The article is contributed by Andesh Bhatti - Angel Investor & Founder of Collectcent.
Seed investors usually invest for one of three reasons - indulgent, humanitarian, and utilitarian. They invest either because they believe the idea will bring a transformation in the market, uplift the community, or the most evident and widespread - bring in a good ROI. Even though every seed investor has a specific reason for investment, they are all driven by market trends.
For instance, even though financial, industrial, and technology-related businesses are currently dominating India's stock market, attracting both local and global investors, the historic highs of the MSCI India index which received twice the global index returns in the last year have been fuelled by demographic trends, government and fiscal policies and geopolitical shifts of the global economy post the pandemic.
This is the phenomenon that has resulted in a boom in the established networks and syndicates, as well as individual investors who can provide essential seed funding- and bootstrapped start-ups have especially caught their interest.
Why should bootstrapped start-ups matter for seed investors?
Bootstrapped businesses attract investors because they have already made it through the 'valley of death', found product-market fit, and most probably (although due diligence will reveal the specifics of it) generated enough revenue to keep the firm de-risked. Not to mention, that because they don't have the buffer of investment capital to fall back on, bootstrapped start-ups are also more creative and confident. There are other advantages to funding a bootstrapped start-up as well.
Entrepreneurial self-confidence is fostered when people are pushed to think outside the box, come up with original solutions, and make essential trade-offs. This is significant for investors who are looking for innovative ideas to invest in.
Plus, bootstrapped start-ups usually exclusively look for and work with people who are willing to have a stake in the company's success, and are dedicated to seeing it succeed. This fosters a sense of belonging and commitment within the team.
Building a firm without investment capital also forces you to be more resourceful and deliberate. You’re careful with hiring and outsourcing, wanting to accomplish more with fewer resources.
What happens when bootstrapped start-ups and seed investors align?
Start-up founders and investors both benefit from an investment. Right from the start, when the investment is made, deficit spending has the potential to significantly enhance growth if done correctly. Investment allows the bootstrapped start-up to expand faster than it would have been able to without. Founders are essentially giving up partial ownership in exchange for greater growth and ultimate value. Overall, it is a great prospect for investors and a great way for start-up founders to spend or share their equity- but first, both parties need to reach the optimum place for action.
When does the investor’s interest arise?
Building a team, testing the concept, establishing an online presence, garnering attention, finding consumers, and filing for intellectual property protection are all examples of major steps in the start-up development process. Once these are achieved, bootstrapped start-ups begin to look to raise capital to meet a new set of milestones.
In the end, it all essentially comes down to important milestones and pivotal junctures called inflection points. An inflection point occurs when the value of a firm rises suddenly because of factors that include reduced risks, sanctioned standards, and verified predictions. It is when investors see that these key milestones have been met and the company's valuation gets a boost, that the investors are ready to take a closer look at it.
Early-stage Funding Activities are getting busier
Indian investors' profiles are evolving rapidly, as when more money flows in, more start-ups take-off, and exits get even more attractive and innovative. It is no longer only senior executives and affluent firm owners who are flocking to investment networks and writing checks to get in on the action; it is also mid-level employees, well-paid tech aficionados, and traditional stock market investors. They are the main drivers of the frenzied activity taking place in the early-stage funding market. In the past year, for instance, 455 start-ups received seed and Series A funding.
The biggest complaint in the investment landscape in India has always been that while there are many ideas and people with potential, access to capital is still not as easy as it is in other developed economies. However, now as things appear to be changing, a large number of previously rejected proposals are likely to be funded, provided of course that they have value to offer.
This implies that an entirely new chapter is about to begin and bootstrapped companies, already well-adjusted to market risks and possessing proven potential for growth (and responsible growth at that) will see great opportunities.