Robert Ochtel’s Blog

An Experienced Approach to Venture Funding

Entrepreneurs, Lower Investors’ Risk by Validating your Start-up Company’s Business Proposition

By their very nature, early stage company investors are risk adverse.  Seldom do they invest on a whim.  Generally, sophisticated investors take up to six months to do their due diligence when considering a potential investment opportunity. Angel groups also have a similar due diligence process, but it is often shorter, on the order of two to three months. The point of this due diligence process is to identify any potential investment risks so that these same investors can be assured, to the best of their ability that they are investing in a start-up company that can provide a substantial return on investment to their at risk monies.  That being said, it is impossible to eliminate all potential investment risk for any start-up investment opportunity. On the other hand, entrepreneurs can help minimize the effects of the risk adverse nature of their potential investors by validating their business proposition in the market place. This is best accomplished by doing your research, talking with customers, and validating your business model with your competitors. By doing such, entrepreneurs can lower their investment risk and at the same time make their start-up company and its investment opportunity more attractive to their potential investors.

Do Your Research

All entrepreneurs want to begin writing their business plans on day one.  This is a big mistake, especially when you are trying to lower your potential investment risk and at the same time validate your business proposition.  As such, spending the time doing the necessary primary research to validate your business model is the first and most important step to creating investor-focused business plan.  Why, because many times your first impressions regarding your start-up company’s business proposition can be improved upon, based on this same primary market research.  That is, what you first believe is a strong business proposition, can often be substantially improved upon and presented in a much stronger light, once you have taken the time to do your market research by analyzing the markets, your competitors, the general trends, and subsequently developing a go to market strategy.  Therefore, it is important to take the appropriate time up front to do the necessary research to validate your start-up company’s business proposition. This will make your technology, product or service offering much stronger and at that same time provide you with the necessary background information to properly defend your business proposition to your potential investors.

Talk to Your Customers

The best way to validate your business proposition is to talk to your customers. This step is often over looked by entrepreneurs.  These same entrepreneurs generally believe they “know best” and that customer will buy their technology, product or service offering sight unseen.  That is, in many cases entrepreneurs do not believe that they need to take the time to validate their business proposition by talking to their customers.  This again is a big mistake.  Why, because if your customers do not like your product offering or do not see the value of your business proposition in the same light as you do, you will never be able gain market traction and bring a successful technology, product or service offering to the market.  This is not really a surprise to most entrepreneurs, but being in a hurry to secure funding, they often skip this step in validating their business proposition.  This will come back to bite you, as some of the first questions from investors will be: “What customers have you talk with? Who is interested in purchasing your technology, product or service offering?”   If you have not talked with your customers, before they consider investing in your start-up company, your potential investors will require you to do so.  Therefore, take the time and make the effort to talk with your customers early to validate your business proposition, it will serve you well when engaging with potential investors.

Validate Your Business Model

Finally, being money managers, venture capitalists will want you to have validated your business model against your competitors’ to see what is substantially different, and where your business proposition provides your start-up company with a long-term, competitive advantage in the market.  At the same time, these same investors want to know how and why customers are going to buy your technology, product or service offering. Therefore, as an entrepreneur, you need to validate your business model in the market and against your competitors.  Seldom are start-up company’s business models unique in the market.  Generally, there is always a competitor or similar business model in a non-related industry that start-up companies model their business proposition upon.  As such, investors want to know this and at the same time be assured that your business model has had a history of success either in your targeted market or in other markets with similar product offerings.  So take the time to validate your business model. This will not only help you assure success in the market it will instill confidence with your potential investors.

Early stage investors are risk adverse by their very nature. They have to be, because investing in start-up companies is very risky.  To lower the investment risk for your potential investors you need to take the time to validate your start-up company’s business proposition to the market place. To properly do this you need to: do your research, talk to your customers and validate your business model. By doing this you will not only arm yourself with the proper information when presenting your business proposition and investment opportunity to your potential investors, you will also instill self confidence and confidence with your 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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May 10, 2010 - Posted by | Venture Capital | , , , , , , , , , ,

1 Comment »

  1. Just want to say what a great blog you got here!
    I’ve been around for quite a lot of time, but finally decided to show my appreciation of your work!

    Thumbs up, and keep it going!

    Cheers
    Christian, iwspo.net

    Comment by dikerhive | May 16, 2010 | Reply


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