September 1, 2021
The increase in the flexibility of the economy has given rise to multiple start-ups. While these start-ups might have a strong vision and an exciting idea, they cannot survive in the dynamic business environment without substantial financial support.
Start-ups seek investments from multiple people, including investors who have been building companies for a long time. Based on the idea and the start-up stage, these investors make robust investment decisions for companies in the seed stage, Series A, Series B and Series C.
Mr Tarun Davda, the Managing Director of Matrix Partners, and Mr Ashish Kumar, a partner at Fundamentum Partnership, shed some light on how investment decisions are taken for start-ups at different stages how the finances drive growth for these companies.
While a start-up has several elements attached to it, the more significant factors tend to change with the growth of the start-up. There are no theoretical frameworks that can be applied directly to any start-up. However, there are specific tried and tested methods that can be used to get the desired results.
When a company is at series A, the considerations are made depending on the early project management framework, which results from the business idea and the vertical in which the company is operating. The definition of PMF changes from company to company.
When you are at series B, there is a considerable movement from early PMF to a scalable PMF. Here, a company is expected to foresee scalability in the market in which it operates, and the team has integrated all its efforts to achieve a particular goal.
Series C talks about a profitable PMF. Companies in this stage have proven to have a working business model, and they have tangible results that contribute to the company’s growth. You, as an entrepreneur, will reduce a certain level of risk at every stage before you reach series C. De-risking is an essential element for any business model as the business becomes more scalable with the lowering of risk.
As an investor, you can look at the metrics of the company from the buying viewpoint. For instance, for a content company, the number of daily active users is a good metric, but the elements of this metric can be easily bought. On the other hand, engagement is one such metric that one cannot buy easily as there are multiple factors involved when the brand engages with the user. An investor will focus on the sanity metrics, which is unique to the platform.
According to Mr Ashish Kumar, there are two types of companies:
For a company nearing profitability, the year-on-year growth rate and the unit economics are considered essential performance metrics for both investors and the company.
In the case of the Winner takes all model, there are two types of metrics that investors look for:
An increase in both of these metrics is seen as a lucrative opportunity for investors.
For a consumer internet company like Ola, Matrix Partners looked into multiple metrics like:
Once these metrics reach a point where they start showing satisfactory results, you can look out more complex metrics like EBITDA, ROCE, match of demand and supply etc.
For Ola, reducing the average wait time was one of the significant contributors to the company’s success. Consumer cohorts also played an essential role in understanding the demand for Ola services. Such metrics can only be tracked down if a consumer decides to experience the service again with the same brand. The cohorts here can further be divided into Ride Cohort and Revenue Cohort.
The degree of usage of data science is increasingly becoming a metric for measuring or analysing the growth of a consumer internet company like Ola.
Mr Tarun Davda says, “The best SaaS companies of what we’ve seen is that they continue to grow but will end up having a negative net revenue churn.” This means that these companies can grow by 30-40 per cent without putting in much effort.
Other metrics include:
Most global consumers can generate a $10 Gross Margin Value out of the $1 investment they receive. For an investor, the return on capital is a critical element, and this should be a key growth contributor for any SaaS company planning to become a market leader.
A successful consumer internet company works out their input metrics as they start growing. With the improvement in their business proposition, they should emphasise the Derivative Metrics, which gives an even better picture of how the company is growing. Some of these metrics are:
PharmEasy, a consumer internet medical company, is in the space where market share is not a very relevant comparative metrics. In such a case, you will have to start looking for other accelerators like the brand value that can contribute to the company’s growth. Good customer experience and the product offering were the accelerators that helped a company like PharmEasy grow 3X times.
Product enhancement to the marketplace stakeholder is also a fundamental metric of growth for consumer internet companies. In the case of a famous tourist company, Travel Triangle, the agents worked as accelerators for the business.
There is a market for your product, and your go-to marketing strategies would define a need for the market. In a country like India, the market is not deep enough for the applicability of a product-market fit.
Investors also lookout for a founder market fit before investing in a business. Some founders are more suited for a particular company or an industry as compared to others.
The metrics tend to change with every innovation that comes into the market. In the case of the self-driving vehicles industry, the capital expenditure is enormous. In these businesses, an important metric is the percentage of vehicles getting at least one booking a day. With the increase in business, the metric changes to 5-6 rides per vehicle.
In a country like India, multiple players start solving the same problems, making it difficult for them to capture market share. Going platform first is the best way to go about it. Think about your customer value proposition as when this factor gets coupled with the platform first approach, and the business tends to succeed.