Under the VC Radar: Factors Evaluated before Investing

Feb 25, 2022

With more and more startups driving innovation and India's growth engine, Venture Capital firms are overwhelmed by the inflow of investment opportunities to participate in. In such a scenario, a standard framework for evaluation and investment decision is crucial to ensure efficiency, transparency and faster TAT. We have broken down the process into 3 broad stages!

Indian startups raised $42 billion in 2021 from individual and institutional investors. India also became the 3rd largest unicorn hub in the world, with a total of 90 unicorns (companies with $1 billion valuation). 

With about 64,000 startups all geared up to accelerate India’s growth engine, it becomes a herculean task for institutional investors like Private Equity (PE) and Venture Capital (VC) firms to filter out the winners from the lot. While an investment thesis lays down the foundation for any VC and acts as a first layer of filtration, an evaluation scorecard helps cherry-pick investable ventures. 

At Auxano, we have a 3-stage evaluation process for every investment opportunity we come across. We ensure that we have a firm decision on the investment by the end of the 3rd stage, including all documentation taken care of.

The first stage is an initial evaluation where we assess the industry and make an attempt to gauge the founding team. 

  • Problem statement

  • Revenue

  • Technology integration

  • Market size

  • Competitive landscape….. the list just goes on. 

Fundamentally, valuing a startup is very different from valuing an established company. Quantitative analysis and financial projections don’t always predict the future success of an early stage startup, especially when they are introducing something new and unique to the market. 

  • Valuation, 

  • Scalability and 

  • Business Model become secondary aspects that VCs and other investors look at. 

As part of the second stage, we dive further into the business model - 

  • We go through the documents shared by the startup, 

  • Undertake site visit,

  • Record customer feedback, 

  • Relationship with suppliers and team dynamics. 

The strength and ability of the founding team to disrupt the market and simultaneously be prepared to pivot at the right time is of paramount importance. 

A great business idea in a booming industry being led by an apathetic entrepreneur who has no clarity in the vision, may not score high on the VC scorecard and is clearly not an investable opportunity

On the other hand, even if multiple solutions exist for the same problem but the founding team’s approach has the winner-like potential, it certainly becomes exciting and doable. 

  • Distinct business model,

  • Economies of scale, 

  • Traction and 

  • Overall business growth are all core to the investment desirability in the company .

Such a team is always open to push beyond their limits, driven by pure passion for the business. This level of clarity in vision and a realistic outlook gets reflected in the conversations founders have with investors. 

Having said that, it is important to pay due respect to the process of raising funds and onboarding investors.

Statutory requirements, financial statements and other documents should ideally be prepared in time to ensure a seamless fundraising process and execute the plans laid out for the growth of the business. 

  • Term sheet,

  • Due diligence-related paperwork,

  • Shareholders’ agreements, 

  • Issuance of share certificates,

  • Stamp duties and 

  • Investment thesis re-evaluation, are taken up at the final stage

A well laid out roadmap to success bridges the gap between proposition and vision. It is important to highlight the tangible steps and milestones targeted and at the same time, convince the investor that the team can pull it off even if things go south!

Author(s) :
Karan Pawani