Think of VCs and startups like animals in a jungle who are looking for the right partner to mate. Just because two lions of opposite sex are roaming in the same area and come across each other, it does not lead to mating. The process of attraction only starts if they give each other the right mating signals.
Similarly investors respond to certain signals and for the process of attraction to start startups need to give those signals out.
Team: experience , domain expertise , passion, staying power, etc.
Market: potential size should be very large , your products/service / business model should clearly indicate what problem you are solving and why will you get a significant share of the market.
Return on investment (only thing that matters in the end to an investor): An investor needs to see strong possibility of a 10x plus exit. Which is a function of:
- A large market
- Capability of the team with its products / services to take the business to a scale , within 5-7 years. So that the investor can sell his shares @ 10 times the investment price
Apart from the signals investors are looking for, everything else is pretty much NOISE at this stage and should be minimized.
Once the investor sees the right signals, the process of attraction starts. He will come closer to you and your business. That’s when he will look for further details about products , domain, detailed financials etc. He will also spend efforts to learn more about the domain and may involve some domain experts.
He further validates the same thing:
- Whats are the odds of getting 10-20 X Return on Investment in 5-7 years
- Whats are the odds of getting 5-10 X Return on Investment in 5-7 years
Once he is reasonably convinced about the RoI. Next stage for him is to look for all reasons to say NO. He looks for things about the team / market / product / competition / legal issues – which may put the odds of RoI at a big risk.
- And if he finds anything which can seriously risk the RoI – he will back out
- If not, things move forward
This post was jointly written by Sameer and Nandini
Many entrepreneurs working on new ideas, seem to live with this assumption that Idea Sharing = Idea Stealing. That is, if I as an entrepreneur share my idea with others, they will steal it and make it their own. Garnering this notion, they fail to share details of their project, about what solution they are building or which the real problem they are solving. This does not give an opportunity for the person on the other side, however competent he is, to give constructive feedback or be the devil’s advocate. Hence, entrepreneurs may land up working on their idea in vacuum.
This approach leads to a lot of lost opportunities, such as, missing out on opportunity in getting:
- any relevant information
- useful contacts
- feedback, approval or criticism
or even a missed opportunity in creating a genuine relationship. All of the above are fairly important for an entrepreneur working on a new idea.
Here is another and better approach, which as entrepreneurs we believe in and propagate:
- Just an idea is not worth any value
True value is derived out of the team that works on the idea, the planning, knowledge and the final execution
As founders and the core team, the secret lies in your strategy. However, this needs validation and refinement from various kinds of people:
Potential investors: They can give us feedback from the investors’ point-of-view, thus helping us refine our idea or pitch. Also, since these guys, interact with a lot of young companies and entrepreneurs with ideas; they are in a position to tell us if our idea will work or if any such thing already exists.
Entrepreneurs: These are the guys who are brimming with ideas and who will always have a word of wisdom or two. They are well networked and update about the startup world. These guys can help in validating the idea and refine the thoughts.
Potential customers: Who best to learn from than the end user?
Other people: People in general, who do not have the domain knowledge about what you are doing. Try selling your idea’s power to them. That experience will surely teach you a thing or two.
You can always choose not to talk about some sensitive/confidential parts of your business. Other than that, the more you talk about your idea that much more refined the concept / pitch will get, as we tend to improve our pitch with each sharing. It is a natural mending method that helps crystallize our thoughts. So, all you entrepreneurs with idea; share them!
Also would love to build the discussion, so go on comment on either of the blogs..
Couple of good posts about why “VCs don’t sign NDAs”, before entrepreneurs share the ideas: