Robert Ochtel’s Blog

An Experienced Approach to Venture Funding

Entrepreneurs, Legacy Costs Can Hurt Your Start-up Company’s Fund Raising Efforts

Start-up companies, by definition, need to be nimble and have the ability to change direction as the market changes.  Often with the development and maturation of a start-up company, things can change significantly from the original direction, mission and focus of the company.  This is especially true, if this same start-up company has been through multiple incarnations to develop a differentiated and long-term sustainable competitive position in the market.  These changes in direction do not come without costs to the start-up company itself.  And, often these costs can hurt your start-up company’s fund raising efforts.  Therefore, as you move forward and your start-up company changes direction, strategy, and its market entry tactics, you need to step back and understand what legacy costs need to be let go or changed to successfully move your start-up company forward in your fund raising efforts.  This can include replacing old executive team members, restructuring the company’s capitalization, and shedding old, irrelevant contracts, as all of these things if not appropriately addressed will hurt your start-up company’s fund raising efforts. 

A Change in Direction May Require a New Executive Team

Significant changes in direction for a start-up company may result in requiring new executive team members to move your start-up company forward.  Often these changes in direction come with a new CEO.  As such, the executive team members that were relevant for the old company and its original focus are not appropriate for the new company and therefore this often requires the new CEO to clean house and secure a completely new executive team.  This significant level of change within the executive management team of a start-up company can be very traumatic and should not be made over night. If there are some team members that have relevant capabilities and skills that add significant value to the new direction of your start-up company, then they should be given a chance to move forward with new direction of the company. On the other hand, if there are executive team members that lack the proper motivation and appropriate skill sets to add any value moving forward, then they will need to be let go and replaced with new executive team members that have the skill sets, motivation, and ability to move your start-up company forward.  Nothing is worse for a start-up company than to have legacy executive team members hanging around that add no value to your start-up company and its current direction. So, make the decision to bring on new executive team members and let go the legacy executive team members that do not any value regarding the new direction of your start-up company.  This will clean the slate and provide for a better path forward for securing funding.   

A Legacy Capitalization Structure Often Needs to be Changed

One thing that will immediately diminish the interest of potential investors is a legacy capitalization structure that does not support your required funding efforts. This legacy capitalization structure can take many forms and can include the following:

  • Too many small investors with tiny equity positions,
  •  Too much debt,
  • Too much equity for legacy team members,
  • Too much of a “hangover” in the stock option pool,
  • Not enough equity for multiple investor rounds,
  • Other.

These legacy capitalization structure issues need to be addressed before you talk with investors.  If you do not do this, you may risk losing potential investors.  So, take a look at your legacy capitalization structure before you engage with your investors.  If you do not know what makes an attractive capitalization structure which will facilitate the venture funding of your start-up company, find a financial consultant that has worked with venture capitalists. They will be able to provide you with the appropriate advice regarding recapitalization of your start-up company to make it more attractive to investors. 

Old Contracts May be Inappropriate or Irrelevant

Often with significant changes in direction, start-up companies should take the time to review old contracts and strategic relationships.  Contracts that were once important to your start-up company may be inappropriate or irrelevant to your start-up at its current point in time.  So, make sure that you clean up old contracts and relationships before you engage with your investors. This can include:

  • Discontinuing certain strategic relationships,
  • Cancelling old irrelevant contracts,
  • Reviewing and modifying existing contracts,
  • Other.

As an entrepreneur of a start-up company you must take the necessary steps to eliminate any risks moving forward. This includes reviewing all of your outstanding contracts and strategic relationships.  By doing so, you will facilitate third party angel or venture capital funding.

Often start-up companies go through multiple incarnations to develop a differentiated and long-term sustainable competitive position in the market.  These changes in direction do not come without costs to the start-up company itself and often require this same start-up company to shed some of its legacy costs to move forward in its fund raising efforts. To do this, an entrepreneur must often secure a new executive team, change its capitalization structure and cancel old, irrelevant contracts.  This is often necessary, as in doing so, you will be putting your start-up company in a much better position to secure venture funding from angel investors or venture capitalists.

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 29, 2010 - Posted by | Venture Capital | , , , , , , ,

1 Comment »

  1. Great information! I’ve been looking for something like this for a while now. Thanks!

    Comment by cna training | April 11, 2010 | Reply


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