Robert Ochtel’s Blog

An Experienced Approach to Venture Funding

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.

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April 6, 2009 - Posted by | Venture Capital

1 Comment »

  1. Great Guidance

    Dear Human Brother!!!

    I appreciate your kind Endeavour

    Comment by Bhaveshkumar J. Bati | May 2, 2009 | Reply


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