What Do Venture Capitals Seek in Startups in the Post-Pandemic World?
Startups have become a worldwide phenomenon. You can see numerous startups in most industries. Perhaps you have enjoyed the services and products of these startups in your daily life. A startup in a very literal sense is a newly founded company with non-linear and exponential growth. For startups, this pandemic era may not be a suitable time to seek new investors. With the limitations that have been brought by this pandemic, many startups suffer significant losses, though there are also some startups that thrive due to the pandemic.
To help young aspiring entrepreneurs and startup founders, BINUS BUSINESS SCHOOL continued its CEO Speaks on Leadership event which has been ongoing since 2003. On Friday (12/6), BINUS BUSINESS SCHOOL invited Eddi Danusaputro as a speaker for the CEO Speaks on Leadership with the theme “What Do Venture Capitals Seek in Startups in the Post-Pandemic World?” via Zoom.
Eddi Danusaputro is the CEO of Mandiri Capital, a venture company under the Mandiri Group which is currently investing in 13 fintech startups. Eddi Danusaputro is also a Finance lecturer at BINUS BUSINESS SCHOOL. In this webinar, Mr. Danusaputro shared his insights on what venture capital is looking for in a startup, especially in the post-pandemic era.
Build a Solid Team
The first step in developing a startup is assembling a team of founders. Generally speaking, you need to lay a good foundation for your startup. So, start by finding a scalable problem. “What problem are you going to solve? What market opportunity can you serve?” asked Mr. Danusaputro. From there, create a solution that will become the selling service or product of your startup.
According to Mr. Danusaputro, most venture capitals including Mandiri Capital will not invest in a startup with only one founder since it is too risky. However, he also urged not to build a startup with many co-founders. Ideally, a good startup has 2-4 founders, with each having their own specific roles.
These roles can be categorized into hackers, hipsters, and hustlers. The hacker works on the tech aspect and programming of the company, whereas the hipster manages the design, marketing, and user experience. Lastly, the hustler takes over the business development of the startup. It is possible that one founder works in more than one role.
Create a Good Business Model
Mandiri Capital has seen hundreds of startup each year. Most of them fail to get funding from this venture capital firm. From Mr. Danusaputro’s perspective, this transaction failure is usually due to the business model of the startup.
A good business model must have a clear idea of what the startup is going to sell. It must portray how the startup is going to generate revenue and finally gain profits. A business model is not something that you can modify freely. Therefore, you need to be smart and thorough in creating the right business model that can support your startup to thrive for years to come, even during the pandemic.
Then, how do investors come into the scheme of the startup journey? It starts in the valley of death, the early stage of the startup journey. Data from Harvard Business School shows that 95% of startups fail in the valley of death stage. The first investor that you need to convince is called the angel investor, which consists of your friends and family.
As your startup grows, you proceed to series A or the early stage. During this era, venture capitals such as Mandiri Capital will be interested to become investors. Then, you can proceed to series B up until series E. The goal is for your startup to reach an IPO or acquisition. As the traction increases, it will be easier for a startup to gain venture capital. Mr. Danusaputro advised founders to not pitch their startup to venture capitals if they are still in the early stage.
For startups in the early stage, the founder team is the most important component during a pitch with venture capital. However, for startups in the growth stage, the focus changes into traction. During the pandemic, it is harder to keep the traction up. Therefore, venture capital mostly seeks a startup that does not rely on face-to-face sales and founders who are willing to cut costs.
Tips on Approaching Venture Capital
Start by calculating the valuation of your startup. Try a comparable transaction method by finding similar startups as benchmarks, 5 startups at the very least. From there, you can have a rough calculation of how much your company’s valuation is. Your startup valuation may change during this pandemic.
If your startup suffers more than 50% of losses, then it is a sign to start modifying your business model. It is wise to withhold any fundraising during the pandemic. However, Mr. Danusaputro said that a startup can start publishing debt obligations which can be exchanged for a stock 1-2 years from now. Another tip from Mr. Danusaputro is to always save at least 20% of stocks for founders, especially during an IPO or acquisition. ** (E-PID)