You think of a brilliant business idea, it may arise from a problem you faced or from your thought process. You believe your business will work; it can create disruptions or beat the market leader. You are reluctant to share but you still share this idea with your very close group of friends. They get excited too. Superb, you have a team as well. Everything seems rosy now. Then you create a mental checklist which says – Idea – Check; Team – Check; Investment– Not Sure? Well, this is the scenario for most startups in Nepal. I faced a similar situation in 2010 for my first startup venture. We tend to tackle the money problem by analyzing our own finance; i.e. how much I can chip in or my family can support with. Then asking the team, how much they can put in or their family can support. With this limited fund, you start your business.
In my case problems started to arise very soon. One friend who invested more wanted a bigger stake in the company, but was not willing to work. Similarly, everyone in the team wanted their return ASAP as they wanted to impress their parents. We continued under this pressure for 2 years and got convinced that it would be better to shut down. After interacting with various startups in Nepal, I learned that my story is not unique. Most startups faced the same problem.
We might have heard instances where people get funded for their idea. Terms like Angel Investor, Series A, B, C funding, Venture Capital (VC) Fund and others might also be familiar to us. However, in Nepal these terms have little or no value. There might be few angel investors but we do not know who they are and how to approach them. Even if we approach them, they might ask for a bigger stake and we end up working for them rather than working for ourselves. Funding is mostly available when you have a good business model with strong revenue streams. There are no VC in Nepal as no laws have been defined for them. Banks will not fund you unless you have collateral (i.e land). Ultimately, the only financing source available is FFF (Friends, Family, and Fools).
With limited access to capital, entrepreneurs do not have adequate appetite to take risk. They are more focused on day to day operations and increasing sales, not on discovering a new revenue model or incorporating changes to the business model. Therefore, the big question arises; how to facilitate investment for idea stage startups?
From the perspective of investors, investment on idea stage startups is a risky proposition. However, there are some investors who still want to take such risks. Such investors in Nepal particular look at the following five aspects:
The startup team is most important. Investment is not made on the idea itself but rather on the team. Some important things that investor might consider are – credibility of team members, experience and education of team members, past success and failures in startups of team members.
The startups must show the potential of being scalable and sustainable in long run. Few important things to consider are – problem startup is solving, target market, target market size, whether or not the idea can be implemented to other markets and factors that affect in sustainability of startup.
Innovative business ideas have a better chance of survival in long run. It also causes disruption in the market that creates better chances of survival for a startup. Few important things to consider are – does the startup have a unique selling proposition, whether other companies can replicate similar idea or not, is there a benefit that startup provides over existing solutions.
Once investors have analyzed the idea with above parameters, they would like to know what will be their size of investment. Investors like to begin with small amounts in the initial phase in order to minimize their risk. Things to consider in this step are: financial projections based on realistic assumptions, cash flow projection, strategic plan which shows what will startup do with the investment.
Finally, investors would like to assess their exit options from startup. At this step, investors take most caution. They fear that they might not be able to exit as the startup might shut down. The startups need to understand that investors seek return for a period of time. They do not intend to run a startup as a partner indefinitely. Hence, things to consider during this stage are: plans developed by the startup for investment return, is there an option of selling the company to a bigger player in the market, is it possible to sell the stake to other investors in the future.
Upon analyzing these parameters, investors make decisions. Therefore, it is advisable for startups to seek investment from FFF or put their own money first to test the business model. Putting your money in your startup will show the investor that you are committed to your business. If entrepreneurs start looking for investment from the get-go, the startup might not be appealing to investors. Once they have reached a stage where they know their business model, it is at this stage, they should seek for investment.
At Biruwa we meet many entrepreneurs and startups seeking investment. Our effort is to provide them guidance and connect them to investors if they have potential. Entrepreneurs believe that the business idea is everything and investors will just give their money based on the idea itself, but that is hardly the case. The business idea is merely a start, you need proper execution to materialize the idea. Therefore, next time you have an idea and you start your mental checklist, do think about strategies to get investors on board.