What investors look for when making Early Stage Startup Bets
The one thing which is the most important for any stage of startup investing is the “Founder or the Founding Team”
The founding team plays an even more important role especially in the early stage investing as there isn't much data to back the thesis/business model and thus the primary focus of early-stage investing lies around the founding team.
In most cases bets are placed on founding teams and not on single founder companies to hedge the risk, however that does not mean that single founders do not get funded.
When an investor says “Founding Team” what does that mean?
It means an investor is looking for anything between 2-3 co-founders who have complementing skills, come from similar backgrounds and are equally involved in the startup process in terms of passion, mindset, EQ as well as to a certain degree the equity split between them.
The core reason investors prefer an equal or somewhere close to equal equity split between the founders is plain and simple, with the dilution of equity in a Series A/B all founders need to be still involved in the startup with the same or rather more passion to make it big as they were initially.
In case one or more founders holds negligible equity in the company by Series A (anything below 10%) then there are very high chances that he/she might take the company for granted and not be as motivated as the other co-founder who maybe has a 35-50% stake still in the company post dilution.
Second most important thing that an investor looks out for is the product market fit.
What does a product fit mean for an investor?
There can be some brilliant innovation that can ease up the lives of certain people but that does not definitely mean it is a product market fit for the investor. An investor likes to see products that solve an actual “NEED” rather than a good to have product and at the same time the market opportunity for the product needs to be massive, in terms of scale and a global reach.
Third important factor that an investor looks out for is the product itself. There are dedicated funds that have their investment thesis around certain industries or type of products, some focus only on D2C brands, some focus of AI&ML, some on Fintech and similar while some are completely sector agnostic. An investor who has set their thesis on certain industries will focus only on the products that they prefer which in turn is very helpful for the startups as well. Sector focused VCs don't only bring capital to the table but also industry connects and advisory.
In all of the cases there needs to be a robust product which has the capacity to scale at a fast pace.
The biggest difference between a startup and a business is not only the innovation but also the speed at which a startup grows and expands.
Last and the most underrated aspect that most early-stage startups tend to ignore are the on-ground compliance or running a business, having standard SHA’s between founders, dividing roles and responsibilities and having a clear business model.
Every investor is in it to see money coming in and most startups fail to lay down a clear path to revenue with their business models or try to create too many business models. This is a Big NO for investors as this showcases lack of clarity on the part of the founders.
Investors are happy with a single stream of revenue as well, but it needs to be clear from day zero.
