At least one-third of all start-ups fail or lose investor interest because they don’t know how to spend their money.

Startup looking for funding Investors want you to learn how to spend money
Atom Startups Thursday, May 04, 2017 - 15:33

We’re into the second quarter of 2017, and there appears to be some good news in the offing for Indian start-ups after a first quarter plagued with controversies. Investors seem to be upbeat about funding entrepreneurs again, and the Indian start-ups scene looks set for a new innings of large funding rounds. This time around, Angel investors are hawkish on innovative business ideas across verticals like SaaS, fintech, and health tech. The beleaguered e-commerce space, too, is making headlines after a hiatus of almost four years. 

What are investors looking for in entrepreneurs and their vision/companies this time around? Have the Indian entrepreneurial whiz kids wisened up since the last rounds of funding? After e-commerce start-ups burned funds on discount wars and went into a tailspin, the million-dollar question in this round will be, “How do you plan to spend the money as we invest in your vision/enterprise?” Given that new trends like third party credit assessments and entrepreneurs-in-residence are here to stay, we can be rest assured that investors are keenly watching out for entrepreneurs who have learned their lessons well before they seek funding.

In the business of start-ups, everything – known and unknown – is going to go wrong. What most entrepreneurs fail to understand is that as investors we share in that risk of failure. It’s not just your idea going bust, it’s also our money and our judgement calls. So, as investors, we expect that the money we invest will be used to strengthen various aspects of the start-up. Below, I list some of the areas Indian start-ups should focus on when explaining to us what they will do with the funding received:

Business Model: The primary reason many enterprises fail is because their business model does not work. No amount of funding can save a start-up that has a weak or ineffective business model. Although this more apt for very small start-ups, it can also affect mid-size and large start-ups. Instituting a proven business model is not just attractive for receiving funding, but in a way it is also a responsibility an entrepreneur owes to his investors. How an entrepreneur intends to turn his idea into an operational enterprise is what investors need to know. A proven business model can help an investor assess possible economies of scale for the start-up, too, which also means that better the enterprise’s ability to scale fast and scale economically, the better its chances are to receive continued investor interest. Remember, customers and investors are buying end products – not ideas.

Technology: Once the start-up has instituted a proven business model, the next major focussed spending should be on technology that will enable to scale up your carefully thought business idea faster. Installing a start-of-the-art technology for your business has a reinforcing effect on other aspects investors are watching: operational spend and customer acquisition. Many companies are providing AI-based back-end solutions for process automation, which also enriches customer experience. This is also one of the reasons start-ups focussed on providing technology-based market solutions consistently outperform other ideas in raising money. 

Operating Spend: This is another focus area for start-ups; entrepreneurs must spend on process automation at the operational-end. Knowing how and where to spend money on the business is one of the keys to determining the probability of the start-up’s success. Many enterprises tend to hire plenty of people to customise experiences and meet growth targets in their business plans. This is especially true of well-funded companies. However, manual processes not only tend to cost more but are also more likely to generate errors. Clean, streamlined processes account for lower operational spend, and are more likely to catch investor interest. People-heavy enterprises would need higher operational costs, and these are likely to remain consistent or go up, unless the organisation downsizes – which will create a whole new set of optics issues.

Customer Acquisition: This should be a conscious decision arrived at between the founders and the investors. If profitability is the primary target, then the team can choose to spend less on customer acquisition. However, if grabbing a bigger market share is the initial target, then the team has to focus spending on customer acquisition. In fact, customer acquisition frequently ranks as the second biggest reason why start-ups tend to fail. And this point again loops back business models – a well-balanced business models will recognise the costs required to acquire customers. Linking this to operational spend, if the enterprise depends on human resources to acquire customers, then the start-up is effectively tying itself to higher operational spend on employees and dedicating lower amounts for customer acquisition, which will in turn hurt the original business model, growth targets, and investor attraction.

At least one-third of all start-ups fail or lose investor interest because they don’t know how to spend their money, and in an ecosystem that has been through a roller-coaster ride in terms of funding and optics lately, prioritisation of expenditure and the quantity of spend on each of the cost head will be critical in receiving funds from investors.  2017 is already beginning to be a helleuva of a year and fasten up because we are just getting started.

Archana Priyadarshini, an active angel investor, has come on board recently as Venture Partner, Unicorn India Ventures. She is Bangalore-based and heads the Unicorn team and deal flow from the city.

Become a TNM Member for just Rs 999!
You can also support us with a one-time payment.