Robert Ochtel’s Blog

An Experienced Approach to Venture Funding

A Business Idea or Concept Does Not Make A Venture Fundable Business Proposition

Every year millions of individuals come up with a business “idea” or “concept” that they believe could be the beginning of a fundable start-up venture.  While many of these ideas or concepts may have merit at the 30,000 foot level, it is the process of taking a business idea or concept and making it a valuable business proposition that makes the difference between a fundable start-up company with a technology, product or service offering, or just a business idea or concept, to be left by the potential entrepreneur as a passing thought. This article addresses some of the basic steps that need to be addressed to take your business idea or concept and create a real business proposition that can then be presented to the venture funding community.

Is There a Market for your Business Idea or Concept?

As a potential entrepreneur interested in developing your business idea or concept, the first place to start in your due diligence planning process is to analyze the market.  Here, you need to identify and then determine which target market or markets are addressable with your proposed technology, product or service offering.  No market means no potential for selling your business idea or concept. Remember, the last thing you want to do is develop a product that is looking for a market. You need to solve a “problem” or “market need”. That being said, you not only have to identify which markets may use your product offering, you have to determine the basic characteristics of these markets including:

  • Market size (Revenue and Unit Sales), and
  • Market growth (High Growth, Low Growth, Declining Growth).

Both of these market characteristics have an effect on the ability to sell your idea or concept and at the same time generate a “scalable” business that will be attractive to potential venture investors.  For these given market characteristics, you want to identify markets that are large and are growing. These are the ideal characteristics of the target markets for your proposed business idea or concept. 

 Does your Business Idea or Concept Have a Long-Term Sustainable Competitive Advantage in the Market?

Just having an idea or concept does not necessarily imply that you will be successful in the market.  From an investor’s point of view, you also need to have a long-term sustainable competitive advantage in the market. Here, investors look to invest in start-up companies with an idea or concept that they consider to be “disruptive” in nature.  That is, the idea or concept needs to change the “basis of competition” within the targeted market(s) or sub-market(s) of interest. A disruptive technology, product, or service offering, with a long-term sustainable competitive advantage does not invoke an evolutionary change in the basis of competition (e.g., 10% cost reduction), but a revolutionary change that results in a new competitive paradigm shift for a given market. A revolutionary idea or concept can address any or all of the following:

  • A shift in the structure or nature of the technology offering in the market,
  • A significant reduction in the average selling price,
  • A significant reduction in the time-to-market, and
  • A new avenue for sales channel logistics.

Overall, the underlying theme of a disruptive idea or concept is that it provides the means and justification for the target customer base to change their status quo and go with your start-up company with its new technology, product, or service offering as a way to facilitate and obtain a competitive advantage in the market. Historically, there have been many companies with unique, disruptive technologies that have changed the basis of competition in the market and at the same time created a long-term sustainable competitive advantage in the market, some of these companies include: Ford Motor Company, Apple Computer, Google, Netflix, etc.

Does the Business Model of Your Idea or Concept Reflect an Industry Standard Business Model?

Venture investors are risk adverse.  This concept is not really intuitive for potential entrepreneurs, but by the very nature of their business they need to “manage” risk to protect their investments, and at the same time secure a return for themselves and their limited partners.  That is, investors do not invest to lose money!  With that being said, typically investors look for ideas or concepts that have business models that reflect well understood standard business operations for a given industry.  This allows these same investors to weigh the advantages of your business idea or concept over an industry standard financial model to see where and how you are going to secure a financial advantage over your competitors. Therefore, when developing your business idea or concept, look to the industry leaders in your market and model your financial statements (e.g. income statement, balance sheet and statement of cash flows) after these competitors.  This will provide your investors with a basis for their financial analysis, and at the same time provide a historical reference point to measure your projected financial success in the market. 

What is the Projected Return on Investment for your Business Idea or Concept?

As part of developing a legitimate business idea or concept, you need to determine what the potential financial investment returns are for your prospective investors.  This concept, although not foreign to most potential entrepreneurs, does provide issues for most first time entrepreneurs, from a practical point of view.  In general, it is understood that venture investors look for a 5 to 10 times their invested capital in a 3 to 5 year period, respectively.  These numbers reflect expected historical financial returns and should only be used as a reference point. Some venture investors expect more, some will take less, but the key here is to develop financial pro forma statements that meet the expected returns of potential investors and at the same time are defendable.  Here, the best thing to do is develop three financial scenarios for your business idea or concept, including a:

  • Best case scenario,
  • Typical case scenario, and
  • Worst case scenario.

By doing this, you will have fully analyzed all financial aspects for your proposed product idea or concept.  In the end, you will have to pick one financial scenario to present to your potential investors.  But, by going through this financial scenario analysis, you will have a good solid basis for discussing the expected financial returns of your business idea or concept with your potential investors.

Who are Your Customers and How are You Going to Bring Your Idea of Concept to Market?

Another key attribute to developing your idea or concept is to identify your target customers and determine your appropriate sales channels for your technology, product or service offering.  These items are often over looked by first time entrepreneurs, and together are often a stumbling point for presenting your business idea or concept to your potential investors.  Here, one of the best things to do first is to identify your customer base and then break it down into tier one and tier two customers.  This will allow you to position your potential customers and determine, in your go to market strategy, which customers you talk with first and then second. In my experience, it is better to talk to your first tier customers second.  This will allow you to work out any issues regarding the presentation of your idea or concept to your customer base.  Then, by the time you talk with you first tier customers you will have already been exposed to most of their questions, and at the same time, this strategy will facilitate for a much smoother presentation.

Finally, you need to identify the sales channels you will develop to address your customers.  Whether, direct, indirect, or virtual, you need to spend the time to think through your sales channel strategy and determine why this will support your product idea or concept and at the same time provide the level of market penetration to allow you to be successful in the market. Here, a successful channel strategy can accelerate your time to market and break even, increasing the return on investment for your start-up company and your investors.

Having an interesting idea or concept is not enough to get venture investors’ attention.  As a potential entrepreneur, you need to develop your idea or concept into fundable business proposition.  Addressing the market, competition, business model, expected financial returns, customers and channel strategy, will get you moving in the right direction for developing a fundable business proposition.  The steps outlined here should be used as a baseline for any entrepreneur working to develop their idea or concept into a fundable business proposition and moving it to the next level with potential investors.

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June 22, 2009 - Posted by | Venture Capital

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