Over the last few years we have seen a rise in a class of investors that have plugged a hole in the fund raising exercise that every startup has to tread on its way to getting to a certain size before the big boys of the VC world get involved.

Till recently this activity was restricted to a set of people who have either been entrepreneurs, run startups themselves with or without successful exits or High Net-worth Individuals, who have been exposed to financial products that fall outside the assured returns ambit.

There is increasingly an influx of individuals that goes beyond this narrow and restricted range – which is great for the startup ecosystem. It widens the set of people getting involved with this activity, not only in terms of access to pools of capital that would not have necessarily been deployed in startup capital fund raising, but also the much cited network effects in terms of availability of  relevant industry experience and skill-sets for mentoring fledgling startup initiatives.

But what skews the situation dramatically is how some startup founders and entities dispensing financial products are using (abusing?) this much needed resource. I’m increasingly seeing an undue focus on what returns investors (all paper money) made in the last couple of years, a year and in some cases, even the last 3-5 months!  

What are these ballyhooed returns based on? What is the basis for this increase in valuation, what is the said valuation based on in the first place? This amounts to a complete mis-selling of an asset class that has no track record of revenues and customers, backed by no real underlying assets and no definitive line of sight as to what the future revenue growth will be – other than an opinion of a few folks charted out in a spreadsheet.

Angel/retail investors have to realize that this is at least a 7-8 year horizon game. They should focus on what the product is and what the team is trying to do in terms of disrupting the market place and satisfying a market need.

There are several milestones that a startup has to traverse in this time frame (and I’m only focusing on the fund raising aspect, leave only all the moving parts of running a startup). Raise seed money, then raise larger and larger rounds of funds through the much traversed fund raising tango that looks something like : seed – team and concept, series A – product, series B – customers and traction, series C – scale, series D – profitability and so on.