Robert Ochtel’s Blog

An Experienced Approach to Venture Funding

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.

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February 17, 2010 - Posted by | Venture Capital | , , , , , , ,

2 Comments »

  1. Impressive!. We learned a lot here.

    Comment by mac iPhone ringtone maker | March 7, 2010 | Reply

  2. Hi Robert,

    As someone who’s worked in corporate America for almost 30 years, it’s refreshing to see the knowledge out there on entrepreneurship and venture funding.

    Thanks,
    Marty Jennings

    Comment by Marty Jennings | March 10, 2010 | Reply


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