Robert Ochtel’s Blog

An Experienced Approach to Venture Funding

Three Things Entrepreneurs Absolutely Need to Know Before They Talk To Their First Venture Capitalist Investor

Being an entrepreneur is not a guessing game.  Like any successful endeavors in life, starting a business as an entrepreneur, which depends upon third-party venture investors for its ultimate success, requires time and lots of hard work, as well as considerable planning and preparation.  Much of this planning and preparation process is often overlooked by first time entrepreneurs.  Why, because many of these same first time entrepreneurs believe the following: “Hey, I have a business idea and why shouldn’t I receive funding from a venture capitalists no questions asked.”  This thinking will not get you too far with potential venture capitalist investors.  They expect you to be prepared, and have thought through your proposed business idea from all angles.  In this vain, as a minimum, there are three items you need to answer before you step foot in front of any venture capitalist investor.  This article addresses these three items and outlines why by answering these three questions, you most likely will succeed in getting a follow-up meeting with these same venture capitalist investors.

What Problem am I Solving?

Investors first want to know that you are solving a problem in the market.  They do not want to invest in start-up companies with a technology, product or service offering that is looking for a problem to solve.  Why, because unless there is a “defined need” for you start-up company’s technology product or service offering no one will buy it.  Remember, you are in business to acquire paying customers and not to develop a “cool” technology, product or service offering.  Venture capitalists understand this, and from the beginning they are looking for the underlying reason customers will pay for your product offering.  Is your product offering cheaper?  Does your product get your customers to market faster?  Does your product offering save your customers money?  There many underlying reasons customers will buy your product offering. You need to determine this reason.

All venture capitalists want to know is that there is a reason for customers to buy your technology, product or service offering.  Therefore unless you are filling a “need” in the market you will be hard pressed to convince these same investors that you have a fundable start-up business.  This is very simple and at the same time is more often overlooked by entrepreneurs.  So, before you decided to present your business plan to potential venture investors, take a self assessment and determine what problem you are solving.  Be realistic and practical in your assessment, as you should know your investors will be.

What is My Business Model and Projected Financial Returns?

Most first time entrepreneurs do not really understand the venture funding game.  That is, they really don’t take the time to understand venture capitalist and their objectives and goals. So, let’s be clear, venture capitalists are in business to make money – a lot of money. Therefore, they need to invest in business opportunities that make business sense from the financial point of view.  Therefore, a new start-up company with a proven business model will make sense to venture investors.  On the other hand, a new business venture with an unproven business model will not get any real attention from these same investors.  Why, because venture capitalists are in business to mitigate their financial risk, and having a business model with a proven track record in the market will give these same potential investors the level of comfort that they need to consider the investment opportunity.

In addition, as an entrepreneur it is necessary that you know your projected financial returns of your start-up company for your venture investors. The standard rule of thumb here is 5 times the initial investment in 3 years or 10 times the initial investment in 5 years.  These numbers, do not reflect any reality or are even close to the average returns venture investors receive on their investments, but are merely the standard financial hurdles venture capitalists use to judge different start-up business opportunities.   So, as an entrepreneur you need to know your financial returns and make sure they conform to these industry standard projections.  Anything less will not get you a follow-up meeting with these same potential investors. 

Finally, as an entrepreneur you need to remember that venture capitalists only invest in a limited number of start-up companies over their lifetime of their venture fund, so they need to be careful when vetting start-up company investment opportunities.  Understanding the business model and the projected financial returns is their first step to considering a potential investment opportunity.

Is My Product Offering Unique and Compelling?

As an entrepreneur, you need to have a product offering that is both unique and compelling.  Anything less, will most likely not get venture investors attention.  Why, because these two attributes will differentiate your start-up company’s technology, product or service offering in the market.  If your product offering is unique, it more than likely is patentable or has intellectual property associated with it.  This will differentiate your product offering to your investors.  Why, because it provides the opportunity to create value – something that will potentially bring much higher financial returns when the investors go to sell the company.  Also, being compelling provides a reason for customers to buy your product.  This will provide the ability to create market “buzz” and associated market traction.  Remember, “time-to-money” increases the financial returns for your investors.  So creating a product with compelling value proposition for your customer base will get your investors attention from the beginning. Therefore, as an entrepreneur, if you wish to secure funding from third-party venture investors you need to create a product offering that is both unique in the market and compelling to your customer base.

Venture capitalists see lots of investment opportunities every year. Many review thousands of executive summaries and business plans.  Very few, if any of these same investment opportunities get the attention of the venture capitalists.  Why, because they do not address necessary items that will make their investment opportunity successful from an investor’s point of view.  This article has outlined three necessary things that entrepreneurs need to know before they get in front of venture capitalist. If these three things are not addressed in detail during your first meeting with investors, you will not get a follow-up meeting.  Therefore, be aware these three items as they most likely will provide you with the ability to secure immediate traction with potential third party investors.

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 14, 2009 - Posted by | Business Planning, concept, Idea, Venture Capital, venture finance, Venture Funding | , , , , , , ,

2 Comments »

  1. Great article Robert! I especially agree with the second item concerning business model and financial returns. Like you said in a previous post, venture investors and sophisticated investors in general are primarily financial minded people and will spend a lot of time looking at the financials. Unfortunately, in my experience there is a disconnect in the minds of entrepreneurs as to the importance of a detailed financial model. In order to address this disconnect, I launched my website http://www.proformafinance.com to provide entrepreneurs and small business owners with compelling, professional financial modeling at a competitive cost.

    Thanks,

    Robbie Hoffner
    Founder & Principal
    Pro Forma Finance

    Comment by Robbie Hoffner | September 15, 2009 | Reply

  2. Great article, The concept of value investing has encouraged me to start a portal of value investing on the Indian stock markets. I am doing analysis of Low PE, High dividend yields, Low PB and Low PB with high returns. I would love to share anything which is common. I really appreciate the effort you have put in your blog.

    Comment by Srinivas Rao | September 16, 2009 | Reply


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