You have to be in an investible space
Raising early stage equity investments is always tricky. When you read the newspapers, it seems like everyone is being able to raise early investments, but when you go out to raise, it seems very hard. Only a very small percentage of ideas are able to raise sufficient early stage investments to be able to fund their business. It’s important to understand how early stage equity investors look at a business. Not all good businesses are investible. And not all invested businesses are good businesses. Early stage investors are looking to solve to making a certain kind of investments that fetch them very large wins. This is to counter the risk of many of them failing as well. Lets look at what is an investible space from an investor’s perspective.
Large market size
This is by far the most important. Operating in a large space does not guarantee your funding, but operating in a small space pretty much guarantees that you will not got interest. It’s among the first check boxes that an investor looks at. Lets analyze it a little bit in more detail.
Firstly, what is market size. Here you see concepts like total market size, and addressable market size (TAM). For example if you are selling children’s furniture online, then total market size would be the total volume of children’s furniture sold today “online”. Not online and offline, but online only. The addressable market size would be based on your category (premium, affordable etc.), your channels of reach (different portals etc.) and so on. So overall children’s furniture market maybe say, Rs. 2,000 crore online and offline. Your market size if you are selling online might be 10%, say 200 Crore. If you are selling premium furniture, then your TAM might be 20% of this, which is 40 Crore.
In the above example, investors will say that if you are super successful, you may capture 20% of this market and hence your business in the best case may be a 8 Crore business. It may have a margin of 2 Crores. This is good business, but its not investible. It does not have enough size to find an exit or to provide the kind of return that equity investors are looking for. You are better off growing this business organically, use some debt maybe and get to a strong and profitable business.
A good investible business in India should have a TAM of $1B or more. Then investors can believe that over time, you can keep growing and build a business, which is hundred million or more, and hence have a sufficiently large return. Even if it takes a lot of capital and a lot of initial losses to get there, this is a more investible business vs. the small and beautiful business above.
This is why we see E-commerce platforms, Medical Platforms, Real estate platforms, Food etc. attracting large amounts of capital since the markets are very large.
There are many ways of doing market sizing for your business – top down, bottom up, competition, analyst reports and you should use these. However, the key is to be specific and not be too generic. For example, the healthcare space may be humongous but if you are selling a small product to doctors, you have to market size for that. Some times you may argue that I will do this and this more after 2 years, however unless there is a clear articulation of that and it’s a natural extension, you have no real leverage to do that. It’s a balancing act – you can’t lean too heavily on future expansions at the same time you can’t slice it too narrow.
Its an issue of timing – not too early, not too late
Its important to ask yourself – “Why now?”. What has changed that enables your specific business to be done at the current moment. Usually you have to look at macro trends for this. MBA calls this “PEST” analysis. Political, Economical, Social and Technological factors.
The point is that human needs don’t dramatically change. Only they can be better / differently serviced over period of time. Our need to commute has always been there, now we have taxi cab aggregators to make it cheaper and convenient. Our need for education has always been there, now there are new ways to fulfill that online.
Hence, one has to look at what has changed in the environment that allows me to “now” scale my business model, something that couldn’t have been done 10 years back. Otherwise, somebody would have done it 10 years back.
For example, as more people have Internet access, Internet can be used as a disruptor to enable commerce. As more people have mobile phones, even niche mobile apps can reach lots of users enabling a large enough business model. So earlier doing an Internet based portal for a niche category was not scaled enough but now doing it on mobile enables a wider reach and large enough business is possible.
Increase in computing power is a change that now enables big data and deep analytics. It could not have been done 10 years back. Increase in digital spends makes marketing much more data driven as well, thereby providing another boost to the whole analytics industry.
While many of us worry about being too late to market, in my experience, the bigger problem is being too early. The first time I heard to mobile based field force automation, it was 2001. We are still waiting. Internet itself had a first coming in 2000 and then a second coming in 2009 an now a mobile driven 3rd coming. Hopefully its for real today. Online education is probably still early. Getting the market timing right is critical but very hard to achieve. Many businesses fail because they are unable to get this right.
Same-same but different – existing needs are easier to fund vs. new ones.
As I mentioned above, human needs don’t change that much. Only they are better served. As entrepreneurs, many of want to innovate, however innovation is also a fine balance.
Investors want to see a market existing today for those needs. Ideally you should be displacing someone, competing with some other players and so on. If you are standing alone in your market, its very hard to judge whether it will work or not. It’s a major leap of faith.
So ideally you should be able to explain how a need was being earlier met, where was that money going and how yours is a better value proposition for the same spend. This is easy for investors to understand. This is why we see so much transaction commerce. Aggregation of existing spends. We are seeing this in cabs, retail, fasion, laundry, whatever you can think of. These are places where consumers are already spending and companies are providing them more value for their money.
All content products ultimately compete with media – TV, Newspaper etc. Hence they are called social media. They compete with TV time and hence are monetized by media spends. This is a very large category as well since marketing spends are huge.
B2B plays are always RoI driven. You look at existing spends, optimize them or you give businesses a way to get more customers. In India, there is a lot of activity right now to help SME’s get more customers and we see a lot classified kind of businesses for the same. Large enterprises focus on systems and automation and that is a play. Outsourcing etc. is a clear cost arbitrage play. Same services at a lower cost.
However, its good to have some differentiation as well. My experience is that entrepreneurs try to differentiate too much and make a product for which there is no need. One can differentiate in many ways using product, business model, segment and so. One does not need to differentiate in everything. Pick 1-2 key differentiators that give you focus and you can execute on those. Same same but different.
This is why a X for Y format is popular to describe your business. X is the sameness and Y is the differentiator. Uber for flowers or any such description helps you understand in a simple way and also to the investors.