Understanding How Venture Capitalists Assess Startups

The rapid development of Indonesia's startup ecosystem has implications for the opening of investment opportunities by venture capital companies. In order to get the best potential, careful appraisal techniques are the strategy of investors in investing choose investment destination. For founder, knowledge of how investors value is also important to understand, because basically startups and investors will form a strategic mutual relationship.

Indonesian Venture Capital and Startup Association (AMVESINDO) in a session webinar specifically discuss this topic. Present as a speaker was the Deputy Secretary General of AMVESINDO Andreas Surya, who is also a partner of Kejora Ventures. He said, "Not all businesses that are classified as investment must be a venture capital investment destination. Investors tend to already have specific targets, and are now increasingly looking for innovations that can have an impact and even change people's tastes and behavior."

The current pandemic has clearly become good lesson for investors, about how to see startup business models can agile adapt to market share. For this reason, according to Andreas, there are several aspects that become a benchmark for venture capitalists when looking for startups. First, the business model must scalable, startups can increase the scope of business well without being accompanied by a high increase in costs. Then repeatable, business does not only run in one particular cycle. And the third one hyper growth, which is able to show super fast growth.

To get an assessment of these three things, there are usually four main variables that the venture capital team will comprehensively look at and test, including founder, market, product, and performance. In assessing founders, investors look at the capabilities and passion owned in running the startup. Things to do like background check related to their performance and experience. For early-stage startups, this assessment is crucial -- as investors invest in founder.

"Because this stage is very subjective, there are at least three stages of research that investors can do for this aspect. First, do an internal study such as desk study about the industrial landscape and market to measure whether founders able to compete in battlefield this. Then, increase direct interaction with founders, clarify the information we receive, see the product, see customer journeyher, the internal procedures. Then lastly, take the time to reference check to business partners, past investors, and previous employees of founders the. There is always a gap to be explored," explained Andreas.

After the founder, the next variable is the market. Investors will judge how much potential market that is worked on by related startups, including projecting whether the market share will grow and startups present at the right timing. The way to measure it is more objective than before, because it can be done through research by asking consumers' perceptions, satisfaction levels, and interests in the segment.

The next variable is unique value proposition products developed by startups. Here, investors will see about the competitive map that exists in the market and what added value it is trying to present. When assessing early-stage startups, investors usually don't have enough data on costs and profitability. Assessment will rely on qualitative aspects, or can only compare with data proxy (number of downloads, site traffic etc) and benchmarks with similar businesses.

Operational and financial performance are the last variables to be looked at. Ability founder in carrying out the execution of his plans will be seen here. Venture capitalists will ask for historical financial statements, projections, economic unit or cost structure, and potential profitability. Startup potential for exit is also an investment factor.

In addition to technical aspects, there are also more principal things such as the common vision between founder with investors. As stated by AMVESINDO Chairman III Chrismanto Saragih who is also a CRO of Family Venture Business Partners, "For example, there are types of impact investors which not only assesses the profitability aspect but also looks at the social and environmental impacts of a business on society."

He continued, in assessing the business feasibility of venture capitalists, sometimes they also carry out direct assessments in the field. "We have experience with candidates investees in Central Java from the agricultural sector, which carries out the production and marketing of organic rice in an integrated manner. We do a direct assessment end-to-end starting from looking at the manufacturing process and fertilizer factory, managing rice fields, having dialogue with farmers and fertilizer factory managers, we also check the land, because if we go through paper We just can't be 100% sure," said Chrismanto.

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