3 Key Things Investors Look At Before Backing Student-led Startups

3 Key Things Investors Look At Before Backing Student-led Startups

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Yesterday, we did a story on how the success stories of Postman, Zepto and a few others have encouraged many investors in India to understand the potential of student-led startups and bet on them. For instance, Postman was started by Abhinav Asthana as a side project to solve a specific problem. It then set out to create a tool that would simplify the API testing process and in 2021, it became the most valued Indian SaaS startup after $225Mn funding. We also wrote about many global success stories of student-led businesses such as Yahoo, Google, Meta and Reddit.

Today, in this follow-up article, we ask four leading investors in India to share with us the three key things the investors’ community looks at before deciding to back businesses born out of colleges.

Madhukar Bhardwaj, principal, Physis Capital, the venture capital arm of Inflection Point Ventures:

When investing in businesses born out of colleges, investors recognize that college startups may have certain limitations due to their relative lack of industry experience, limited established track records that more experienced entrepreneurs may possess and relatively smaller proof of concept. Investors understand these limitations and carefully evaluate the startups on multiple factors to mitigate the associated risks.

By assessing the founder’s vision, capability, and passion, investors gain insight into whether the entrepreneur has the necessary drive and entrepreneurial skills to overcome obstacles and succeed in a competitive business environment, and whether the founders possess the leadership skills needed to scale the business.

Investors thoroughly evaluate the market potential and competitive advantage of the business. They assess the size and growth rate of the target market, ensuring there is a demand for the product or service. Investors seek startups that address a significant market gap or have the potential to disrupt existing industries, and how it positions itself against established players.

At such an early stage, investors also look at market validation and traction and consider it strongly in the context of the scalability of the business. Investors analyze the startup’s ability to scale operations, reach new markets, and handle increased demand. They seek startups demonstrating a clear path to growth, scalability, and eventual profitability. College startups must demonstrate a clear understanding of how they will scale their operations, reach new markets, and handle increased demand to attract investor confidence and be able to raise future rounds of funding as necessary, which can provide an eventual exit to early-stage backers of the business.

Richa Bajpai, founder, Campus Fund:

Investors place significant emphasis on the entrepreneurial team behind the business. At an early stage, with very little data, investors seek individuals who are passionate, coachable, and resilient, as these traits are essential for navigating the unpredictable journey of entrepreneurship and driving the business toward success. Additionally, they seek to understand the core motivation of the founder to build the business.

Investors thoroughly evaluate the market potential of the business. They assess the size of the target market, its growth rate, and the competitive landscape. They seek to invest in businesses with a large addressable market (even potential adjacent large markets) that offers significant growth opportunities.

Investors look for proof of concept or a minimum viable product. They want to see that the business has already achieved some level of validation, such as beta users, early customers or partnerships. Demonstrating these indicates that the company has overcome initial hurdles and has the potential to attract customers and generate revenue in a sustainable manner. It provides investors with confidence that the product or service has market demand and can gain traction in the future.

An amazing founding team with a large uncapped market is a good recipe for success; the product however can continue to evolve based on feedback and trends.

Nitya Agarwal, VP, Investments, 3one4 Capital:

One of the areas where we spend a lot of time when working with student-led startups is to validate the commercial viability of the idea. This involves understanding the prospect of venture scale and monetization over a period of time. This is where deeply understanding business projections becomes important and we encourage teams to think deeply through how they expect their business’s economics to evolve over a period of time.

Given how fast tech is evolving today, it is imperative for these startups to have the right domain expertise to not only execute but also take the right strategic decisions such as expansion or pivot at the right time. Hence, a deep understanding of not only the sector but also the problem statement one is looking to solve becomes critical as a part of the evaluation process.

Lastly, It takes a village to get a company off the ground. A founding team’s ability to attract the right set of individuals for their startup is key to success. A founder’s ability to map key talent areas and his plan to plug the same is crucial in the early days of any business. Therefore, as a part of our evaluation process, we spend a lot of time understanding the team’s DNA at early stages.

Vatsal Kanakiya, Principal and CTO, 100X.VC

We look at the hunger to learn and grow. How hungry is the founder to actually build the business out rather than just have the title of a founder. We also analyze the key skills and market knowledge. This means, have they done the work to understand the market, and build the right skills. Lastly, we look at the pace of execution. This means, how fast are they moving in the direction they want.

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