When should you approach VCs/Institutional Investors?

Posted by fshsfhsfh on Saturday, February 18, 2012

While the restaurant business is not exactly a very VC (Venture Capital) friendly business (see my earlier post on this - http://restobizindia.blogspot.in/2011/03/restaurant-business-angel-investment.html), there have been a few transactions in this space recently (Mast Kalandar - Investment by Helion Ventures, Fasoos - Investment by Seqouia Capital). Given the expected growth in the Restaurant industry in the next few years, I expect investment transactions to increase in this space. So if you are a start-up in the restaurant space, what do you need to do to attract VCs and when is a good time for you to approach them?

Based on my interactions with about half a dozen partners in VC firms, here are some broad guidelines. Professional/Institutional investors evaluate opportunities using the following 4 criteria:

1) Growth potential of the opportunity area - will this space allow a few businesses to the tune of 100 Cr each to be set up in 5 to 7 years. In general investors invest in not more than 1 or 2 businesses in a specific area to de-risk their investments. Currently the appetite for early stage investments in the restaurant space is low (especially given that VC investments in Yo China, Kaati Zone, Booster Juice etc. do not seem to have generated returns for the investors yet - even after about 5-6 years. Typical VC investors seem to look for an exit in 5-7 years). So if a VC has invested in a restaurant business already, chances are they will not make additional investments. Other VCs will also be cautious. This will change in the future once a few businesses succeed and generate significant returns for the investors.
2) Quality of the Management team - Self explanatory
3) Scalability of the specific business model with some validation - This, in my opinion, is the most critical yard-stick. The broad consensus is that you need to have about 10 operational and profitable units, with atleast 1 unit in another city. At this number, the team has proven that they can manage scale to some extent, the business model is validated to a large extent and if funds are available, the same model can be replicated quickly without too much further experimentation. Having a unit in another city is some validation that the model will work in multiple cities and the management team has the ability to manage remote operations. At this stage of your business, a VC will put in money to help you scale to about 100 units in 5-7 years and exit through a IPO or by selling to a large private equity player.
4) Price at which the investment opportunity is available - Equity % in return for the investment. This is again self-explanatory. A VC will be expecting a 10x return at a minimum on the investment. So expect to give up reasonable equity for the money.

In summary, the right and the earliest time for you to approach VCs would be when you have atleast 10 profitable and operational units with atleast 1 unit in another city. By bootstrapping, this will realistically take you anywhere between 3-10 years depending on how capital intensive your business is and how much money you personally have access to. In this business, it is unlikely that you will get money based on a 1/2 units, a concept and business model on paper. 

{ 0 comments... read them below or add one }

Post a Comment