What investors value in early stage startup

The valuation in early stage startups (raising first round of funding) is more of an art than a science. Most of the commonly used mathematical valuations models go for a toss. However there are some things that can increase your ability to raise funds at higher valuation which means either more funds than average or less equity dilution than the average.

Some of the primary factors include:

  • Hotness of the Sector – Hot sectors command more premium compared to slow growing ones.
  • Strength of Management Team  – A number of factors come into play here:
    • Educational background of the team (IIT/IIM guys in India raise 75% of funding as per a report)
    • Relevant Work Experience – This gives investors the confidence that the team is aware of domain and the underlying technology.
    • Prior Entrepreneurial Experience – even if it was a failed venture is useful. If you have a Successful Exit to your credit, nothing like it.
    • Completeness of the Team – At least the team should have two people – one who can build and the other who can sell.
  • Functioning Product – A functioning product (does not have to be complete) is much better to have than a brilliant idea in mind and a killer power-point presentation. If you can give a demo of your solution and impress the investors, nothing like it.
  • Traction – Market Validation of the idea is a huge plus point. If you have huge number of eyeballs (lets say 10,000 users or 100,000 users) or else paying customers which though a small base is growing fast week-on-week. Some Silicon Valley startups boast of 5-10% week-on-week growth. Some of the numbers that can be evaluated here are:
    • Average Order Size
    • Number of Orders
    • Revenue
    • Repeat Customers
    • Conversion Rate
    • Customer Acquisition Cost

Other factors include:

  • Uniqueness of Idea
  • Size of Market
  • Competitive Advantage
  • Commitment of the Founders – in terms of time and money

Last but not the least, even if you have everything, how well you are  able to present this in your business plan, pitch deck and financial model also matters.

This has been nicely summarized into a checklist on this web page, but it is more relevant to Silicon Valley startups. Valuations in India work differently due to different cost structures.


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