Startup CEOs have been selective when bringing on investors

 Startup CEOs have been selective when bringing on investors

Mumbai: The startup industry is seeing a case of role reversal. Founders, who were previously rigorously scrutinized by investors, are now being subjected to the same intense scrutiny. Following a series of instances in which investors turned on them and withdrew from follow-on rounds, startup owners have become exceedingly selective in the kind of investors they choose to work with.

According to a half-dozen investors, business experts, and founders who spoke with Mint, entrepreneurs want to ensure that investors share their vision and would assist them in difficult times via reference checks and due research on the funds.

The founders have been alarmed by recent examples of investors turning the tables on them, limiting follow-on investment, and demanding the development of a more robust business plan. After the financing winter became more severe, the tendency accelerated, creating gaps in the investment ecosystem. "Only the highest level 10% to 15% of assets in the mid-late-stage growth market are of interest to investors; those entrepreneurs have all the options. Interesting enough, even within these, the winning and losing bids have margins of 30% or less, meaning that the softer problems are more important than ever before in the founder's consideration set, according to Kashyap Chanchani, co-founder and managing partner of the investment bank The Rainmaker Group.

The founders are focusing more on these concerns, from who the business hires to what rights each investor receives. "Does the investor's financial sheet have a lot of room? Does their reputation aid in luring additional investors or facilitate the IPO? Does it significantly alter the dynamics of my board? How do the results of the peer reference checks look? More often than ever, entrepreneurs are posing these questions, he said.

According to experts, as money has grown more commoditized, a founder's access to global markets and expertise operating businesses comparable to theirs in other countries has become increasingly important.

Since the community has grown, there are means for founders to verify references on investors to learn more about their methods and contributions. While most funds may provide monetary assistance, only those with unique abilities can really provide value and open doors, according to Anjana Sasidharan, partner and head-India at L Catterton, an investment firm that focuses on consumers and is sponsored by luxury goods company LVMH.

Industry analysts assert that in early-stage investment, the character of investors and their capacity to participate in succeeding rounds are always important considerations. The amount of cash and the speed at which a fund can wire the money, however, was the sole criterion founders would consider in the growth stage 24 months ago since the product market fit and total addressable market—the most crucial parameters of a business—were already established. Now, it also crucial whether the investors are willing to support founders through difficult times and while making difficult choices.

"Founders consider bringing on investors who share their values and the company's mission. The capacity to support a company through difficult times and choices is crucial, according to Ankit Agrawal, co-founder and CEO of InsuranceDekho.

Earlier this month, the company secured $60 million in a series B fundraising round from investors including MUFG and Beams Fintech Fund.

Investors did not query the founders about the growth trajectory and values two years ago, during the financing boom.

Investors have started asking more challenging questions due to the drying up of cash and the failure of many firms to grow beyond a certain point.

Investors have not only declined to take part in follow-on rounds, but some have also questioned firm governance processes and taken strict steps to ensure founders stick to the script, causing the split to become even more obvious.

"Both investors and entrepreneurs profit from the diligence process, which was originally designed to provide investors more knowledge about the founders. It takes ten years to build a firm, therefore we owe it to the founders to give them our full support. We reiterate this promise with thoroughness. As investors, we also advise our founders to carefully research the company and anybody assuming a board position. Finding problems is only one part of the process; the other is figuring out how to work together effectively. stated Alok Goyal, a partner and co-founder of early-stage startup funding company Stellaris startup Partners.