If you’re involved in startups, you know how trends can grip an industry. Excitement builds around specific subsectors or technologies, which in turn leads to the creation of more startups, which in turn leads to more hype.
But remember – You’ve not entered a sector, just because it’s #trending
In my experience, signing on to these trends can often act as a warning sign for investors. Instead, investors like to see you have focused on an industry for the right reasons; maybe you’ve identified an unmet market demand, maybe you’re cutting costs dramatically, or maybe you’ve identified a subsector where your product will be able to make a disproportionate impact on the end user.
Let’s take the education sector as an example. Currently, the online test prep industry is booming; the number of web and mobile solutions catering to those across the socio-economic spectrum is ever increasing. There are standout market leaders such as Byju’s, Meritnation and Toppr, alongside a host of niche solutions, all claiming to offer unique learning methods guaranteed to produce impressive test scores. Undoubtedly this is good news for Indian students, who are gaining access to an array of resources that aim to improve their education. But given the competition, it makes for a challenging sector for a new business to launch in – they will face competition on pricing, product features and even hiring the right sales people. Ultimately this means a new business is likely to end up only incrementally improving the education of India’s BoP population. It’s a story that is echoed across industries.
Now, compare this to a solution in the teacher training sector, a sub-sector that doesn’t receive as much attention. Teaching standards in India are poor, with a report by the National University of Educational Planning and Administration admitting that there are significant “deficiencies relating to teacher quality and teaching-learning process”. Unfortunately, there are relatively few tech-enabled and scalable solutions addressing this problem. Therefore, if a startup can address this problem by improving the teaching quality for those in the BoP, they can take advantage of the lack of competition, and will have a disproportionate impact on Indian education. It’s this identification and exploitation of an opportunity that can lead to disproportionate impact on education AND a sustainable revenue model that marks out great entrepreneurs, from those just looking to make a quick buck in the hottest new sector.
You’ve demonstrated traction
Next up, an obvious one. Rarely will a VC get excited about a business that hasn’t generated revenues. Why is this? Well, in my view, it comes down to 3 key reasons:
- It’s difficult to confirm an entrepreneur’s commitment to an idea, if they haven’t progressed it past the business plan / concept stage. How is the investor to know that the entrepreneur has the drive and desire required to create a long-term business, if they haven’t invested time or money up to this point.
- An entrepreneur may claim that they are solving a problem that exists for millions, but it’s difficult to confirm that such a problem exists until there is proven demand for the product.
- Investors have a very clear idea of how they would like their seed funding to be deployed, and typically that is not on hiring a first employee, or alpha testing. In the case of Unitus Seed Fund, we see a capital injection as a tool to be used in preparing the business for growth. This involves goals such as hiring key employees, identifying the most efficient customer acquisition model, and finalizing key partnerships.
Whilst there are exceptions to this rule (most notably startups focused on network building), the rule of thumb would be – don’t approach a seed round until you’ve generated some revenues.
You’re aware of the challenges
Finally, launching a business is not easy, VCs know that. There are numerous challenges along the way ranging from finding the right team members to collecting money from customers. Instead of hiding these challenges from investors, founders should embrace them as an opportunity to show off their entrepreneurial flair.
Time to look at another example. If a direct to school focused education content provider approaches Unitus Seed Fund looking for investment, we think we might know some areas they will be facing challenges in. For instance, their sales cycles are likely very long, perhaps they have difficulty collecting payments, and their sales are likely to be highly seasonal. These are areas that we will want to ask questions about, as we know they are common problems for companies in that sector. Therefore, a founder that is proactively open about these challenges, and displays that they have a strategy in place to deal with them not only in the short term, but the long term as well, provides a very positive signal. Even if they don’t have a strategy in place, the fact that they have identified the major challenges they are facing is a far superior option to hoping we won’t notice.