“PanchTatva” – Five Elements of Early Stage Investing

Startup Founders often reach out to us curious to know what exactly are early stage investors looking for when they evaluate startups for purpose of equity investments ? While each VC or syndicate seed fund or angel network may have a weighted average formula of multiple factors with each investment committee of a fund assigning different weights for each factor, for simplicity sake we can say that the most common factors would be the following 5 factors and for analogy sake – the PanchTatva or the Five Elements of Early Stage Investment:

Criticality of the Problem (Fire) – Do many consumers (for B2C) or businesses (for B2B) actually face the problem which the startup is trying to solve? Is the need really critical or not? Is there a fire out there which the fire-fighters need to control or is it just a false alarm? In rare cases it may also often that the startup is a category creator and once customers experience the product or the service they would continue to use it for a very long time. Like a spark in the woods may actually burn the entire forest.

Competitive Landscape of the offering (Water) – Is the startup swimming in a red ocean which is full of larger fishes and many are struggling for survival or is the startup swimming in a blue ocean with little competition. If the space is very cluttered and many startups offering the same or similar solution have already captured large market share and/or raised significant funding then chances of a new startup getting traction from customers as well as investors would be very low.

Market Size (Space) – We have often seen VCs give the feedback for startups that they are operating in a very niche market and the market size is very small hence they would like to pass the opportunity to invest. Founders should always be ready with a roadmap of how their offerings can cater to new target segments or the other option is try to sell more products or solutions to the same target segment. Founders and investors both understand that startups evolve with time but it is the Founders responsibility of communicating to investors that they envision a very large space or universe for their startup.

Traction (Air) – Investors love to see the growth in startups on multiple fronts – growth in number of customers, increasing ticket size, revenue growth, increasing Life Time Value (LTV) of customers, improving retention data of customer cohorts. And now its not about growth at any cost, its about responsible growth, reducing Customer Acquisition Cost (CAC), logical unit economics. Not only traction from customers but traction from fellow credible investors often helps investors in reaching a decision to invest. The knowledge that the startup has reasonable amount of oxygen or air in the tank encourages investors to pump in more oxygen and extend the runway for the startup.

Team (Earth) – Investors love a diverse team of Co-Founders and senior management who can nurture and grow the company. They are expected to be super ambitious and yet humble and grounded like mother Earth nurtures life and its gravitational pull holds everything together.

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