Objective and Problem Solving: The offering of any startup should be differentiated to solve a unique customer problem or to meet specific customer needs. Ideas or products that are patented show high growth potential for investors. 

Market Landscape: Market size, obtainable market-share, product adoption rate, historical and forecasted market growth rates, macroeconomic drivers for the market your plans to target.

Scalability and Sustainability: Startups should showcase the potential to scale in the near future, along with a sustainable and stable business plan. They should also consider barriers to entry, imitation costs, growth rate and expansion plans.

Customers & Suppliers: Clear identification of your buyers and suppliers. Consider customer relationships, stickiness to your product, vendor terms as well as existing vendors.

Competitive Analysis: A true picture of competition and other players in the market working on similar things should be highlighted. There can never be an apple to apple comparison, but highlighting the service or product offerings of similar players in the industry is important. Consider the number of players in a market, the market share, obtainable share in the near future, product mapping to highlight similarities as well as differences between different competitor offerings.

Sales and Marketing: No matter how good your product or service maybe, if it does not find any end use, it is no good. Consider things like sales forecast, targeted audiences, product mix, conversion and retention ratio, etc.  

Financial Assessment: A detailed financial business model that showcases cash inflows over the years, investments required, key milestones, break-even points and growth rates. Assumptions used at this stage should be reasonable and clearly mentioned. See sample valuation template here (to be sourced under templates section)

Exit Avenues: A startup showcasing potential future acquirers or alliance partners becomes a valuable decision parameter for the investor. Initial public offerings, acquisitions, subsequent rounds of funding are all examples of a exit options.

Management and Team: The passion, experience and skills of the founders as well as the management team to drive the company forward are equally crucial in addition to the all the factors mentioned above.

Investors realize their return on investment from startups through various means of exit. Ideally, the VC firm and the entrepreneur should discuss the various exit options at the beginning of investment negotiations. A well performing, high-growth startup that also has excellent management and organisational processes is more likely of being exit-ready earlier than other startups. Venture Capital and Private Equity funds must exit all their investments before the end of the fund’s life. The common exit methods are:

i) Mergers and Acquisitions: The investor may decide to sell the portfolio company to another company in the market. For example, the $140mn acquisition of RedBus by South African Internet and media giant Naspers and integrating it with its India arm Ibibo group, presented an exit option for its investors- Seedfund, Inventus Capital Partners and Helion Venture Partners.

ii) IPO: Initial Public Offering is the first time that the stock of a private company is offered to the public. Issued by private companies seeking capital to expand. It is one of the most prefered methods by investors to exit a startup organisation.

iii) Selling shares: Investors may sell their equity/shares to other venture capital or private equity firms.

iv) Distressed Sale: Under financially stressed times for a startup company, the investors may decide to sell the business to another company or financial institution.

v) Buybacks: Founders of the startup may also buyback their shares from the fund/investors if they have liquid assets to make the purchase and wish to regain control of their company.

A term sheet is a “Non-binding” list of propositions by a venture capital firm at the early stages of a deal. It summarizes the major points of engagements in the deal between the investing firm/investor and the startup. A term sheet for a venture capital transaction in India typically consists of four structural provisions: valuation, investment structure, management structure and finally changes to share capital.

i)          Valuation: Startup valuation is the total worth of the company as estimated by a professional valuer. There are various methods of valuing a startup company, such as: Cost to Duplicate approach, Market Multiple approach, Discounted cash flow (DCF) analysis and Valuation-by-Stage approach. Investors choose the relevant approach based on the stage of investment and market maturity of the startup.

ii)         Investment Structure: It defines the mode of the venture capital investment in the startup, whether it is through equity, debt or a combination of both.

iii)        Management Structure: The term sheet lays down the management structure of the company which includes a list for the board of directors, and prescribed appointment and removal procedures.

iv)        Changes to share capital: All investors in startups have their own investment timelines, and accordingly they seek flexibility while analyzing exit options through subsequent rounds of funding. The term sheet basically addresses the stakeholders’ rights and obligations with respect to subsequent changes in the company’s share capital.