Robert Ochtel’s Blog

An Experienced Approach to Venture Funding

Essential Element #5: Target Your Funding Audience.

Often, start-up companies looking to secure equity funding from venture capitalists or other private equity sources do not spend any time learning about their potential investors and the types of venture capital firms that are available as funding sources or their specialties. By doing your homework on the venture capital firms and their specialties, one can target the appropriate venture capital audience for your company, its target industry, technology, stage of funding, and geographical preferences. So, it is important to become a “sophisticated” entrepreneur. That is, do your research on your potential venture capital base that will be receptive to you, your company, and its technology, product, or service offering.

How to Approach the Venture Capitalist

The best way to approach a venture capitalist is through a quality or “soft” introduction. Unsolicited business plans get rejected 95%+ of the time. With a “soft” introduction through a banker, lawyer, personal friend, accountant, or another entrepreneur, the venture capitalist then has a reference point in which to consider the business plan. If your contact has a good reputation with the venture capitalist, they will not want to introduce a plan that is inconsistent, incomplete, or will tarnish their reputation, and, as such, has a much higher probability of being reviewed and considered by the venture capitalist. As always, it is not “what you know”, but “who you know” that makes the difference in many career situations. This is especially true within the venture capital community.

Meeting the Venture Capitalists

Many entrepreneurs do not realize that the initial meeting with the venture capitalists is primarily a “selling” task. Here, it is the entrepreneur’s job to present the essence of your company and its business plan concisely. The object is to convince the venture capitalists of your plan’s merits and at the same time earn their trust and mutual respect.

It is also a mistake to assume the venture capitalists have read your business plan and/or executive summary. It should be remembered that venture capitalists are by their nature very busy individuals. Therefore, in many cases they will have not read your plan. This by no means shows a lack of interest on their part. It may be that they are very interested in the “space” or market you are addressing, understand the competition within this space very well, and are looking for a company that is offering disruptive technology which provides a defendable competitive advantage in the market so that they can make an investment to benefit their investment portfolio. Many venture capitalists I have met or presented to have a very clear idea of the “space” they would like to invest, but at that same time are looking for that company that provides them with appropriate reasons to invest.

Most meetings with venture capitalists are approximately one hour in length. Make sure before your start your road show pitch that you discern the amount of time available for the venture capitalists. If you have an hour, do not assume you have the total amount of time to present. As stated earlier, an appropriate rule of thumb is that for one hour of time; spend 20 minutes presenting your road show pitch and 40 minutes for questions and answers. It should be noted that the venture capitalists, although interested in your pitch and remaining fairly attentive, are often much more interested in getting their questions answered to determine if your company has what it takes to be a candidate for an investment. So make sure that you are prepared to answer many questions from the venture capitalists from all different angles and various types of subject matter. When the meeting is done, make sure you find out what the next steps are so that you may prepare and follow-up appropriately.

Do it again until you are successful

There are many things to learn from meetings with the venture capitalists. Many of which are positive, although not all meetings can be successful. As such, one should not be disappointed if venture capitalists do not show an interest in your company. This could be for many reasons, including the following:

  • Investment Opportunity is Not Right: The investment opportunity is not of interest to the venture capitalist. Since not all meetings with venture capitalists can be successful, take what you learned from the meeting and improve your road show pitch for the next meeting. By using each meeting as a testing ground, entrepreneur’s can only improve themselves and their “pitch” for the next meeting with a potential equity investor.
  • May Not Ring True to the Investor: Many times even though your company and its business plan is a good one, it may not ring true to the particular venture capitalists you presented to. That does not mean that there will not be other investors interested in your company and your business plan.
  • Already Has Similar Investments: It is often the case that the venture capitalists are interested in your pitch because they have invested in or are considering investing in a company with a similar product or service offering in the same “space”. This many times is the case and allows these same equity investors to measure your investment opportunity against the one they are invested in or are considering investing in.

 Often during meetings, venture capitalists have opinions about your company and its technology, products, or services that are contrary to your vision for your company and its future. This is too often the case. This does not mean they are right. In many instances, they are only throwing out opinions to see how you are going to react, and at the same time test your resolve and vision as an entrepreneur. Also, as often the case, if you talk with three different venture capitalists, you will get three different opinions. As with many subjects, “opinions are everywhere”. Do not let this type of response dissuade you from moving your company forward in the direction you choose for your company. It is often smart to consider multiple views, but you must assume a track that you are comfortable with for you and your company.

Finally, you should learn from each meeting and experience with various venture capitalists. Each meeting provides you with the opportunity to improve your road show pitch, as well as hone your ideas and vision for your company. The key here is to move on to the next meeting and “do it again” until you are successful.

The information outlined in this article comes from my new book entitled “Business Planning, Business Plans and Venture Funding – A Definitive Reference Guide for Start-up companies.” This book is available at www.carlsbadpublishing.com.

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February 23, 2009 Posted by | Venture Capital | 3 Comments

Essential Element #4: Know Your Odds in Securing Funding.

As can be expected for start-up companies, venture capital financing is very difficult to secure. Most venture capital firms receive from several hundred to more than 1,000 business plans each year. As one can imagine, many of these plans are not reviewed or even looked at. Of the business plans that are reviewed, one can expect the following:

  • Sixty percent were rejected after a 20- to 30-minute scanning.
  • Another quarter was discarded after a lengthier review.
  • Approximately 15% were investigated in depth, and two-thirds of those were dismissed because of serious flaws in the management team or the business plan could not be easily resolved.
  • Of the 5% that were viable investment opportunities, terms acceptable to the entrepreneur(s) and other existing stockholders were negotiated only 3% of the time.

 

Therefore, as an entrepreneur with a comprehensive business plan being the ticket for consideration, one has only: 1) a 15% chance of being seriously considered for an investment, and 2) a 3% chance of securing capital from the venture capital community. Also, as a rule of thumb, it takes approximately 150 to 300 hours to develop a comprehensive business plan. Finally, it should be noted that entrepreneurs often have unrealistic expectations regarding the time it takes to secure funding from private equity investors.

  • For angel investors is it typically 3 to 6 months.
  • For venture capitalists it is usually 9 to 12 months or more.

In today’s environment these time lines are much longer.

As outlined, venture capital funding is not for the faint of heart.

The information outlined in this article comes from my new book entitled “Business Planning, Business Plans and Venture Funding – A Definitive Reference Guide for Start-up companies.”  This book is available at www.carlsbadpublishing.com.

February 16, 2009 Posted by | Venture Capital | Leave a comment

Essential Element #3: Know the Funding Community- Angel Investors vs. Venture Capitalists.

There are various funding options available to entrepreneurs. This includes self-funding as well as funding from third-party equity sources. The funding options include bootstrap, angel, venture capital, and corporate partner funding. The bullet item list below outlines these various funding sources, the funding stage, and typical associated funding ranges.

  • Founders, Friends, and Family: Pre-Seed, Seed and Start-up; $25K – $100K
  • Individual Angel Investors: Seed and Start-up; $100K – $500K
  • Angel Groups: Start-up and Early Stage; $500K – $2.0M
  • Venture Capital/Corporate Partner Funds: Early and Later Stage; $2.0M and Up

For purposes of this article we will focus on angel investor and venture capitalists.

Angel Investor vs. Venture Capital Funding

Venture capital investing is generally the most well-known type of start-up investment services available in the market. Although many entrepreneurs are aware of venture capitalists and associated venture funding, many are not aware of the process, issues, and concerns that arise when engaging with venture capitalists. As a way of an introduction, the following bullet items outline some of the basic differences between angel investors and venture capital firms.

  • Personal Background: Angel Investors: Entrepreneurs; Venture Capitalists: Money mangers
  • Money Source: Angel Investors: Own money; Venture Capitalists: Fund provider’s money
  • Firms Funded: Angel Investors: Small, early-stage; Venture Capitalists: Medium to large, Later stage
  • Amount of Investment: Angel Investors: Small; Venture Capitalists: Large
  • Due Diligence: Angel Investors: Minimal; Venture Capitalists: Extensive
  • Contract: Angel Investors: Simple (10 pages); Venture Capitalists: Comprehensive (!00 pages)
  • Monitoring of Investment: Angel Investors: Active, hands-on; Venture Capitalists: Strategic
  • Exiting of Firm: Angel Investors: Of lesser concern; Venture Capitalists: Very important
  • Rate of Return: Angel Investors: Of lesser concern; Venture Capitalists: Very important

As noted above, the underlying characteristics that delineate angel investors are much different than that of venture capital firms. This is primarily a function of nature of the organizations and background of the two types of investors. Where angel investors generally invest smaller amounts of money with the goal of facilitating the start-up company’s move to the next level of third-party investment from venture capital firms, venture firms generally invest large sums of money with the goal of cashing out in three to five years through an initial public offering (IPO) or through an acquisition by a large corporation. The following bullet items provide a comparison of the investment statistics between angel investors and institutional venture capital financing sources.

  • Funding Sources (U.S): Angel Investors: 234,000; Venture Capital Firms: 1,830
  • Annual Investments: Angel Investors: $25.6 B; Venture Capitalists: $35B
  • Total Transactions: Angel Investors: 51,000+; Venture Capitalists: 2,910
  • Seed Stage Transactions: Angel Investors: 25,000+; Venture Capitalists: 128
  • Mean Investment: Angel Investors: $500,000; Venture Capitalists: $8.9M

As noted above, statistically, angel investors focus much more on seed and early stage company funding. With over 51,000 total transactions a year, and over 25,000+ transactions in seed stage companies, entrepreneurs are in a much stronger position in receiving funding from angel investors than venture capitalists, which only funded 128 seed transactions in 2005. So, as outlined, with 234,000 independent angel investors in the US and only 1, 830 professional venture capital firms, entrepreneurs should focus their seed stage funding efforts on securing money from angel investors.

In addition, the interaction between the angel investor and the start-up company versus that of the venture capital firm and the start-up company are generally very different. Where the angel investor(s) are more nurturing and patient toward the start-up company, the relationship between venture capitalists and the start-up firm can many times be better characterized as an “adversarial” relationship based on meeting financial projections with unrealistic expectations. It has been my experience that the underlying difference between the two relationships is that many venture capitalists are MBAs from top business schools with little or no experience in developing a start-up from the ground up. They concentrate on the “should be projections” of the financial statements, as opposed to the realistic issues in developing a business. Given this difference, and the necessity of working with the venture capital community, it is highly recommended that entrepreneurs and their start-ups work with venture capitalists that have “hands-on” start-up experience. This will facilitate a much more mutually beneficial relationship between the two parties, the entrepreneur and the investor.

The information outlined in this article comes from my new book entitled “Business Planning, Business Plans and Venture Funding – A Definitive Reference Guide for Start-up companies. This book is available at www.carlsbadpublishing.com.

February 9, 2009 Posted by | Venture Capital | , , , , | 1 Comment

How do entrepreneurs secure funding in today’s environment?

 This is a very challenging environment to raise funding from venture capitalists. So how do entrepreneurs raise money in this environment? During his recent interview (2/3/2009) with Steve Mullen of Start-up BizCast, Robert Ochtel provides advice to entrepreneurs seeking funding in today’s environment. To listen Robert’s interview go to Start-up BizCast #80 – Small Business Venture Funding at: http://www.startupbizcast.com/2009/02/04/startup-bizcast-80-small-business-venture-funding-robert-ochtel/

February 4, 2009 Posted by | Venture Capital | , , , , , | 2 Comments

Essential Element #2: Take Time to do Business Planning before You Jump.

More often than not start-up companies do very little product planning or basic product or market due diligence before they decide what path is best for their company. This “read, fire, aim” approach to business planning has caused many start-up companies to fail or at best restart their planning process after multiple failed efforts in meeting with investors. The old adage “you never get a second chance to make a first impression” is true – especially in the private equity funding community. More often than not, given the small, insular characteristics of the finance community, you will not get a second chance to restart your company and secure investor interest. So take time to do business planning before you jump.

Business Planning and Business Plans – What’s the Difference?

The difference between business planning and a business plan is that one is a process – business planning – and the other is the result of the business planning process – a business plan.

The Business Planning Process
Business planning is a process. Many large- and medium-sized corporations go through their business planning process on an annual basis. This process determines where they are going to spend their resources (capital equipment, human resources, etc.) in the future based on the dynamics of the market place. This annual process is sometimes very well defined, with an end date and deliverables that are provided at all different levels of management. In other cases, the business planning process is very informal and does not require the same level of due diligence. In small companies, especially start-ups, the business planning process can be non-existent. Whether well defined or informal, the objective of the business planning process is to set the direction of the corporation for the next three to five years based on the dynamics of the market place. Business planning provides a process that all levels of the organization can review and agree to, such that everyone from the lowest to the highest level of the organization is moving in the same direction.

With the stated goal of optimizing the return on investment for the corporation, and ultimately the shareholders, the business planning process is the key for successful start-up companies. By going through this business planning process, you can determine the best way to spend the company’s resources for the next three to five years. Many times, various technology, product, or service ideas or concepts do not make it through the business planning process. This is the “stated goal” of the business planning process – to weed out those technologies, products, or service offerings that do not provide a sufficiently high enough return on investment opportunity for which a company should spend its valuable resources.

The Business Plan
The business plan is the end result of a start-up company’s business planning process. The business plan is a document that delineates, in detail, the technology, product, or service offering that is being funded for the next three to five fiscal years and possibly beyond. The business plan is a single document that provides all the details of the technology, product, or service offering, from expected development costs to projected market penetration over the foreseeable period of interest to the expected financial return on investment. The business plan is often developed over a period of time and goes through multiple iterations. The end result is a “complete” document that provides all of the necessary details for a given technology, product, or service offering.

Why Both Business Planning and Business Plans are Necessary

The business planning process, and the result, the business plan, are necessary for companies to rationally determine where to spend their valuable resources, over the projected period of interest. For large corporations, the business planning process can result in the development of multiple technology, product, or service business plans. Refer to the following figure. On the other hand, for start-up companies the business planning process generally results in the development of a single business plan. Refer to the following figure.

The Business Planning Process – “Provides the Roadmap”
The business planning process is used to provide the “roadmap” for your corporation. If not done, your corporation, public or private, has no rational path forward in which to invest its resources. In addition, there is no ultimate understanding of the “topography” of the market. The result is that your corporation is walking down the road with a “blindfold” on, not knowing what to do or where to invest its resources. Even if the blindfold is taken off and there are multiple paths in which to take, your corporation does not know based on a rational planning process, which path forward will be the best for the company. There are no defined strategies or tactics that allow your company to navigate the turns or bumps in the road. In addition, there is no way to define your company and how you plan to position yourself, relative to your competitors, in the market.

The exercise of going through the business planning process and at the same time using this process as a tool in which to vet your company’s business ideas, resulting in a focused business plan does several things for your company. First, this process allows all business concepts and ideas to be reviewed on a level playing field. This gives each business idea and resulting business plan the ability to be presented and evaluated on its own merits. Second, this process provides the ability for the company to review each business plan on its investment requirements and return on investment. This provides a financial basis in which to evaluate all business plans. Finally, once completed it provides a corporate-level vetted roadmap in which your company can move forward to introducing its new technologies, products, or services into the market.

The Business Plan – “Sets the Bar”
The business plan “sets the bar” in which a corporation measures itself and its overall performance. Based on a business plan or multiple business plans, a corporation then has a way to determine if it is performing up to the its own projected goals and standards, as well as the generally accepted standards that define a successful company in the industry in which they are participating. These can include, but are not limited to:
• Revenue growth objectives,
• Market share gains,
• Gross margin targets,
• Sales and marketing objectives,
• Customer traction goals,
• Operational margin goals,
• Earnings growth objectives, and
• Return on investment targets.

The business plan can also determine if the technology, product, or service offering is maximizing the return on investment for your corporation by comparing projected and actual performance over a given period of time.

By going through the business planning process and developing the resultant business plan, your corporation can then develop a proactive, rational plan for addressing the market for its underlying technology, product, or service offerings.

The information outlined in this article comes from my new book entitled “Business Planning, Business Plans and Venture Funding – A Definitive Reference Guide for Start-up companies. This book is available at www.carlsbadpublishing.com.

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February 2, 2009 Posted by | Venture Capital | , , , , , | 2 Comments