Robert Ochtel’s Blog

An Experienced Approach to Venture Funding

Assimilation of the Appropriate Research Data and Real World Input will Help Impress Potential Investors

Many times entrepreneurs believe that having a business “concept” or “idea” is enough to get their potential investors interested in investing in their start-up company.  Nothing can be further from the truth.  This may work for “friends and family” investors, but sophisticated investors often take three or more months to do their due diligence on potential investment opportunities to make sure that they are credible and have a good chance of being successful.  That is why smart entrepreneurs take their time to develop their business “concept” or “idea” in to a value-added business proposition that offers a long term sustainable competitive advantage in the market and the same time is scalable in an expedient time frame. To do this, entrepreneurs need to do their appropriate research, call real world customers, and talk to potential strategic partners.  Once this is complete, these same entrepreneurs need to assimilate this data and real world input into a value-added business proposition. By doing so, you will impress your investors and increase your chances of receiving funding.

Do Your Research

Doing research takes time and is hard work.  That is why most entrepreneurs try to skip this step in developing their “concept” or “idea” into a real business proposition.  The thing that most entrepreneurs do not really understand about doing research (market, competitor, etc.), is that it provides you, as an entrepreneur, with much more value-added information than you realize.  As you take the time to work through the research process and learn more about your target market(s), competitors, general trends, price points, etc., there comes a point where all of this data starts to make sense and at the same time provide invaluable insight.  That is, at a given point in your research process you begin to assimilate all of this data and then are able to:

  • Determine the strategic opportunistic needs of the market, 
  • Develop a value-added proposition for your start-up company’s technology, product or service offering, and
  • Develop a long term defensible and sustainable growth position over your competitors.

This assimilation process does not happen overnight.  It takes a significant amount of research, time, and effort, but in the long run will put you in a strong position when talking with your potential investors. As you now have real data to back up your value-added business proposition and at the same time, you can also substantiate your ability to enter a given market or markets to create a long term, differentiated, competitive position.

Call your Real World Customers

Once you have completed your research and created a business proposition that you believe is of significant value to your customer base, the next important step is to focus on calling your real world customers.  All of the research in the world is of little value unless it is verified with actual, real world customers.  This is where most entrepreneurs fail and it is what differentiates a good investment opportunity with a great investment opportunity in the eyes of your potential investors.  More often than not, many entrepreneurs believe they are smart individuals and that their technology, product or service offering will be accepted with open arms by their targeted customer base.  Nothing is further from the truth.  Even if you have a product offering that offers substantial cost savings or other significant advantages, there are other issues that will affect potential customers’ decisions in using your start-up company’s product offering.  This can include:

  • Integration time and effort,
  • Customer product planning schedules for new product offerings,
  • Completeness of the product offering,
  • Product rollout schedule and future product roadmaps.
  • Availability of important product features, functions and capabilities, and
  • Other.

Therefore, as an entrepreneur of a new technology, product or service offering, the most important thing you can do to differentiate your investment opportunity from the other start-up companies looking to secure investment monies is to call your real world customers!  These same customers will inform you of the important aspects of your “proposed” product offering that make sense and what things that do not make sense.  In addition, they more often than not will provide you with invaluable input that will often change your initial product focus or require you to prioritize necessary features and functions for your product offering. All in all, valuable customer input, from various potential customers, will allow you to assimilate this data and then create a much more attractive product offering for both your initial product offering and follow-on products outlined in your start-up  company’s product roadmap.

Talk to Potential Strategic Partners

Generally start-up companies, require strategic partners to become successful in the market. These strategic partners can come in many forms including:

  • Complementary technology partners,
  • Manufacturing partners,
  • Channel partners,
  • Marketing partners,
  • Others.

All of these potential strategic partners are not only valuable to your start-up company with regard to what they bring to the table in terms of their products, capabilities, technologies, etc., but they more often than not bring invaluable input in terms of their insights to helping you bring a successful technology, product or service offering to market.  Often these same potential strategic partners can provide invaluable insight to help facilitate both your near and long-term success in the market. This can include:

  • Determining your go to market strategies and tactics,
  • Defining your initial product offering’s features functions and capabilities,
  • Developing your initial rollout schedule and securing early revenue,
  • Identifying new market opportunities and revenue sources,
  • Lowering costs,
  • Other.

The insight, products, technologies and capabilities of these real world strategic partners can create significant value for your start-up company and its technology, product or service offerings. They may even cause you, as an entrepreneur to change direction and focus on new opportunities with much greater potential investment returns. Therefore, by talking to potential strategic partners early on in your start-up company’s development you can assimilate this information to create significant long-term value for your start-up company.

Interesting business “concepts” or “ideas” do not generally get sophisticated investors excited to the point that they are willing to invest in your start-up company. These same investors more often than not have a defined due diligence process that they need to go through to determine if your start-up company offers a business opportunity worth investing in.  By doing your research, calling your real world customers, and talking to potential strategic partners, you have ability to absorb a significant amount of data that can be invaluable to the near and long term success of your start-up company. In addition, assimilating this data and developing a value-added business proposition that provides a long term sustainable competitive position in the market will not only impress your potential investors, but it will help your start-up company secure funding with these same individuals.

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.

February 22, 2010 Posted by | Venture Capital | , , , , , | Leave a comment

Entrepreneurs, a “Concept” or “Idea” Must be Verified with a Sustainable Business Model

Too often entrepreneurs approach venture capitalists or other third party investors (e.g. individual angels or angel groups) with only a business “concept” or “idea”.  For this same business “concept” or “idea” to be of any real value to these same investors it must be verified with a sustainable business model.  Remember, once venture capitalists are interested in a business proposition, the first thing they do is to review the supporting financials to understand if this same business proposition supports a sustainable and scalable investment opportunity.  If so, they will venture further to better understand the product offering, investment opportunity, and management team. If not, they will move on to the next business “concept” or “idea.  So, as an entrepreneur, you need to verify early on that in fact, your business “concept” or “idea” supports a sustainable and scalable business model.  By doing so, you will substantially increase your chances in securing funding.  If you do not, you will most likely be bypassed the venture capitalists and other third party investors alike.  This article focuses on the top line related financial items that you need to focus on early during the business planning process that will help you determine if your business concept is worth pursuing further.    

Identify and Verify Your Revenue Sources

Whether your start-up company is focusing on developing a technology, product or service offering, you need to first identify all of your potential sources of revenue.  It should be remembered that venture capitalists are highly risk adverse.  So, if you have the ability to secure multiple revenue sources from a single technology, product or service offering, this is all the better in the eyes of your investors.  Multiple revenue sources minimize the overall investor risk, and at the same time allow your start-up company to scale its revenue growth much faster than it would be able to do with a single source of revenue.  It also increases the potential returns for your investors.  In addition, often if you dig deeper into potential revenue sources during your planning process you may indentify additional market opportunities in which to sell or apply the same or a slightly modified version your technology, product or service offerings. These revenue generating opportunities, in some cases, may be larger and easier to access than that of your original targeted markets. So, take the time to analyze and understand all of your potential revenue sources and their associated markets.  This will provide you with tremendous benefits you as approach potential investors.  

Determine Your Product Offering’s Gross Margins

During the business planning process, after you identify all of your revenue sources, you need to next focus on the gross margins of your start-up company’s technology, product or service offerings.  This is important, as if you cannot generate a healthy gross margin, from your start-up company’s technology, product or service offering, you will not be able to cover your variable costs (sales, marketing, general and administration and research and development) to support a sustainable and scalable business. In short, if your start-up company’s gross margins are not high enough or sustainable, you will never be able to cover your operational costs and generate an operational or net profit.  So take the time to analyze all the costs associated with generating and bringing your technology, product or service offering to the market.  These costs include materials, manufacturing labor, channel marketing, support, etc.  If you do not understand all of the “costs” associated with getting your technology, product or service offering to market, you will not be able to develop a predictable, long term sustainable business.  Therefore, focus on your start-up company’s gross margins, as developing a product offering with a healthy gross margin will allow you to develop a sustainable business operation for the long run.

Verify Your Top Line Financials Using Your Competitors’ Financial Statements

Once you have identified your revenue sources and determined their associated gross margins, you need to verify your findings. This is best done by looking at the income statements of your top competitors. By doing this, you can determine if your revenue sources and their associated gross margins (revenue – cost of goods sold) are representative of that of typical competitors within your industry.  If you have multiple revenue sources from various technology, product or service offerings, you need to look at the competitor financial statements for each of your product offerings. This will allow you to verify the top line financials for all of your revenue sources, and provide additional support when engaging with potential investors 

One of the easiest and best ways to verify your financial top line numbers is to go to Yahoo Finance (http://finance.yahoo.com) and look at the income statements of your competitors.  Generally, here it is best to look at multiple competitors for each product offering as well as the industry average.  By doing so, you will not only be able to verify your own top line financial numbers, but you will be able to determine where your top competitors fall on the financial performance spectrum and model your start-up company’s financial statement accordingly.  Remember if you do not verify your financial numbers, your potential investors will and it is better to do your own homework up front than to find out about it during an investor presentation.

Business “concepts” and “ideas” can be intriguing, but it is a sustainable and scalable business proposition that gets the attention of potential investors.  To move from a business “concept” or “idea” to a sustainable business proposition, you must identify all of your revenue sources, determine their associated gross margins, and then verify your top line financials with your competitors’ income statements.  This will allow you to determine if you can develop a sustainable operational business model.  This is not the end of the road in developing a complete financial model, only the beginning.  But, what this top line analysis does is to help entrepreneurs identify the appropriate technology, product or service offerings that will move them forward toward a verified sustainable and scalable business model that will secure potential investors’ interest.

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.

February 17, 2010 Posted by | Venture Capital | , , , , , , , | 2 Comments

Entrepreneurs, Take Your Time When Choosing Key Personnel for Your Executive Management Team

Choosing the right executive management team for your start-up company can make the difference between getting funded and not getting funded.  Once investors “like” the business proposition, their investment decision primarily rests on the quality, experience and depth of the start-up company’s executive management team.  Therefore, choosing the right executive management team members is a key for any start-up company.  So, as an entrepreneur, you need to take your time in choosing your executive staff, as it is better to have a hole in your executive management team than to choose the wrong person for a key position within your start-up company.  Therefore, be very careful when choosing individuals to server as your start-up company’s executive management team, as picking the right team members will help you execute your roll out plan, allow you to attract investment capital and serve your start-up company well both short and long terms.

Don’t Commit Up Font with Unknown Individuals

When choosing the initial members of their executive team, entrepreneurs generally go with “known” individuals.  This can be a mixed blessing.  More often than not, the entrepreneurs have worked with these same individuals in some capacity during their career.  This makes these same individuals a “known” entity and therefore, the entrepreneur has a good sense of their skills, work ethics, morals, and overall ability to perform on the job, both in good times and in challenging times.  On the other hand, if these same “known” individuals do not work out, it is much more difficult to let them go, as existing personal relationships are often more difficult to sever. Therefore, be careful when choosing friends and/or colleagues to be members of your executive management team.

For key executive management positions that need to be filled with “unknown” individuals, as an entrepreneur you need to learn to be a bit more skeptical.  With that being said, I find it important to meet with these same individuals and understand both their motivations and compensation requirements.  Some of these same individuals are just looking for a pay check and are not willing to put in the necessary time or work up front to show what they can do.  These types of individuals, as such, do not provide you with the opportunity to determine what overall value they can offer your start-up company. I would pass on these individuals. On the other hand, if an individual is someone you are interested in bringing on board offer them a minimum number of stock options for a short period of time, for example, three to six months. Then use a performance-based consulting contract as the engagement vehicle to define the initial relationship.  At the end of this period you will have a better understanding of this “unknown” entity and their commitment to your start-up company and the skills and value they can bring to your start-up company.  Remember, individuals that are not willing to work on some type of performance-based consulting contract upfront, are not individuals you need to bring onboard as key members of your executive management team of your start-up company.  Accordingly, this type of short term performance based assessment is the best indicator of long term performance and value an individual can bring to your start-up company.  Anything less, is just a shot in the dark, and is something your start-up company cannot afford, both in terms of lost time and opportunity.

Don’t Let Executive a Staff Member that is Not Working Out Linger too Long

Often, even “known” entities, colleagues or friends that are brought on board to be members of your start-up company’s executive management team do not work out.  This is usually obvious from the beginning and can manifest itself in many ways, including:

  • They are not willing to put in the effort or commitment to get things done. 
  • They do not add the necessary value that is expected of a senior executive staff position.
  • They are not self-starters and require too much direction and “hand-holding”. 
  • They have too many personal distractions that take away from their job performance.

Be that what it may, these same individuals are not to be considered valuable executive management team members of your start-up company and over time can often be more of a distraction and overall hindrance.  As such, these executive management team members need to be removed as soon as possible. Allowing these same individuals to continue to be a part of the executive management team will only cause resentment among the other executive staff members, as they will understand that these individuals are not pulling their weight and need to be replaced.  Therefore, as an entrepreneur you need to understand that even “known” entities do not always work out. Hence, it is your job to recognize this early and institute a discipline-based, performance improvement plan, if possible, or let them go, as doing nothing and letting it linger too long will not benefit your start-up company and its overall performance.

Executive Management Teams will Change

Sometimes valuable executive management team members, of your start-up company, will leave the company for a number of reasons. You, as an entrepreneur, need to recognize that all executive management teams change over time. This can be for performance reasons, personal reasons, etc.  The key here is to make sure that you recognize that the initial executive team you start with will necessarily not be the executive team you end up with. This is especially true if you take on third party venture monies.  Venture capitalists are notorious for removing members of the executive management teams of the start-up companies they invest in, and in many cases you will have no control of this.  So you need to recognize that through attrition, your own actions, or the actions of third party investors, your executive management team will change. This, more often than not is a good thing, as over time non-contributors leave and higher value-added individuals are brought on to replace them, and as such the executive management team will get stronger.  Therefore, as an entrepreneur, you need to recognize that a change, at the executive management team level, of a start-up company, is often a good thing and will in many cases enhance the overall performance of your company.  

As an entrepreneur, you need to take the necessary time to choose the right individuals to serve as members or your start-up company’s executive management team.  This is imperative for any successful start-up company.  To do this properly you should not commit to “unknown” individuals up front, recognize that even “known” individuals may not work out and need to be replaced, and finally recognize the fact that all executive management teams will change over time.  Understanding these principles is important. Therefore, take your time to choose the key individuals of your start-up company’s executive management team, as this will necessarily help facilitate your start-up company’s success 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.

February 8, 2010 Posted by | Venture Capital, venture finance, Venture Funding | , , | Leave a comment

Entrepreneurs, Take Your Time to Choose the Right Directors for Your Start-up Company

Choosing the individuals to serve as members of the board of directors for your start-up company is a very important task and one that should not be taken lightly.  Like, key members of your executive staff, the individuals that will serve on the board of directors of your start-up company must have the appropriate backgrounds, understand your start-up company’s technology, product or service offering, and have a strong reputation for helping to develop and steer successful companies.  Anything less is not acceptable. Therefore, be careful to choose the right individuals to serve on the board of directors for your start-up company, it will help you to attract capital and serve your start-up company well both short and long terms.

Don’t Choose Your Friends as Directors

Entrepreneurs, like any individual, tend to choose friends and other professional associates to serve as members of the board directors for their start-up companies. This is not really a good choice, as friends or even professional associates may not have the appropriate amount of experience or the skill set to help steer your start-up company through the trials and tribulations that will come your way. In addition, in some cases, personal friendships or professional relationship histories may get in the way of objective assessments and prudent business decisions. Therefore, in understanding the importance of board level positions, as well as the legal implications, it is more important to choose the “right” individuals to serve as members of the board of directors of your start-up company, as opposed to “known” friends of other individuals that may not be able to provide the necessary insight and direction that is critical to facilitating the success of your start-up company in the market.  So, take your time, as an entrepreneur, to choose the appropriate board members for your start-up company.  Remember, friends and other professional colleagues do not necessarily make the appropriate board members.  You need to choose individuals, for your board of directors, with the same prudence that you would when choosing the next member of your start-up company’s executive team.  Using this type of insight will serve your start-up company well.

Look for Individuals that Understand Your Space

Individuals that are to serve members of the board of directors for your start-up company need to necessarily understand the “space” or industry you are in.  This is necessary for them to offer any valuable insight to what is going on within the industry and the overall trends of the market. This is a key aspect to choosing members for your board of directors. If any of the individual members of your board of directors do not understand your start-up company’s technology, product or service offering and/or the space you are participating in, they will be much less likely to be able to provide you with the necessary insight and direction necessary to guide your start-up company to success in the market.  In addition, they will not really understand what is being discussed during board meetings, and most likely will end up being a distraction during these same meetings. Consequently, these same individuals will not be able to properly digest the important issues being discussed and triangulate this same information into conclusions that will add value to your start-up company’s direction.  Remember, successful start-up companies often need to change direction or pivot quickly in order to react to what is going on in the market or compensate for past decisions that took this same start-up company in the wrong direction.  Therefore, when choosing team members for your board of directors, choose members that have the appropriate amount of experience in your space, this will allow these same members to provide valuable insight to the necessary decisions that need to be made to steer your start-up company in the right direction.

Stellar Reputations will Attract Money

One of the things that you need to consider when choosing individuals to be members of your board of directors is to find individuals with “stellar” reputations.  This can be individuals that:

  • Have a strong history of choosing and working with successful start-up companies,
  • Have developed an extraordinary reputation as a technology and/or business specialist within the industry that your start-up company is focusing on, or,
  • Have invested in number of successful start-up companies and has a reputation for choosing winners. 

Remember all people want to be associated with individuals that are perceived as successful or winners within their industry.  In addition, choosing board members with “stellar” reputations will allow you to attract money.  As, good deals with great board members, get the attention of investors and as such these same start-up companies have a much easier time attracting investment monies.  So, take the time to identify and approach individuals with stellar reputations to serve as board members of your start-up company. This will necessarily make your start-up company attractive to potential investors.

As an entrepreneur, you need to take the necessary time to choose the right individuals to serve as members or your board of directors.  To do this properly you should stay away from friends, look for individuals have an understanding of your targeted space, and choose individuals that have stellar reputations.  Using these items as criteria when choosing potential directors for your start-up company will provide you with the necessary insight to select individuals that will have the necessary background, experience and insight to help successfully facilitate your start-up company through any trial and tribulations that come your way.

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.

February 1, 2010 Posted by | Venture Capital | , , , , , , , | 1 Comment