Robert Ochtel’s Blog

An Experienced Approach to Venture Funding

Entrepreneurs, Get Your House in Order Before You Present to Investors

Many start-up companies go through one or more incarnations before they are ready to engage with potential investors.  As such, more often than not, a tremendous amount of history exists that may have detrimental effects on your start-up company and its ability to secure funding from these same investors. Often, with changes in corporate vision and strategy, redirection in product focus and new executive teams along the way, there exist significant amounts of baggage that can have an adverse affect on how potential investors view your start-up company.  In order to make sure you put your best foot forward, you need to make sure that you have your house in order before you engage with investors. To accomplish this, you should review all of your start-up company’s outstanding contracts, update your capitalization structure, and secure a committed team.   If you do this, you can avoid any potential missteps with your investors and at the same time increase your chances of receiving funding.

Review Your Contracts

If your start-up has been through one or more incarnations, more often than not there exist old contracts that need to be reviewed and then determined if they are still applicable to your start-up company, its vision and product offerings.  Often, old contracts were based on completely different sets of assumptions and circumstances and must be voided or dissolved appropriately. If not disposed of properly, these outstanding contracts can have a detrimental effect on your company moving forward.  In some cases, these same contracts need to be renegotiated, since at the present time, your start-up company may have a completely new business model that significantly changes the role or importance of a contractor and their technology, product or service offerings.  Accordingly, many times, going back and renegotiating a contract can be a difficult and time consuming task.  So, before you open up a can of worms, you should spend the time to thoroughly review the contract to see if you can live with it as originally structured. If you can, keep the contract as is.  If you cannot, you need to go back and properly explain to the contracted party, that there have been significant changes in the direction of the company and you need to either renegotiate the contract.  If they are not willing to renegotiate, you need to find other sources for their technology, product or service offerings and immediately cancel the contract.  It should be noted that often when you try to renegotiate a contract, the contractor will have decided that the original contract was not fair to them and try to get a much better deal.  If this is the case, you need to understand if you can live with the updated demands.  If you cannot, then cancel the contract and move on.  Remember, you investors will want to review all of your contracts and old contracts that could have an adverse effect on your start-up company and have not been updated or voided will be an issue with your potential investors.

Update Your Capitalization Structure

Many times a start-up company that has been through several incarnations will need to be recapitalized to properly reflect the new debt and equity structure of the company and its present executive team.  Often old, executive team members and corporate structures will need to be modified, in order to move your start-up company forward. This is one of the most difficult tasks to accomplish, as old executive team members will want to retain their equity ownership and new executive team members will want their “fair” share of equity for their anticipated future contributions to the company.  So, you need to take a look at the whole picture, including previous contributions by old executive team members and their importance to your start-up company at the present point in time, and then come up with a new capitalization structure that works for all parties involved.  Many times, this includes changing the equity ownership of old team members.  In addition, you need to address any debt on the books and determine, if this debt is associated with any significant and present aspect(s) of your start-up company’s business moving forward.  If so, you will have to live with it, and if not you need to try to get this debt off the books through negotiations and/or voiding of any associated contracts. Remember, investors do not invest in your start-up company to pay off old debts.  So, if you can remove any old debt, do so, as it will help your start-up company moving forward.  Finally, in some instances, a start-up company with a long history, minor changes in the capitalization structure will not improve the situation.  In this case it is better to take your start-up company into bankruptcy and restart the company with a new capitalization structure.  Although not recommended, sometimes this is unavoidable. 

Secure a Committed Team

As often stated, investors invest in the “team” and not the “product”.  As such, for a start-up company with a history of several incarnations, often original team members, at the present time, do not add any significant value to your start-up company.  As such, these team members need to be removed and replace with new committed team members that will add significant value to the new direction of your start-up company. If you do not do this, you will end up with a bloated team and several non-contributing team members. This will de-motivate your contributing executive team members and bring the performance level of your start-up down.  Remember, it is better to clean up your start-up company’s executive team before you engage with investors. Many times these conversations are difficult, but necessary.  Accordingly, you need to have the best executive team you can possibly have and get their commitment to move your start-up company forward to success in the market before you talk to investors.  If you do not, you will not be successful in securing funding from potential investors.

A start-up company that goes through several incarnations often has a significant amount of history that can adversely affect the company moving forward.  To avoid this, and before you begin talking to potential investors, you much get your house in order. This includes reviewing your contracts, updating your capitalization structure and having a committed team.  If you do this before you engage with investors you will greatly improve your chances of securing funding from these same 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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March 15, 2010 - Posted by | Venture Capital | , , , , , , , , , ,

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