Robert Ochtel’s Blog

An Experienced Approach to Venture Funding

Entrepreneurs, Stretching the Truth May Ruin Your Chances of Securing Funding from Potential Investors

Many times when entrepreneurs meet potential investors they do so for the first time.  With a blind introduction, a cold call, or recommendation from a colleague, entrepreneurs need to quickly gain credibility with their potential investors.  This is not an easy task, and is especially true when presenting to potential professional investors (e.g., venture capitalists) that “know their space” and are looking for the next exceptional business deal, with a credible and fundable team. In this situation, the worst thing that an entrepreneur can do to ruin the potential of securing funding from these same investors is to “stretch the truth” regarding any aspect of their business, the business opportunity, or their current state of development.  This approach to trying to “impress” your potential investors will only come back to haunt you, and in a worst case scenario it will ruin your reputation as well as your chances of receiving funding from any or all investors. Remember, the financial community is small and information regarding “bad” deals or non-credible entrepreneurs will get around fast, ruining any chances or receiving funding in the future.   

Increase Your Credibility by “Knowing” Your Business

The best way to prepare for investor meetings is to know your business.  As such, you need to do months of business planning and preparation just to get to the point where you are truly prepared for meeting potential investors for the first time.  Winging it will not go too far, as you will lose any potential interest from your investors if they know that you are not fully prepared, and trying to skate through the funding process. Remember, professional investors usually specialize in a given “space” (e.g., biotechnology, IT, wireless), and as such they are very well read in this area of focus and know all of the players and the current and future trends in the industry.  You need to be just as “knowledgeable” as they are, as you are trying to convince these same potential investors that you and your start-up company offer a unique technology, product or service offering that can create a long term sustainable competitive advantage in the market. This is no small task, but by “knowing” your business you will have required knowledge to create a credible story line for your technology, product or service offering.  Therefore, before you call one investor to set up a meeting, make sure you have taken the time to “know” your business, as this will substantially increase your credibility with your potential investors.

Don’t Stretch the Truth, Just Say “I Don’t Know”

When presenting in front of potential investors for the first time, many entrepreneurs want to always appear knowledgeable on all subject matter and all questions that are posed to them.  If you are well prepared, you will most likely be able answer 99% of the questions or subject matter posed to you during your first meeting with potential investors. That being said, there will always be one or more questions that you either don’t know the answer to, or did not prepare for.  This can be compared to preparing for a test, as you know you are ready, but it is that one thing you did not spend much time on that will catch up with you at test time.  To get through this many entrepreneurs try to “stretch the truth” or their “knowledge base” in a real time fashion in front of their investors. This can be a real untenable situation. In the worst case scenario, your investors know you are “stretching the truth” and you will instantly lose all credibility.  Alternatively, this approach will lead to more follow-on questions regarding the same subject matter and again you will be out on limb, just hoping to be able to get through the line of questioning without getting caught.  These scenarios can be easily avoided by just telling the potential investors, “I don’t know and I will get back to you.”  This is the best approach, as in this scenario you do not put your credibility in jeopardy and you still have to ability to impress your investors with your follow-up answer.  Remember, sometimes investors are just asking you questions to see how you will react.  So again, do not put yourself and your reputation out on a limb by “stretching the truth” in an effort to appear knowledgeable, as this approach will not work with potential investors.

Investor Due Diligence will Validate Both You and Your Start-up Company

Finally, as an entrepreneur, your “credibility” needs to stand up through the investor due diligence process. Therefore, any half-truths, or “stretching of the truth” during your investor meetings will be invalidated during the due diligence process. For professional investors, this due diligence process can take three to six months.  Therefore, during this process, you need to be careful to represent you and your start-up company in a truthful manner at all times. Accordingly, this due diligence process will require you to address all aspects of your start-up company, including:

  • The development status of your technology, product or service offering,
  • The members of your executive staff and their participation in your company,
  • Any and all invested capital, and company debt,
  • Strategic customer relationships,
  • Market size and growth potential,
  • Customer development status,
  • Corporate capitalization, and
  • Other

By truthfully and fairly representing your start-up company’s investment opportunity you will be fully validated through the potential investors’ due diligence process. This will also provide them with the assurance that they are dealing with a first class, reputable team, making your start-up company a much more favored investment opportunity for potential investors.                                                                                                            

Most entrepreneurs and potential investors do not know each other when the meet for the first time.  As such, the onus is on the entrepreneur to quickly gain credibility with these same potential investors. This is accomplished by knowing your business, never “stretching the truth” and presenting an investment opportunity that will stand up to thorough due diligence by your potential investors.  By doing so, you will increase your immediate credibility with you investors and the potential of receiving funding from these same investors.  So, take the high road and present you and your start-up company in a straight-forward, honest manner, it will serve you well with your potential 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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April 26, 2010 Posted by | Venture Capital | , , , , , , | 1 Comment

Entrepreneurs, Develop a Funding Strategy That Works for Both You and Your Investors

Most, if not all start-up companies, require third party funding to get their company off the ground.  Additionally, many entrepreneurs of start-up companies have no idea what it is like to deal with these same third party investors.  Although funding is a necessary evil of the start-up world, it not necessarily the panacea that most entrepreneurs believe it is.  With goals and objectives that do not necessarily align, entrepreneurs need to be aware that taking in third party equity necessarily changes the game. Why, because external monies come with outside rules, objectives and goals. So, as an entrepreneur you need to be aware of this. Therefore, take your time to develop a funding strategy that works for you and your investors.  This will minimize the pain associated with third party funding and make your engagement with these same third party investors a more pleasurable experience. 

Identify Significant Near Term Milestones that Focus on Market Traction

Third party investors are in business to make money.  As such, they want to be assured that your start-up company has the ability to secure traction in the market.  Therefore, as you develop your rollout plan and associated significant milestones, you need to focus on how you will get near term traction in the market. Nothing is more important to investors, as they need to be assured that once the monies are invested and the technology, product or service offering is developed, that your start-up company has the ability to secure market traction.  Anything less will not be attractive to investors. 

It should be remembered that angel investors and venture capitalists are really money managers and not risk takers. They need to understand that your plan focuses on significant near term milestones that focus on securing customers.  Therefore, you need to always take this into consideration with developing your rollout schedule.  If you do not do this, you will not get the attention of your investors.  Remember “time-to-money” is the name of the investment game and developing near term milestones with this in mind will help keep you focused on market traction, the number one issue for investors.  

Get a Realistic Handle on Your Total Funding Requirements

All potential investors want to know how much “total funding” is required for your start-up company to be successful. This is especially true if they are an early investor in your start-up company.  From an investor’s point of view they want to minimize any future dilution of their investment, so one of their biggest concerns is how much total money will need to be invested in your start-up company to get it up and running and be successful in the market.  As such, dilution is the main concern of all investors, as the more future dilution that takes place, the less return on investment they receive on their money.  So, as an entrepreneur you need to be aware of this, as investors’ self interest, protection and preservation of their invested monies is their main goal.  So, make sure you have a realistic handle on the total funding required for your start-up company.  This will provide you with credibility with your investors.  It will also provide these same investors with the ability to predict potential future dilution scenarios and their final equity position and hence return on investment in your start-up company.

Match Your Funding Requirements with Your Investors

Entrepreneurs need to be aware that there are multiple types of investors in the start-up funding world and that each type of investor has access to a given amount of capital to invest in your start-up company, depending on your development stage.  So, as an entrepreneur, you need to take the time and develop a funding scenario that makes sense for your start-up company and its funding stage, the development and rollout of its technology, product or service offering, and for your investors.  This funding scenario can include a single round of funding, or multiple rounds of funding, but the key here is to deliver significant milestones with each round of funding that raise the value of your start-up company when looking to the next round.  Also, you need to be aware of the amount of funding that is available from various funding sources for each round and company stage, as this will affect your funding strategy.  The list below outlines various funding sources, their funding stage, and typical associated funding ranges.

  • Founders, Friends, and Family: Pre-Seed, Seed and Start-up; $25K – $100K
  • Individual Angel Investors: Seed and Start-up; $100K – $500K
  • Angel Groups: Start-up and Early Stage; $500K – $2.0M
  • Venture Capital/Corporate Partner Funds: Early and Later Stage; $2.0M and Up

Therefore, as an entrepreneur, you need to match your funding requirements with capital resources of your potential investors and your stage of development. This will make your funding path much smoother and create an opportunity for you to increase the value of your start-up company as you rollout your technology, product or service offering and secure traction in the market.                                                                                              

Most start-up companies require some kind of outside funding to develop their product offering, secure market traction and get their company on the road to success in the market.  The funding road can be difficult and at the same time third party funding comes with outside rules, objectives, and goals.  As an entrepreneur you need to be aware of this and develop a funding scenario that takes in both your requirements and objectives, but the requirements and objectives of your potential investors.  So, focus on the things that will make you both successful, including, near term milestones with associated market traction, realistic total funding requirements, and matching your funding requirements with your investors’ resources.  By doing so, you will create a funding path that is much smoother and has a much higher potential for success.

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.

April 19, 2010 Posted by | Venture Capital | , , , , , , , | Leave a comment

Entrepreneurs, Identify and Secure Your First Class Executive Team Using Small Amounts of “Sweat Equity” and a Consulting Contract

Start-up companies are notorious for not having any money to pay for anything. This is especially true regarding paying for the salaries of potential, first class, executive team members. Often, this is seen as a crutch to bringing a first class executive team on board.  On the other hand, indentifying those individuals that are willing to work for “sweat equity” are most likely your best bets.  Why, because it is these same individuals that understand that nothing in life that is worth anything is free and they are willing to prove it to you by contributing their time, effort, skills to create value for your start-up company.  On the other hand, individuals that want to be paid a salary up front to prove that they can perform are probably not worth the money they are asking for. So, as an entrepreneur take your time to indentify a first class executive team.  While doing so, you will find the right individual contributors that have the appropriate skill sets and are willing to commit their time and energy for a small amount of “sweat equity” to get your start-up company off the ground.  These same individuals are the ones that are willing and have the capabilities to create significant value to your start-up company.  To keep the ball rolling in this manner, you must check your rolodex, network and sell your vision, keep potential executive team members informed on company progress, and identify near term responsibilities and tasks for each potential executive team member.

Check Your Rolodex, Network and Sell Your Vision

Finding the right executive team members for your start-up company takes time.  It is not an overnight task. So, take your time to identify the right executive team members, as it is much better to find the right individual the first time, than it is to go through multiple iterations on bringing on the wrong individuals, only to have to let them go within three to six months. 
To find the appropriate executive team members, you need to check your rolodex, spend time networking and sell your vision to everyone you meet.  Selling your start-up company’s vision is the key, as you never know who will be the right individual with the appropriate skill set to help move your start-up company forward. With this in mind, finding the right individuals with the appropriate skills and capabilities is an active process.  Don’t always pick the first person you find, as this is often a big mistake.  Through networking and talking with colleagues you will necessarily find the appropriate executive team members that are willing to put in the time and effort in to move your start-up company forward.  In fact, if these same individuals buy into the vision of the company, they will be willing to “walk through walls” to get things accomplished. It is at that point that you know you have found the right executive team members.  Finally, with each executive team member you bring on, you necessarily exponentially expand your network and the pool of individuals to choose from, as each new executive team member has their own rolodex and network of colleagues to help develop your start-up company. This is absolutely beneficial to your start-up company and moving it forward and building a successful executive team.

Keep Potential Executive Team Members Informed on Company Progress

Often with the “virtual” nature of start-up companies, many of your potential executive members or significant individual contributors will be geographically disperse and can often take some time to convince to come on board.  With the support of the internet, you can keep these same individuals informed of the progress of your start-up company. This is important, as you want these same individuals to be excited about the possibility of coming on board your start-up company.  So, every couple of weeks or so, as the CEO of your start-up company, you should set aside a time to contact potential executive team members to keep them informed on the progress of the company. If these are significant events that are upcoming, or meetings that have the potential to create substantial value for your start-up company, these potential executive team members will want to know.  Keeping potential executive team members informed will raise their energy level and get these same individuals excited about joining your start-up company.  So, take the time to keep potential executive team members informed on the progress of your start-up company as this will keep them excited and get them to commit to joining your start-up company.

Identify Near Term Value-added Tasks for Each Team Executive Member

Once you have identified an executive team member that you want to bring on board, the best thing to do is to bring them on as a consultant for a fixed period of time, usually three to six months.  This can be done with a standard consulting contract, with a small amount of “sweat equity” for compensation.  This arm’s length relationship is invaluable, as you need this time to determine whether you want to bring this person on board full time as a contributing executive team member of your start-up company. So, use a consulting contract to identify the near term value-added tasks this individual needs to accomplish as a team potential executive member. This will allow you to determine if this individual is able to contribute at an executive team member level. If the potential executive team member does not work out, you are out is a small amount of equity based on the terms of the consulting contract.  On the other hand, if this person works out, you have identified a high-level, contributing executive team member.  So take the time to indentify the appropriate value-added tasks and time frame, so that you can get an appropriate assessment of potential executive team members.  This will save you lots of time, money and equity in the long term.                                                                                                           

Start-up companies typically do not have any money to pay for the salaries of potential, first class, executive team members.  This, often seen as a crutch, can be used as a positive to indentify and bring on board executive team members that will add significant value to your start-up company.  Through a process of networking and selling your vision, keeping potential executive team member excited, and offering “sweat equity” through a consulting contract, you can identify and evaluate potential executive team members’ skills, capabilities and commitment. By taking this approach, as an entrepreneur, you can secure a first class executive team to make your start-up company successful in the market and at the same time minimize any associated risk and expense to 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.

April 12, 2010 Posted by | Venture Capital | , , , , , , , | Leave a comment

Entrepreneurs, A New Vision and New Executive Team Members can Move Your Company Forward and Create Significant Momentum

Start-up companies often get stifled with an old vision and legacy executive team members that lack of motivation to move the start-up company forward.  This is usually due to the fact that the start-up company has been through multiple incarnations, and as a result, the original vision for the start-up company is old and the associated legacy executive team members lack the desire and motivation to move the company forward due to multiple failed attempts to do such.  With an underlying technology, product or service offering that still has significant merit and associated upside in the market, the founder(s) of the start-up company must significantly change direction to get the company moving forward again.  To do this, the start-up company must come up with a new vision, secure a new executive team that have the motivation to move the company forward, and develop a near term plan to create significant momentum to begin engaging with investors.      

Create a New Company Vision

The vision of a start-up company can be a great motivator.  If this same vision is inappropriate or does not match the needs of the market, a start-up company can get stalled and not have the ability to move forward and secure funding. Sometimes to create a new vision for the company the founders must step back and relook at their target markets to identify new trends and strategic opportunistic needs that are addressable with their underlying technology, product or service offering.  Often the original direction of the company is based on a vision that will not come to fruition in the near term.  This is generally due to the underlying fact that the entrepreneurs and their executive team of the start-up company initially targeting the wrong market and associated customer base. As a result, there are many start-up companies with visions that are fraught problems, including, being too early to market, targeting markets that lack significant market size, or identifying markets that lack the necessary and immediate customer demand for their technology product or services offerings. Consequently, as an entrepreneur you must recognize this and create a new vision based on near term market opportunities that take advantage of your technology, product or service offering.  This is often a difficult task, as changing the vision of your start-up company and how it will ultimately create success in the market requires entrepreneurs to separate themselves from the past “vision and focus” and create a completely new “vision and focus”.  As a result of this separation and re-thinking, a start-up company can often create a new vision that will bring more success as it moves forward.  

Find New Executive Team Members that Buy Your Vision

Often with the change in “vision” for your start-up company, there comes a completely different change in direction.  As such, old, legacy executive team members may not buy into the new vision or focus of the start-up company.  This is not unusual, as restarting an early stage company can often cause nervousness and trepidation with the old, legacy executive team members.  At this point in the development of your start-up company the founding team members must find new executive team members that buy in to the new vision of the start-up company. Unencumbered with the past and legacy issues, these new executive team members can bring new energy and significant motivation to your start-up company and its new vision.  These same new executive team members often bring a new perspective and outlook that will enhance your ability to move forward in the market.  Finally, these same new executive team members often and necessarily bring a whole set of skills that are required for the change in direction and new vision of the start-up company.  So, make the effort to find and secure new executive team members that buy into the new vision of your start-up company as this will necessarily allow your start-up company to move forward toward future success in the market.

Develop a Near Term Plan that Will Create Significant Value and Momentum

With a new vision and new executive team members, the next thing to do is to develop a near term plan that will create significant value and momentum for your start-up company. This plan should fit into the overall long term strategy of the start-up company and at the same time allow you to engage with your targeted customer base. Doing this will provide you with the ability to validate your new vision with “real” customers, create momentum and at the same time create significant value as you move your start-up company’s technology, product or service offering development forward. In developing this near term plan, you will provide an opportunity for the new executive team members to add value to move the start-up company forward with their individual skills and capabilities. This will bring these new executive team members together by contributing to a new term plan and will ultimately provide baseline for success of the new vision of the start-up company and at the same time provide the necessary value and momentum to move forward.                                                                                                     

Start-up companies often get stifled with an old vision and old, legacy executive team members that lack of motivation to move the start-up company forward.  This lack of motivation often comes from multiple incarnations and associated failures that have left this same start-up company standing still with no direction.  To move the company forward, the founders must separate themselves from the old company, vision and focus and create a new company with a new vision and focus. This new vision and focus often necessarily requires a new executive team.  It will also require a new near term plan to help create both value and momentum in moving the start-up company forward.  By doing so, the start-up company will create new opportunity for success in securing funding and ultimately securing 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.

April 5, 2010 Posted by | Venture Capital | , , , , , | Leave a comment