Robert Ochtel’s Blog

An Experienced Approach to Venture Funding

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.

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April 19, 2010 - Posted by | Venture Capital | , , , , , , ,

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