What Criteria Do Investors Use to Pick Projects to Invest In?
Business angels and venture capital funds are becoming increasingly cautious when choosing investment projects. Rye, Man & Gor Securities (RMG) experts explain this by the fact that the venture capital industry is maturing, raising the bar for projects considered safe to invest in. The total amount of venture investments in Russia shrank to US$ 622 million in 2013, down 31% year-on-year, according to RMG estimates. What are the indicators investors tend to focus on these days, what can influence their decision, and how do they go about looking for startups to invest in?
Team
The most important thing for investors is a team managed by an ambitious leader, rather than just one individual with an idea. Most investors agreed that they would take a well-organized team of two or three people with an idea in early stages more seriously than a “lone wolf” with a good project.
“There has to be an effective, strong team,” Alexander Chachava, Partner at Leta Capital Fund, said.
“People are most important,” Arkady Moreinis, a business angel, shared his conviction.
Monetization
Investors see opportunities for monetization as the second most important feature of a startup project. Venture capitalists believe that startup entrepreneurs would be better off trying to raise money if they already have a working prototype, rather than just a business plan. VCs expect from a beginner IT entrepreneur to have an easy-to-understand working model which would show, as much as possible, how the project is going to make money.
However, if the entrepreneur can only present an idea, he or she can still turn to early-stage VC funds which are ready to invest in building a prototype. For example, AltaIR.vc, iDealMachine and others could invest, on average, up to US$ 100,000 in making a prototype.
“If we believe in the team and the potential market, even if we do not know exactly what the guys are doing, we are ready to invest in a startup like that,” says Sergey Fradkov, Managing Partner at iDealMachine.
Scalability
Last but not least, venture capitalists see a project’s scalability as an important factor.
“We are not interested in [projects that are limited to] a single region, or even the Russian nationwide market,” Yaroslav Shvetsov, head of IT Park business incubator in Kazan puts it bluntly.
“The project must focus on the global market,” Alexander Chachava supports this sentiment.
Focus Areas and Segments
Yaroslav Shvetsov names robotics, gadgets, biomedicine and research-intensive technologies as priority areas. Specific venture capital funds focus on narrow market segments.
“We are interested in marketplaces for transportation and travel services, as well as video services,” says Sergey Azatyan, co-founder and Managing Partner, InVenture Partners.
“Some [venture capital] funds have determined for themselves very precisely in what they are going to invest,” adds Evgeny Gavrilov, CFO, Da You Business. “For example, we at Da You Business are not prepared to invest in the Internet for the sake of the Internet, where revenues stays entirely online, in the virtual world. Online games, dating websites that do not lead to a dinner for two in the real world are not our line of business.”
How do investors find startups?
A majority of the respondents said that they find startups through their Facebook friends. Among other real tools that actually work, the respondents named networking, get-togethers for startup entrepreneurs, venture capital conferences, business partners’ recommendations, professional communities and business incubators at top universities and colleges.
“We use all the available sources: contests, ratings, lists. I am on 80% of judge panels of all events we have going on here,” says Alexey Solovyev, Managing Partner at Prostor Capital.
There are still no barriers separating the investor from a startup entrepreneur: you can send an email describing your project to a venture capital fund. This, InVenture Partners receives about 100 project descriptions a month by email. And, for example, Arkady Moreinis provides personal consultations to startupers at Khoroshaya Respobulika (“A Good Republic”) anti-coffee shop every Tuesday at 2:00 p.m.
Investors recommend novice entrepreneurs to try out a contest as a possible tool, but caution against abusing contest participation.
“This is an excellent opportunity to get exposure and try one’s hand at things,” says Renat Garipov, co-founder, GreenfieldProject.
“If it’s a new startup, which has been exposed to one contest, this is a great positive, but if they canvass their project to a range of contests, this is no longer appealing,” Lydia Knyazeva, Managing Partner, Marly Capital Group, adds.
Click to watch the full video of the survey below:
