good user interface is insufficient to attract investors.
More than ‘what’s visible’, investors look at ‘what’s inside’.
This post is based on a Webinar by Mr. Puneet Vatsayan, co-founder at The Hatch Incubators. You can find a recording of the session here.