Robert Ochtel’s Blog

An Experienced Approach to Venture Funding

Six Product-Focused Items Venture Capital Investors Necessarily Consider When Reviewing an Investment Opportunity

Venture capitalists have to consider many things when trying to understand a potential investment opportunity. From the management team, to the total amount of investment, to the nature of investment environment, venture capitalists are trying to identify potential risks and at the same time mitigate these same risks so that their investments have a higher probability of success in the market.  In addition, when venture capitalists consider and then assess the potential of a start-up company’s technology, product or service offering, these same investors necessarily focus on six items. These six individual product-focused items provide a complete picture and a realistic assessment as to whether the start-up company’s technology, product or service offering will be successful in the market.  This article addresses these six product-focused items and provides the reasoning as to why investors consider these things when assessing the potential success of a start-up company’s technology, product or service offering.

Does the Product Offering Have a Long-Term Sustainable Advantage?

Investors are always looking at the big picture.  One thing they need to understand regarding a start-up company’s product offering is its ability to remain competitive over time.  That is, does the product have a long term sustainable competitive advantage in the marketplace? Why, because a long-term sustainable advantage facilitates exceptional revenue generation capabilities and a much higher return on investment.

From the potential investor’s point of view, a long-term sustainable competitive advantage really has two components. First, is the technology, product or service offering disruptive in nature? A disruptive product offering changes the basis of competition in the market and often results in a paradigm shift for a given market.  This disruptive nature is necessarily “revolutionary” and not “evolutionary” in nature.  A revolutionary change 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 product offering is that it provides the means and justification for the target customer base to change their status quo and go with the start-up company’s technology, product or service offering, as a means to obtain a competitive advantage in the market. 

The second aspect of a long-term sustainable advantage is the fact that there is intellectual property or patents associated with the start-up company’s technology, product or service offering.  Patents are used to provide legal recourse against competitor infringement, or the copying of certain proprietary aspects of a start-up company’s technology, product or service offering. Using patents to protect a product offering can provide the start-up company with a long-term sustainable competitive advantage in the market.  Accordingly, investors are interested in patents for several reasons, including:

  • The ability to protect the start-up company’s market position,
  • The potential to provide enhanced revenue and gross margins,
  • Perceived “value” in which to sell the start-up company at a higher price. 

Having a sustainable long-term competitive advantage in the market is one sure way of securing the attention of potential investors.

Who is the Competition?

Venture capitalists are always interested in understanding the competitive landscape. Why, because having a good understanding of a start-up company’s competitors and their product offerings provide the start-up company and their potential investors a good idea on how to position their technology, product or service offering in the market.  In addition, knowing the specific details of a start-up company’s competitors and their product offerings also gives these same investors a level of comfort regarding the potential of success in the market for the start-up company and their technology, product or service offering. 

As investors know, potential customers always evaluate a start-up company’s technology, product or service offering against their competitors’ offerings. This provides the necessary justification as to why a customer is willing to move from the status quo to a new product offering.  Whether it is pricing, lower system integration costs, lower power consumption or enhanced services, investors need to understand the compelling features, functions and capabilities of a start-up company’s product offering and how it stacks up to the competition on a feature-by-feature basis.  This information will allow them to make an informed decision when considering investing in a start-up company. Therefore, know the competition. This will facilitate the potential investors in making their investment decision.

Is This a One-Product, One-Market Investment Opportunity?

Potential investors always want to avoid one-product, one-market investment opportunities.  Why, because if the product fails for any reason, they have lost their monies and there is little to no recourse to recoup their investment. So, venture capitalists prefer to invest in start-up companies with a technology, product or service offering that can be used to develop multiple product offerings across several targeted markets.  This multiple product, multiple market investment approach substantially lowers the venture investors risk by creating the potential for multiple revenue streams.  In addition, this investment approach is preferred by venture capitalists as it has the ability for substantially increasing their return on investment.  Remember, venture investors are all about mitigating their risks and increasing their potential returns, so a multiple product, multiple market approach is preferred by potential investors.

What is the Size of the Target Markets of Interest?

Venture capitalists prefer to invest in start-up companies that have the potential for high returns. To do this, these same start-up companies need to address large market opportunities.  Therefore, as part of their analysis for determining if a start-up company and its technology, product or service offering is of interest, these same investors are always interested in understanding the total addressable size of the markets of interest.  The bigger the size of the addressable market, the better. Why, because larger markets provide the potential for higher returns on investment and at the same time lowers the market risk for investors.  So, when targeting their markets of interest, entrepreneurs need to take this investor mentality into consideration. This will provide you more credibility with your potential investors and also enhance your start-up company’s potential returns. 

Is the Product Offering a Complete Product?

Start-up company technologies, products or service offerings as initially defined by the entrepreneur and their management team are usually incomplete from the market perspective.  Often the “core” capabilities that define the start-up company’s product offering need to be augmented with additional technologies, products or services to make this same product offering a “complete” product that addresses the necessary needs as defined by the target customers in the defined markets of interest.  Product “completeness” is a concern for investors. Why, because incomplete product offerings often require substantial additional investment, identification of the appropriate strategic partnerships, and additional integration time. All of these items individually and together will delay the time to first revenue, and as a result, lower the return on investment potential for the venture capital investors.  So, as an entrepreneur, define your product offering as complete as possible.  This means talking to your customers.  If done appropriately, you can define a complete product offering and gain credibility with both your customers and your potential investors.

Is There a Product Road Map and What Does it Look Like?

Many times an entrepreneur has failed to develop a product road map for their technology, product or service offering. The lack of a product road map will cause concern for your potential investors.  Why, because investors want to know that as an entrepreneur and the CEO of your start-up company you have a clear understanding of both the macro- and micro-economic trends in your target markets of interest.  They also know that, very seldom is a first product a homerun product and it often takes several generations of products with the necessary evolving features, functions and capabilities to secure significant traction and hence substantial revenue flow.  Therefore, these same potential investors necessarily need to see a product road map with defined, multi-generation features, functions, and capabilities.  This will ensure multiple things for your potential investors, including:

  • You understand the macro- and micro economic market trends,
  • You are not trying to do too much with your initial product offering,
  • You have a firm grasp of the future anticipated development costs associated with your product offering, and
  • You have defined a product road map with a long-term, sustainable competitive advantage in the market.

Therefore, as an entrepreneur, it is imperative that you develop a product road map for your proposed technology, product or service offerings. Again, this will provide your investors with confidence in you and your start-up company.

Venture capitalists have to consider many things when trying to assess the market value of a start-up company’s product offering and its ability to secure market traction.   As an entrepreneur, when presenting your technology, product or service offering to potential investors, you need to be aware of the six, basic product-related considerations that these same potential investors necessarily concern themselves with when making a go, no-go investment decision. This article has outlined these six product-focused items that if not addressed in detail will often make your potential investors pass on your start-up company and the associated investment opportunity.  Therefore, you need to be aware of these product-related, investment considerations when presenting your start-up company and its technology, product or service offering to potential investors. This will provide you with a good starting point when considering securing funding from venture capitalists.

This information was taken from Robert’s new book: “Business Planning, Business Plans and Venture Funding – A Definitive Reference Guide for Start-up Companies”.  Available at www.amazon.com.  For more information on the book go to www.carlsbadpublishing.com.

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September 7, 2009 - Posted by | Venture Capital

2 Comments »

  1. Robert-
    Some of your best work. This raises the bar for others to measure their work by.

    Craig McCord
    c_mccord@msn.com

    Comment by Craig McCord | September 11, 2009 | Reply

  2. Great Post.

    Thanks for the info.

    Comment by electroniccigarettes | September 17, 2009 | Reply


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