Robert Ochtel’s Blog

An Experienced Approach to Venture Funding

Entrepreneurs, Make the Tough Decisions Necessary to Move your Start-up Company Forward

Start-up companies by their nature are very volatile. As such, things change rapidly and need to in order to stay ahead of the game.  Unlike large companies, many daily decisions can have an inordinate affect on both the short term and the long term success of a given start-up company.  Accordingly, entrepreneurs often need to make tough decisions that will have a material impact on their start-up companies.  These decisions should not be taken lightly. On the other hand, due the fast paced nature of start-up companies, and the need to focus on creating significant value in an accelerated time frame, many of these same decisions do need to be made and quickly.  Often delays in decision making can create missed opportunities, and at the same time wreak havoc on a start-up company’s potential for success in the market. This article outlines several examples of tough decisions that need to ultimately be made by entrepreneurs that can significantly affect the long-term success of their start-up companies.  Here, quick decisions are welcomed, as prolonging the decision making process can often lead to a failed venture.

Changes in the Executive Team

The executive team is the key component that drives the success of any start-up company.  Therefore, this is the first thing, beyond the business opportunity, that venture capitalists look at when deciding to invest in a start-up company.  As such, if there is a member of your start-up company’s executive management team that is not working out or not adding significant value to the start-up company and its ultimate goals and objectives, the best thing to do is to remove this person from the team.  Why, because for start-up companies, there is no room for “non-contributing” executive team members. This situation only puts more burdens on the rest of the executive management team. Also, with each executive team member having more than enough to do, everyone needs to be pulling their own weight.  Anything less is a drain on the start-up company and its overall performance.  So, as an entrepreneur, if you recognize that your team has an executive member that is not working out, a quick decision needs to be made to cut your losses.  Here, removing the executive team member and having an empty position is much better than having a non-contributing team member.  Non-performance, by a single team member will lead to resentment from the other executive team members and pull the performance of the overall company down.  So, as an entrepreneur, once you recognize that one member of your executive team is not performing, it is important to remove this person, and quickly.  If you do not do this, your investors will.

 Changes in Strategic Direction

From their inception, start-up companies often go through multiple changes in strategic direction. More often than not, there are good reasons for this and it is necessarily part of the process to support the long-term success of the start-up company.  What is important here is that as an entrepreneur, you need to recognize that sometimes a significant change in strategic direction is necessary to enhancing the overall value of your start-up company. In addition, once the decision has been made to make a significant change in the strategic direction of a start-up company, the executive team needs to fully embrace this decision and commit the company to this new direction. Anything less will cause the start-up company to fail.  A one foot in, one foot out commitment to changes in the strategic direction of a start-up company will not work.  Finally, it is important that any significant changes in the strategic direction of your start-up company are not taken lightly, and do not happen too often, as too many changes in the strategic direction of your start-up company will kill the overall momentum of your start-up and as such will result in disaster. Therefore, once a decision has been made to change the strategic direction of your start-up company, get buy-in from all of the executive team members and move quickly to make it happen.  This approach only will benefit your start-up company.

Deciding on Strategic Alliances

Strategic alliances can help create phenomenal success for start-up companies and at the same time significantly enhance their overall value with investors and in the market.  By providing access to markets, sales channel support, complementary technologies and services, all value added propositions, strategic alliances can be used to create significant value for your start-up company.  That being said, a bad strategic partnership can have the opposite impact on your start-up company.  Therefore, when determining the value of a strategic partnership, look at the market credibility of the strategic partner.  Are they a significant player in the market? Does their name add credibility to your start-up company? Will they be able to deliver on the promises of the strategic partnership?  Often it is often better to step back and make an overall assessment of the potential long-term benefits of the partnership before committing your start-up company’s future on a particular strategic partner.  This will provide you with perspective and allow you as an entrepreneur to make a better decision.

Sometimes it is the case that as an early stage start-up company, you will not be ready for a strategic alliance relationship.  Here, be honest with yourself.  Does a strategic alliance partnership make sense at this point in time?  If it does not, then it pays to walk away, as it may only serve as a distraction to the important immediate goals and objectives of your start-up company.  Therefore, take the necessary time to properly evaluate any potential strategic alliances.  Move quickly, but remember to make an informed decision as the wrong strategic alliance can be detrimental to the overall performance of your start-up company.

Determining a Funding Strategy

Determining a funding strategy is often a difficult task for entrepreneurs. Do I go after all of the required funding now and give away more of my start-up company to investors, or do I look to secure funding in multiple tranches?  This is a very difficult question to answer and how it answered is specific to the each start-up company, their overall funding requirements and their ultimate value at a given point in time.  The key thing here is to outline your start-up company’s significant deliverables for the various funding scenarios and then make a decision as to whether at the end of each funding scenario, if significant market value has been created to secure addition funding from either existing investors or new investors. Remember, investors want to see significant value at the end of each funding round.  So, take the time and map out your start-up company’s significant milestones their associated time frame and then overlay the funding requirements.  This will allow you to determine that natural break points in securing funding and provide your investors with the insight necessary to determine if your start-up company’s funding strategy makes sense.  Remember, determining a funding strategy is often one of the most difficult decisions an entrepreneur can make.  So take the time to make an informed decision, but do not dwell on, as investors will often dictate the overall all funding terms and tranches of your start-up company.  The key point here is to make a decision and then move to secure funding to push your start-up company forward to the next level.

Entrepreneurs need to make tough decisions every day. These decisions often have a significant impact on the start-up company and its long term success in the market. For each decision presented here, whether it changing the make-up of the executive team, moving the start-up company in a new strategic direction, deciding on alliances, or determining a funding strategy,  it is important to make an informed decision.  Also, the quicker the decision is made that more likely you will get your start-up moving forward, and creating momentum for your start-up company. Therefore, as an entrepreneur, make the tough decisions it will only benefit your start-up company.

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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October 26, 2009 Posted by | venture finance, Venture Funding | , , , , , | 1 Comment

Venture Capitalists Consider Four Characteristics to Determine Whether a CEO can Lead their Start-up Company to Success

It is said that venture capitalists invest in the entrepreneurial team.  This is the case for all start-up companies. After reviewing and getting the good understanding of the investment opportunity, the first thing venture capitalist look at is the team.  Why, because they need to understand that their investment will be well managed by individuals with the appropriate backgrounds, skill sets, and capabilities to bring their investment to a successful conclusion. That is, creating the necessary value such that the investors can secure the financial returns they expect, according to their financial risk. For these same investors, it is the underlying characteristics of the CEO of the start-up company, the leader of the team, that are the most important to them.  As investors, venture capitalists seek CEO’s with the necessary characteristics to create a successful start-up company. This article outlines the four characteristics venture capital investors look for in a strong CEO.  By having a CEO with these characteristics, these same investors are more likely to take the risk and invest in your start-up company.

High Moral Character

As in any business, the CEO of a start-up company must be of high moral character. That is, they must be trustworthy and make the appropriate moral decisions for both themselves and their start-up company.  The last thing investors want are moral or ethical situations that will result in a law suit for the start-up company.  Therefore, the investors do background checks and deep personal and professional character interviews to determine the underlying moral character of the CEO.  This high moral character, as with any individual, must permeate both in the CEO’s personal and the business lives. Remember, the CEO has both ethical and fiduciary responsibilities to the start-up company, and as such, needs to conduct themselves appropriately in both their personal life and the business life.  Anything less can have an adverse affect on the start-up company.  Therefore, investors first look into the moral character of the CEO, to determine if he or she is fit to both represent and run the start-up company.  If they are not, as investors, they will either move on or require a change in management before investing. 

 Strong Leadership Capabilities

Leadership is important to any company, but having a strong leader at the top of a start-up company is especially important to a start-up company.  With all of responsibilities and the necessity to get many things accomplished on both a limited budget and in a limited time frame, the CEO of a start-up company must have the ability to lead the company and its team to accomplish, often insurmountable tasks. Accomplishing these tasks is often the difference between receiving and not receiving additional funding from these same investors.  Therefore, investors need to be assured that the CEO of the start-up company has the leadership abilities necessary to make the company successful.  Anything less will be a recipe for disaster, as investors necessarily do not need to take on the risks associated with a CEO that has weak leadership capabilities.  So, when reviewing the characteristics of the CEO of a start-up company investors need to be assured that this same individual have the necessary strong leadership capabilities to drive the company and its team to success.  Anything less will result in a poor investment for the venture capitalists.

Appropriate Background and Experience

Does the CEO have the appropriate background and experience?  This is one of the first questions the venture capitalists ask themselves.  A desirable background necessarily includes the corporate operational experience necessary to run the start-up organization from the top.  If the CEO does not have a similar level of experience, the investors will wonder if they will have the ability to grow into this position.  Remember, investors do not want the start-up company’s CEO to be learning on their dime. As such, they need to be assured that the person in charge will be able to make the appropriate operational decisions as the company grows and progresses through its development and expansion.  More often than not, this requires a CEO with the appropriate operational background and experience. In addition, it is the necessary requirement for the CEO to have had specific experience in the target industry of the start-up company is intending to address.  Again, anything less will require the CEO to learn about their specific industry on the fly and puts this same start-up company at competitive disadvantage in the market. Therefore, it is also important for the CEO of the start-up company to have specific industry experience and the appropriate operational background. This will provide for a much smoother development path for the start-up company and its investors.

Driven Personality

Start-up companies go through many ups and downs as well as changes in direction during their development.  The investors need to be assured that the CEO is driven to make their start-up company successful no matter what situation arises during its development.  Therefore, these same investors need to make an assessment as to whether the CEO has the necessary personal drive to power through the ups and downs of a start-up company.  If they do not believe this is the case, they will not invest.  It should be remembered that a start-up investment is often a marathon and not a sprint, and hence the necessity to have a driven CEO to guide the start-up company for the long-haul is often necessary for a successful start-up company. Therefore, investors need to consider how driven the CEO is to make the start-up company successful in the long term.

Evaluating the characteristics of the CEO of a start-up company is the necessary job of the venture capitalists.  This evaluation can make the difference between a successful investment and an unsuccessful investment.  As outlined here, venture capitalists look for four characteristics of the CEO in determining if they have the necessary characteristics to run the start-up company. This includes: a high moral character, strong leadership capabilities, the appropriate experience and background and a driven personality. By assessing these four characteristics, venture capitalists can gather the appropriate insight as to whether the CEO has what it takes to lead their start-up company to success in the market.  So entrepreneurs, when picking the CEO of your start-up company keep these four characteristics in mind, you can be assured your investors will be.

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.

October 19, 2009 Posted by | Venture Capital, venture finance, Venture Funding | , , , | 1 Comment

Entrepreneurs, What is Your Start-up Company’s “Value-Added” Proposition?

Simple questions from venture capitalists can be the most difficult to answer for entrepreneurs. Why, because they often require both a strategic vision and specific insights to the long-term nature of all aspects of the market, your competitors, and your customers.  This requirement often eludes entrepreneurs as more often than not they are tactically focused and do not really have a strategic vision for their start-up company and the long term business opportunity their investment represents to their customers and to these same investors.  Therefore, when asked “What is the value-added proposition of your start-up company?” they often stumble and in some instances cannot answer this most simple of probing questions.  Why, because they have not taken the time to really evaluate what they are trying to offer the market and their end customers. That is, “Why are customers going to buy your product?”  As an entrepreneur, there are four tenants that you need to address, which will provide you the necessary insight to address the issue of defining the “value-added” proposition for your start-up company.  This article addresses each of these tenants and their ultimate importance to the potential success of your start-up company’s product offering to the market and its end-customers.

What are the Strategic Opportunistic Needs of the Market?

When developing a product offering you need to start from the markets.  Specifically, you need to address the “strategic opportunistic needs” of the market.  That is, what is the “problem” or “need” you are solving.  If there is no “problem” or “need” to solve, then there is no particular reason for customers to buy your product.  Whether it is lower costs, lower power consumption, higher efficiencies, or better service, etc., there needs to be a strategic opportunistic customer need that you are addressing with your start-up company’s product offering. Therefore, to determine your value-added proposition to the market place and the end customer, you need to definitively identify and solve a market or customer need that is currently not being addressed in the market.  The basis of this strategic opportunistic requirement needs to be based on a real assessment of the customers and the market. Anything less, will not cut it, as customers are very discerning, and if they do not see a definitive need to buy your technology, product or service offer they won’t.  Therefore, take the time to define the needs of the market place. Write these needs down on paper, and verify them by talking to a number of potential customers. You will then be able to appropriately define the “strategic opportunistic needs” of the market and one important tenant of the value-added proposition of your product offering.

 Do You Have a Long-Term Competitive Advantage?

Investors need to know that as a start-up company that you have a long-term competitive advantage in the market. This is usually accomplished through the development and subsequent patenting of certain intellectual property as it relates to your start-up company’s technology, product or service offering. This intellectual property, as defined, needs to differentiate your start-up company’s product offering in the market, and at the same time provides significant value to the long-term competitiveness of your technology, product or service offering.  Remember, investors are looking to create long term value, so that they can ultimately cash-in by either selling your company to a third party or going public (not too often these days).  Therefore, you need to create and protect your value-added proposition with patented intellectual property.  Doing so, will provide your start-up company with a long-term sustainable competitive advantage and allow your investors to earn substantial returns on their investment.

What is the Competitive Positioning of Your Start-up Company?

Do you know the competitive position of your start-up company? More often than not, entrepreneurs do not really understand the value of creating a “unique” competitive position in the market.  By creating this competitive position in the market you are differentiating your start-up company in the market and at the same time creating a value-added proposition to your customer base.  Whether it is a lower cost solution, or a unique service offering, you need position your start-up company and its technology, product or service offering as differentiated from your competitors. Apple does this well with their entire line of product offerings.  By offering unique operating systems and value-added user interfaces, they provide a differentiated end-user experience.  Hence, Apple has developed a “value-added” and unique competitive position in the market.  As such, they are able to charge more for their products, as the customers believe that there is value in the Apple product offerings and the overall end-user experience. Therefore, as a start-up company you need to develop a unique position in the market, such that your customers believe there is significant and unique added value in your product offerings when compared to your competitors.

How Do You Define your Start-up Company’s Product Offering?

How you define your start-up company’s product offering can add significant value to your customers and their needs. As an example, many times there is significant value to your customer base in how you deliver your product to the market.  For example, take Netflix and the movie rental industry. By developing a new delivery channel for a “generic” product offering, the home movie rental market, they have been able to provide substantial “value” to their end-customers, and at the same time differentiate themselves in the market.  Therefore, take the time to properly define your start-up company’s product offering. Make sure you are doing this in the context of developing a differentiated product offering for your target customers and the market.  This will allow you to develop a product offering that is defined by market and the end customer needs.  Solving a customer’s problem by appropriately defining your product offering to the market can be a key to adding significant value to your end customer and at the same time differentiate your product offering in the market.

Creating a “value added” proposition for your target market and its customers requires vision and specific insight to the long-term nature of all aspects of the market, your competitors, and your customers. To do this, as an entrepreneur you need to address four tenants, including: identifying the strategic opportunistic needs of the market, determining your long-term competitive advantages, developing a defendable competitive position, and determining your unique product configuration.  These items together will allow you to develop a “value added” proposition to the markets you are addressing and your end customers.  This will also provide your potential investors with the necessary insight to develop a quick understanding of potential for success of your start-up company and its product offering in the market.

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.

October 12, 2009 Posted by | Business Planning, Venture Capital, venture finance, Venture Funding | , , , , , , | Leave a comment

Entrepreneurs, Self-Education the Key to Securing Funding

First time entrepreneurs often want to begin day one by writing their business plan and talking to potential venture investors about their “concept” or “idea”.  This is a big mistake.  As an uneducated participant in the start-up funding process, you have little chance of developing a compelling, investor focused business plan or securing venture funding.  This lack of preparation and self-education is pervasive among first time entrepreneurs and results in substantial frustration from both the investors as well as entrepreneurs.  As a result of this lack of self-education on the entrepreneurs’ part, investors always complain that they cannot find “good” deals and at the same time, entrepreneurs complain that there is no venture money available to fund their investment opportunities.  As with any story, the truth regarding this funding dilemma is often somewhere in between.  But, in this case, since entrepreneurs are the ones seeking investor money, the overall responsibility here lies with the entrepreneur.  They need to educate themselves so that they are properly prepared when talking to potential investors. This article discusses the importance the self-education of entrepreneurs and how this self-education is the key to securing funding for your start-up company and its technology, product or service offering.

Take the Time to Really Understand Your Own Investment Opportunity

It is never really good to “learn” about your business investment opportunity while you are talking to investors.  But, this is what many entrepreneurs do. Most entrepreneurs never really take the time to research all aspects of their investment opportunity from the market size, to their competitors’ positioning, to the details of their financials. As such, they go into their first venture capital investor’s meeting unprepared and get ripped apart by seasoned venture capitalists.  Not a fun experience.  There is an easy way around this scenario.  Take the time to really understand your own investment opportunity. This means, don’t start by writing your business plan on day one. Instead, do the opposite; take the time to research your own investment opportunity. This process usually takes about one to three months depending on your background, the number of markets you will be addressing and the breath of your product offering.

This research process is a valuable exercise.  It provides perspective and allows you as an entrepreneur to step back and evaluate which aspects of your investment opportunity that requires more work, before you begin writing your business plan.  Also, this research is a self-education process that ultimately provides you as an entrepreneur with the necessary knowledge and background to be prepared for the test –your first meeting with venture capital investors.  By having done your research on all aspects of your business investment opportunity you will be prepared and will then be able to answer the necessary questions investors ask to properly evaluate you as an entrepreneur and your associated investment opportunity. Remember, you need to be properly prepared to talk with investors about your business opportunity. The self-education process is the key to this preparation.

Understand the Investment Expectations of Venture Capital Investors

Most first time entrepreneurs falsely believe they are fundable, without really understanding the investment expectations of venture capital investors.  This false sense of entitlement is not based on any reality.  Instead it is based on an unrealistic premise – “if I have a “concept” or “idea” it must be fundable”.  Nothing is further from the truth.  Instead, investors have strict investment criteria and specific things they look for when considering potential investment opportunities. Remember, venture capital investors are “money managers” and have a board or directors to report to, so they necessarily have to be selective in the investment opportunities they consider as potential investments. So, as an entrepreneur, it is very important to educate yourself in understanding the expectations of venture capital investors. From the expected financial returns, to the requirement of strong team, to the necessity of creating a long-term sustainable competitive advantage in the market, it is necessarily important to develop a solid understanding of venture capital investors and their investment criteria. Therefore, take the time to read on the subject, attend seminars on venture funding, and go to business plan competitions. This will enlighten you as an entrepreneur with regard to the venture capitalist investor’s funding criteria and provide you with insight to what these same investors look for in potential investment opportunities.

Target Your Venture Capital Investors and Get a Warm Introduction

Most entrepreneurs believe they can send their start-up company’s executive summary to a venture capitalist they do not know and magically this same venture capitalist will read it and invite them to come in for a review session. This is not the case.  In fact, this rarely happens, if ever.  There are a couple reasons for this.  First, venture capitalists are very busy and rarely have time to review let alone read any business plans that come into their office “cold”.  Secondly, venture capitalists like anyone in business prefer to have investment opportunities introduced to them by people they know.  This is known as a “warm” introduction.  The reason for this is that if they know and respect the person that has introduced the potential investment opportunity to them; they know that this person’s reputation is on the line and they would not ask them to look at it unless it was a “quality” investment opportunity.  Remember, investors are always more comfortable in working with people they know and trust.  It is just human nature. Therefore, when looking to secure venture funding it is important to do two things. First, target venture capitalists that have a history of investing in similar start-up companies.  All venture capital firms have target investment criteria (target technologies, markets, investment amounts, etc.).  Spend the time to investigate and target those venture capital firms which meet your investment criteria.  This will provide you with a target list of potential investors. Second, work hard to get a “warm” introduction to these targeted venture capitalists. You can do this by:

  • Going to networking event in which a venture firm’s partner is a panelist,
  • Looking at the companies they have funded and determining if you know someone at these firms,
  • Working with a law firm that has connections to your target list of venture capitalists.

Remember, targeting specific venture capital firms and then working to get a warm introduction will get you a long way down the road to securing funding. 

As first time entrepreneur, you need to necessarily educate yourself.  This takes time, but in the end is the key to successfully securing funding from the venture capital community.  This self-education process includes understanding all aspects of your own business investment opportunity, having a realistic understanding of venture capitalists’ investment expectations, targeting specific venture capitalist firms and securing a warm introduction.  By doing your homework here, you will save yourself a lot of time and substantially increase your chances of securing funding.

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.

October 5, 2009 Posted by | Business Planning, Business Plans, Competition, concept, Idea, Venture Capital, venture finance, Venture Funding | Leave a comment