Robert Ochtel’s Blog

An Experienced Approach to Venture Funding

Entrepreneurs – Business Plans Are Not Developed For Your Investors!

Today many entrepreneurs complain that their potential investors do not read their business plans.  With an average of over 300 hours of effort required to develop a complete business plan, do they have a point?  I say no!  The real purpose of a business plan is to properly prepare the entrepreneur, with the appropriate background information to raise money for their start-up and not to educate the investors about their company.  This article outlines my reasoning behind this argument.

Until it is Written on Paper a Business Plan is not Real

To develop a complete business plan an entrepreneur has to take their business “concept” from the depths of their mind to the reality of paper.  For many entrepreneurs this is a daunting task.  Most of these same entrepreneurs have never written a business plan before in their lives and really do not understand the amount of research, planning, and diligence effort required to complete this task.  Don’t fool yourself, writing a proper business plan that stands up to the rigors of sophisticated investors (e.g., venture capitalists), is a big effort. As is often the case, in the end, the result is that most of the original concepts or ideas you as an entrepreneur envisioned in your mind regarding your start-up business, and ultimate business plan, will be much different once it is put on paper. I have found this to be the case for every business plan I have written. Although, through the required research, planning, and diligence, the resulting business plan, once written, should reflect the realities of the market and not the original business “concepts” in your mind.  This is an invaluable educational process that will result in you being a much more informed entrepreneur and an “expert” in your business.  As a result of this process, when you get in front of investors, this effort of developing a complete business plan will allow to answer the “tough” questions that will inevitably arise from potential investors.

A Business Plan Substantiates Your Business Vision and Objectives


As an entrepreneur, the exercise of developing a complete business plan allows you to substantiate the vision for your start-up company and at the same time develop market driven objectives that reflect the realities of the market.   This again is an invaluable exercise, as it provides you with a level of confidence that is based on reality and not hyperbole.  Often, once an entrepreneur completes their business plan they realize that their original thoughts regarding the vision and objectives of their start-up company have changed substantially from their original “concepts” or intent.  This is a good thing, as it now provides this same entrepreneur with a market driven vision that has associated business objectives that are now both relevant and achievable. Where before the entrepreneur completed their business plan, their start-up company’s vision and objectives are often unreasonable and would not pass the “smell” test with potential investors.


Remember, often when you present to investors, they will ask tough questions regarding the vision for your company and its overall market objectives. By developing a business plan you will be able to substantiate your response to these questions based on real market data, and a well thought through thorough analysis.  This will provide your start-up company leg up with your potential investors.


A Business Plan Provides Credibility with Your Investors


Completing the task of developing a business plan provides you as an entrepreneur and your start-up company with credibility.  With the completion of your business plan, now you have reference material to substantiate you claims and something to refer to when being questioned by potential investors.  It also shows these same investors that you have the diligence and perseverance to complete such a document and are willing to do the hard work to develop your start-up company.  This is very important to investors as they need to believe that you have the perseverance and drive to get though the tough times. 

I have met many entrepreneurs that talk a good game, but when it comes down to it, they are not willing to put in the required effort to educate themselves, and at the same time bring themselves to the next level by developing a complete business plan for their own start-up company.  This will ultimately not sit well with your investors, because they also know that part of the reason for developing a business plan is to address all of the issues facing your start-up company in the market, and by not doing so, you will more than likely have over looked something.  Finally, if you do not develop a business plan, then those issues that have not been properly addressed through your start-up company’s research and planning process will eventually come out during the investor due diligence process, and may ultimately result in you not securing funding from these same investors.

A Business Plan is a Check Point that is Required by Investors


All investors, when they get to a certain point of interest, will want to see your company’s business plan.  This is generally a “check point” on their due diligence list and is required by all types of private equity investors (e.g., angel investors, venture capitalists, etc.). More often than not, for the larger more established venture capital firms, they will have their junior partners provide a thorough review your start-up company’s business plan, and develop a report that is then provided to the senior partners.  This report is generally the basis that is used to get to the next level of discussions regarding potential funding.  If you do not have a business plan, or your business plan does not meet the requirements of these sophisticated investors, you will not get to the next level of due diligence and ultimately not secure funding. So as an entrepreneur, you need to understand that as some point during the due diligence process, your business plan will be required to be seriously considered as an investment opportunity by your potential investors.


A Business Plan Provides a Basis of Performance Measurement


Your company’s business plan puts a stake in the ground regarding projections of your start-up company’s future performance. As a pro forma based document, your start-up company’s business plan is often used by your investors a measurement stick to determine if your company is performing at the level you anticipated in your start-up company’s planning process.  Therefore, as an entrepreneur, you need to put the proper diligence into the development of your financial pro forma statements.  This will allow you to develop and present achievable market objectives and associated time frames in your business plan. 

From your investor’s point of view, your start-up company’s business plan is used to “set the bar” in which measure your start-up company and its overall performance.  These performance objectives 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.

These performance objectives are often reflected in the terms and conditions of your term sheet and final stock purchase agreement.  Therefore, it is important to develop a business plan that is credible and achievable.

A Business Plan Provides a “Jumping Off Point” for the Future

One of the key benefits of developing a business plan is that you always have a single reference point in which to refer to when looking forward in the constantly evolving market. This does not require that you change your business plan every time you recognize a change in the market. On the other hand, it is important to realize that your company’s business plan is a “living document” and it can be used in the future as a “jumping off point” to reflect changes in the market. This means that changes in the market need to be reflected in your business plan as time moves forward.  Accordingly, not all changes really will affect your day-to-day business plan. Generally, most changes in the market are evolutionary and if you did your homework from the beginning, your business plan has taken care of this, as it is already necessarily a forward-looking document. It is the major changes in the market that may affect your company’s business plan. These things can include a new competitor with disruptive technology, significant changes in the project market growth, substantial changes in the average selling price in the market, etc. These items may cause you to reconsider your business plan. Therefore, as an entrepreneur, your business plan is an important and beneficial document to refer back to when there are significant changes in the market.

As outlined, the business plan is really a tool that is to be used by the entrepreneur to prepare themselves and their start-up company for their meetings with potential investors.  There are lots of benefits to developing a complete business plan, many of which focus on the entrepreneur and their potential success with the investor community.  So, when developing your start-up company’s business plan, remember it is you as an entrepreneur that benefits the most from this exercise, and it is not intended to be a end all for your potential investors.  By developing a complete business plan, the entrepreneur will ensure that their start-up will have the proper focus and at the same time be better prepared when presenting to potential investors.

April 27, 2009 Posted by | Venture Capital, venture finance | Leave a comment

To Become an Expert in Your Field – You Must Become an Externally Focused Entrepreneur

Throughout history some of the most successful companies ended up in failure.  There are many reasons for this, but many times the most telling one is that many of these same companies, as a result of their success in the market, became internally focused and not externally focused companies.  As an entrepreneur, to develop a successful company you need to focus on the external factors that drive your business. This external focus will ensure that you know the key drivers in the market, understand the general trends, and develop a long term sustainable competitive position in your targeted markets of interest.  This article focuses on the external market factors that all entrepreneurs should focus on to become an expert in their field on their way to developing a successful company.

Know the General Market Trends


To become an informed, externally focused entrepreneur you need to understand the general, long term market trends.  This is accomplished by studying the markets, analyzing growth opportunities, and determining the consumers’ needs as well as the technology and service trends in the market.  Understanding these long-term macroeconomic indicators will provide you as an entrepreneur a basis to determine the strategic opportunistic market needs that are not being met in the market today. This will allow you to position your start-up company’s technology, product or service offering to address the unmet needs in the market. By doing this high-level analysis, an entrepreneur will be better equipped to provide their company with a long-term vision and associated product roadmap that will ultimately provide their start-up company focus to drive their success in the market. 

Target Your Markets


As an entrepreneur, determining your start-up company’s target markets of interest is one of your most important externally focused activities. The task of targeting specific markets of interest is usually easier said than done.  There are many market opportunities out there, and as an entrepreneur you need to determine which markets or market segments best fit your start-up company’s technology, product or service offering and at the same time will provide the highest return on investment for your start-up company.  To do this properly, as an externally focused entrepreneur you need to take into consideration the market size, maturity, and growth of all of your potential target markets.  All of these factors will have a tremendous affect on the long term viability of your start-up company.


Market risk is also a key factor to consider when choosing to target smaller, burgeoning markets for your start-up company.  Market risk, is defined here as the ability of a targeted market to grow at a rate necessary to create the appropriate amount of opportunity to sustain your start-up company, and a number of competitors. This is a key consideration when targeting smaller markets.


Finally, as an early stage company, it is often important to identify multiple target markets that are applicable to your technology, product or service offering.  By doing this, you provide the opportunity to support multiple revenue sources, higher return on investment, and at the same time mitigate individual targeted market risk for your start-up company. 


Analyze the Competition


As a start-up company another external factor to consider is the competition in your target markets of interest. Competition may come from large, medium or other small start-up companies.  Competition may also come from other existing companies that have complementary products or that have the capabilities to compete in related markets.  So, as an entrepreneur you need to analyze all possible competitive threats in your target markets to determine the competitive advantages of your technology, product or service offering in the market.  A complete competitive analysis is time consuming, but it often provides the entrepreneur with significant insights to the competitive positioning, and the ultimate competitive advantages of their own technology, product or service offering within their target markets of interest.

An excellent way to develop a complete competitive analysis is to list all of the product features, functions and capabilities that are important to your customer base. At the same time, develop a complete list of competitors in your targeted markets.  This information can then be easily presented in a table format to show how the competitors stack up with regard to these required product features, functions and capabilities.  If done properly, this table will show how your start-up company’s product offers compelling advantages over the competitions’ products. For an explanation on how to develop a complete competitive analysis and examples for various real world applications, refer to my book, “Business Planning, Business Plans and Venture Funding – A Definitive Reference Guide for Start-up Companies.”

Develop a Successful Business Model


All start-up companies must offer a business model that is financially viable and ultimately profitable in the market.  More often than not, your start-up company’s business model will primarily be developed and then driven by other successful competitors in the targeted market of interest and their existing business models.  A successful business model, along with the market size, will drive the potential revenue generation capabilities of your technology, product, or service offering.  Therefore, to compete effectively, as a start-up company you must analyze the other competitors’ successful business models and determine where you may have targeted cost advantages.  These cost advantages can be based on the underlying technology or by lowering the costs associated product itself, its development, or the distribution channel, etc.  The key here is to clearly delineate where and how your start-up company’s business model differs from other successful competitors and results in a significant and disruptive competitive advantage for your start-up company and its targeted customer base.


Call Your Customers


The final component of becoming an externally focused entrepreneur is to know your target customers.  This is only accomplished by calling and then meeting with your customers and discussing your technology, product or service offing with them.  This is where many entrepreneurs fall short and is often what differentiates a successful entrepreneur and their start-up company from its competitors. Only by calling on your customers can you determine what is really important to them in terms of your product’s features, functions and capabilities.  All of the analysis in the world is not a substitute for “real” customer feedback.  Remember, by definition, your customers will know the end market application better than you do.  In addition, as is often the case, what you as an entrepreneur believe are important features, functions or capabilities of your product offering, are many times not really that important to the customer.  Therefore, real customer feedback will provide you with significant insight and at the same time make start-up company a stronger competitor in the market.

To become an expert in your field, as an entrepreneur, you need to be externally focused.  Only then will you have the insight, background, and ability to develop a vision for your company and at the same time determine a long-term sustainable competitive advantage in the market for your start-up company’s technology, product or service offering.  By addressing the items outlined in this article, the entrepreneur will ensure that their start-up will have the proper focus and at the same time be better prepared when presenting to investors.

April 20, 2009 Posted by | Finance, Venture Capital | 2 Comments

Attractive Financial Statements – The First Step to Getting the Attention of the Venture Capitalists

Many first time entrepreneurs have given expertise in a certain area, be it engineering, marketing, business development, operations, etc. When developing their start-up company’s business plan these same entrepreneurs generally leave the development of their financial statements to last. There are several reasons for this, the most compelling of which is they do not understand finance or how to generate the required financial pro forma statements for their start-up company. This can be a big issue for many start-up companies, and one that needs to be addressed appropriately to get the attention of the venture capitalists. This article discusses several general issues facing first time entrepreneurs regarding the generation of financial pro forma statements that are attractive to the venture capitalists.

Venture Capitalists Are “Glorified” Financial Managers

It has been my experience that many of today’s venture capitalists are the products of top tier business schools with no personal experience in being an entrepreneur or starting a company on their own. On the other hand, what they do know is how to analyze financial statements. So, this is what they focus on first when considering a new start-up investment opportunity. This financial statement focus is necessary, since these “glorified” financial managers need to first justify any start-up investment opportunity from pure financial objectives, as defined by the financial return requirements set by their investment fund. Therefore, up front, to determine their initial interest in a new investment opportunity, this is what venture capitalists focus on. If the opportunity does not fit their pre-defined investment criteria, they quickly move on the next potential investment opportunity. This is not an emotional decision; venture capitalists have a board of directors to report to and predetermined investment criteria that are defined in the bylaws of their investment fund, usually an LLC. To these same venture capitalists, it is a numbers game, if a particular start-up investment opportunity does not fit their defined criteria they move on. This is why venture capitalists are generally very short with entrepreneurs and do not see it as their role to provide advice to these same entrepreneurs. A simple “not interested” or “no” is sufficient to them. This often leaves the entrepreneur confused and perplexed.

Return On Investment – Necessary, But Not Sufficient

The return on investment for your start-up company is a necessary, but often not sufficient criterion for consideration by venture capitalists and other professional third party private equity investors. Remember the rule the general of thumb for the venture capital community is 5 to 10 times return on their initial invested monies in three to five years, respectively. This is a goal and not necessarily a reality.

As an entrepreneur if your financial pro forma statements are projecting $50M to $100M in revenue in your fifth year of operations, these numbers, along with those projections for years one through four are discounted substantially by the venture capitalists according to perceived risk. This can be market risk, margin risk, technology development risk, competitor risk, etc. The key point here is that venture capitalists then take your start-up company’s financial projections and run them in their own financial models. This is done for a multitude of scenarios to see if your company’s financial projections hold up to their investment criteria under “worst case” condition assumptions. Therefore, your start-up company’s return on investment projections is only a single data point in considering your start-up company as an investment opportunity. It is only through their own thorough financial analysis that the venture capitalist determines if your company is a worthy investment opportunity and will consider moving forward to the next level of discussions.

Industry Standard Financial Pro Forma Statements

One of the most important factors venture capitalists consider for new investment opportunities is whether a start-up company’s business model is reflected in the market. That is, does your start-up company have a proven business model that is represented by successful companies in your industry segment in the market today. Or is your company’s business model new and unproven in the market. This is an important factor for venture capitalists to understand when considering investing in any start-up company.

Today, almost every venture capitalist I have talked to claims they would have invested in Google. In reality, this 20-20 hindsight does not consider that fact that at the time, Google’s business model was unproven in the market, and as such there were no reference companies that the venture capitalists could refer to that would indicate that there was little risk in their business model and projected financial returns. Hence, I believe that many of these same “Monday morning quarterbacks”, are most likely not telling the truth when they claim that they would have invested in Google, as one of the original venture capital investors.

The key to developing acceptable financial pro forma statements for the investment community, is to develop industry standard pro forma projections, for your start-up, based on similar companies in your SIC code. This can be accomplished using information available on the internet or at your local public library, and is completely explained in my book “Business Planning, Business Plans and Venture Funding – A Complete Reference Guide for Start-up Companies.”

Understand Your Financial Statements and Their Assumptions

When presenting to venture capitalists, the CEO of your start-up company needs to be an expert in all aspects of your company, including its financial statements. It is not a good idea, as the CEO of your start-up, to defer the financial statement related questions to your CFO or another third party. As the CEO, you are the one where the “buck stops”, so venture capitalists expect you to be able answer any and all questions regarding your start-up company’s financial statements. Therefore, as an entrepreneur you need to study your company’s financial statements from an investor’s point of view, including being able to recite the underlying assumptions of your financial statements. If you cannot do this, you will not get far with the venture capitalists and your ultimate goal of securing funding.

If Necessary, Get Help

Developing complete financial pro forma statements for your start-up company is difficult and a daunting task for first time entrepreneurs. This is especially true if this same entrepreneur does not have a financial background. So, given this, the important thing to do is to seek help to generate the required financial projections. By securing a qualified financial consultant, you, as an entrepreneur and the CEO of your start-up company, will be much more confident in your company’s financial projections, and this will show when you present your company to your potential investors. Remember, as a minimum, you need to generate five year financial projections for your start-up company’s income statements, balance sheets and cash flow statements. Typically, for years one and two this is broken down by month and/or by quarter. For the out years, yearly financial statements are fine for venture capital investors.

As discussed, financial projections can make or break your start-up company with the venture capital community. Your start-up company’s financial projections are the first step to getting into the door of the investment community. Therefore, to be considered, your start-up company’s financial statements must provide an attractive return on investment to the venture capital community, while at the same time reflect generally acceptable industry standards. Also, it is important for you as a first time entrepreneur and the CEO of your company, to become the expert on your start-up company’s financial pro forma statements. This will set the appropriate tone and earn you respect with your potential investors.

April 13, 2009 Posted by | Finance, Venture Capital, venture finance | Leave a comment

The “Blind” Entrepreneur – A Recipe for Failure in Securing Venture Funding

First time entrepreneurs often believe they can be successful in raising capital for their start-up company by just diving in and “hoping” for success.  This is a “blind” approach to securing venture funding. The reality is that nothing in life is free.  It takes hard work, study, and due diligence to be a success at anything you want to achieve.  The same is true for raising venture capital or any other type of third party private equity.  By not doing this work up front, first time entrepreneurs put themselves at a disadvantage, and often is a recipe for failure in their venture fund raising efforts.


Understand That You Don’t Know Everything

It has been my experience in life that the most intelligent people I have met are those individuals that know they don’t know everything. These individuals are generally very well educated, and often this realization comes with age and experience.  On the other hand, those individuals that believe they know everything about everything are usually not that smart.  This “I know everything” mentality is often present with first time entrepreneurs.  Many of these same individuals believe they know everything about venture funding, even without having done it before.  I can assure first time entrepreneurs that this is not the case.  My first time in raising venture capital was truly a learning experience, and I made several significant mistakes along the way.  So, based on experience, I can tell you that it is very difficult to secure venture capital without know anything about it.  In a limited number of cases, a few first time entrepreneurs may be successful in securing venture funding without much work or effort on their part.  This is definitely more the exception than the rule.  More often than not, it is those entrepreneurs that do their homework, and become informed about venture capital funding process that are successful in securing venture funding. 


Do Not Begin By Writing a Business Plan

Do not begin day one by writing your start-up company’s business plan.  This is a sure recipe for disaster, or as a minimum, will require you to have to rewrite your business plan many times. Not only will this experience create frustration in the venture funding process, for the first time entrepreneur, it is truly a waste of your valuable time and effort.  Instead, begin by researching and then planning your start-up company’s business.  This may take you one to several months.  Believe me, this is time well spent, and effort is worth it. To do this business planning for your start-up company, as a first time entrepreneur you must do the following:

·         Understand the propriety nature of your technology, product or service offering,

·         Determine the general market trends and strategic opportunistic market needs,

·         Determine your target market segments served and associated growth projections,

·         Understand the competition in you targeted markets,

·         Determine your company’s market entry strategy and tactics,

·         Outline your market entry assumptions and risks, and

·         Create basic financial pro forma projections.


When you get done accomplishing the above business planning tasks, you will be ready to begin writing your start-up company’s business plan.  As stated, this research and planning takes time, but it will save you more time in the long run, and will provide you with the proper roadmap for moving forward with your start-up company and its technology, product or service offering.


Understand the Venture Funding Process

Understanding the funding process means getting a clear picture on what it takes to secure venture capital funding.  This includes answering the following questions.

·         How do I approach venture capitalists for the first time?

·         What are the most efficient ways to approach venture capitalists?

·         What are venture capitalists looking for in an executive summary?

·         When do I provide venture capitalists my business plan?

·         How do I set up meetings with a venture capitalist?

·         What goes into my road show PowerPoint presentation?

·         How should I prioritize my meetings with venture capitalists?

·         What is the protocol of a typical road show presentation?

·         When and how do I follow up with venture capitalists?


Knowing the above items is critically important to your success in securing venture capital or any other private equity from third party investors.  Only by researching and reading up on the venture funding process will you get a good understanding of  what it takes to secure venture funding, and subsequently be able to navigate this process successfully as a first time entrepreneur.


Do Your Investor Due Diligence

All entrepreneurs, first time or not, must do their due diligence on their potential investors before they approach them with an investment opportunity.  This is usually where most first time entrepreneurs fall short. As an entrepreneur, it is just as important for you to understand all you can about your potential investors as they do about you and your start-up company.  Approaching the wrong venture capitalist with the inappropriate investment opportunity is a complete waste of your time and their time.  There are at least five areas you need to focus on when approaching venture capitalist for the first time.  These include the following:


·         Geographic Focus – Determine the geographic focus of your targeted venture capitalists.  Most venture capital groups primarily focus on a limited geographic region.  If you are outside that geographic region, most likely they will not consider your investment opportunity.


·         Stage of Development – Most venture capitalists have a primary stage of development focus.  That is, some venture capitalists prefer to invest in seed capital or early stage companies, while others prefer to invest in later state companies.  This is an important factor when scoping out your potential venture capital investor base.


·         Capital Required – Many venture capital firms have both lower and upper investment limits to the size of their target investments.  This is generally dictated by the size of their venture capital fund.  Therefore, it is important to determine if your capital requirements meet the criteria of your targeted venture capital firms.


·         Industry Specialization – Today, most venture capitalists specialize in a given technology or area of expertise.  This level of specialty is mutually beneficial to the start-up as it is to the venture capitalists, as the venture capitalist will generally have a deep level understanding of your industry and as such can add significant value to your start-up.  As always, research the specialties of the venture capital firms you are interested in approaching. 


·         Venture Capital Leadership – This refers to a venture capitalists willingness to take the lead position regarding an investment.  Generally, there exist both active and passive venture capitalists.  In order to complete your venture capital syndication, you will need to identify a lead, active venture capital investor.


If You Do Not Know Something – Seek The Proper Consulting Advice

Many entrepreneurs that do not know or understand something regarding the venture funding process often do not take the time to seek out the proper consulting advice.  Instead they ask their friends or other individuals that have never been through the venture funding process before.  Doing this will ultimately limit the potential for success of your start-up company.  Instead, you, as an entrepreneur and the CEO of your company, have a fiduciary responsibility to your start-up company to seek out the best advice you can find.  This in many cases will require you to spend a bit of money to hire a consultant to review your business plan and provide you with expert advice on how to move forward. By investing in competent consulting advice early, this will save you from “big” headaches and problems down the road. 


Entrepreneurs often look to secure “free” advice from individuals without the proper track records in venture funding.  This “pro bono” advice, like anything “free” in life, will usually not end up being worth much to you as a first time entrepreneur.  Often these same individuals have not taken the time or effort to properly review your company’s business plan, have not ever started a company, or have never even raised venture capital.  This same “pro bono” advice can ultimately hurt your start-up company in the long term.  Remember it is better to invest in your own start-up early, by securing the appropriate consulting advice, to ensure you are on the right path forward.  By not doing so will cost you more time and money down the road. Remember making a mistake, early in the development of your start-up can ultimately cause your company to fail.


Invest in Yourself and Your Company

Invest in your own start-up company early.  Venture capitalists do not want to fund your start-up company only with their own money. This may be appropriate for “friends and family” funding, but is it definitely not appropriate for third party professional investors.  Hence, venture capitalists or other third party investors want to see that you, as a first time entrepreneur, believe in your start-up company and its vision.  To do this, as an entrepreneur, you have some “skin in the game”.  In this case, venture capitalists are looking to see that you have invested your own “hard cash” in your start-up, and not just your time and effort.  So, if you believe in your start-up company, there is precedence to having invested your own money in your company.  If you do not, third party investors will most likely not want invest in your start-up company either.

As outlined, by doing the hard work, study and due diligence to be a successful entrepreneur, you will avoid the “blind” entrepreneur path.  This, along with seeking the appropriate consulting advice and investing in yourself and your start-up company will more likely provide you, as a first time entrepreneur, with a successful path forward in your venture capital fund raising efforts.

April 6, 2009 Posted by | Venture Capital | 1 Comment