Lightspeed’s Anuj Bhargava Explains: What Investors Expect from Start-Up Founders

For technology start-ups, growth funding serves as the catalyst to scale, innovate, expand into new markets and make critical hires. New capital brings strategic value through investor expertise and industry network, customer introductions, helps maintain operational efficiency and mitigate cashflow challenges.

The landscape of venture and growth financings in India has undergone a major shift since the pre-Covid era. The pandemic gave rise to a low-interest rate environment which saw an unprecedented inflow of capital into Indian start-ups with a very strong focus on high growth, often at the cost of high burn. Post-pandemic, the environment has seen a significant shift in focus towards sustainable growth, profitability and efficient unit economics.

What Investors Look For

For an entrepreneur looking to raise growth capital, it is crucial to understand what investors expect when they consider investing in companies at different stages of development. Growth investors (as opposed to very early-stage investors) prioritise scalability in a large market with product technology and differentiation playing a key role, evidence of a proven product market fit (PMF) and a clear path to healthy unit economics.

Several operational and financial metrics serve as indicators for business efficiency depending on the stage of the company and the sector in which it operates. For example, gross margins demonstrate profitability potential at a very fundamental level and customer acquisition costs (CAC) and lifetime value (LTV) are key indicators of the efficiency of the growth and monetization engine. A healthy LTV/CAC ratio is a signal that the profits generated from a certain customer are significantly higher than the business’ investment in acquiring the customer.

Other critical aspects that need to be outlined in the pitch and the equity story as founders prepare for a growth fund raise include key differentiating factors that make the offering more attractive relative to competition, strong execution, strategic thinking and the ability to build a high-quality team which gives a company the “right to win” over others.

Doing Your Homework

In addition to the above, founders also need to be well-prepared with some internal homework ahead of any fund raise. It is quite likely that a growth financing round will take a couple of months to complete, which maybe much longer than the early-stage fund raise the company may have done at its inception.

The diligence process and the information sought by investors is far more rigorous as the company scales up. It is extremely important to do some preparatory work to benchmark the company against its peers, understand the potential valuation metrics and anticipated dilution in order to come up with the appropriate size of the fund raise. It is imperative that the founders can clearly articulate the use of proceeds from any capital raise.

The size of the round is important to determine how much can be raised from insiders and how much needs to be sought externally from new investors. Another important consideration is whether any secondary sale is needed in conjunction with the primary raise to give liquidity to early investors and expand the round size.

The next step in the process is identifying the right set of investors that are able to write cheques consistent with the stage and size of the round. It is important that investors align with the business goals and add value by bringing in industry expertise, a strong network of advisors and have a proven track record of successful partnerships in the relevant sector.

It is equally imperative that founders evaluate the investors and ensure they understand their vision and can commit to a long-term relationship.

Opportunity to Grow

Considering that growth-stage investors often expect a high return on their investment, it is important to present an accurate view of the business and forward-looking projections that can be delivered. Unrealistic valuation expectations and a large size of capital raise are quite often the reasons why some companies struggle to raise capital. Commitment to strong corporate governance also comes under scrutiny as investors link it to ability to attract follow-on financing and timely exits.

The growth-funding stage is extremely pivotal for a start-up’s journey. Most start-ups struggle to raise a successful growth round as the business execution doesn’t often match up to the promise shown at an early stage. But if done right, growth capital offers an opportunity for start-ups to build a strong foundation, invest in technological innovation and attract top talent. It can result not only creating a very large business but also a smooth path to value creation and successful exits either through an initial public offering or acquisition.

The writer is managing director, India, Lightspeed Venture Partners