Robert Ochtel’s Blog

An Experienced Approach to Venture Funding

Entrepreneurs, You Need to Get the Attention of Your Investors within the First Three Slides to Secure Funding

When meeting potential investors for the first time entrepreneurs need to quickly secure their attention.  Although, the standard thinking is that you have an hour, with 20 minutes to present and 40 minutes of questions, you really only have a few minutes to secure their attention and hold their interest. As such, if you do not secure your potential investors attention within the first three slides of your presentation, you will not secure funding.  Why, because like with any presentation, especially in the case of potential investors, if you do not secure their attention quickly, you risk the likely hood of turning them off completely to your investment opportunity.  So, as an entrepreneur looking to secure funding from third party investors, you only have three slides and a few minutes to secure their interest.  This includes, defining the opportunity, describing the problem and outlining your solution.  If done appropriately and succinctly, you will secure your potential investors’ attention for the next hour.  If not, your investors will turn off and move on to thinking about other potential investment opportunities.  So remember, you need to secure the full attention of your potential investors very quickly, or you risk the losing them and your ability to securing funding altogether.

Define the Opportunity

When presenting to investors, you first need to define the opportunity to be able to get your investors’ attention and their “buy-in” that your target customers will buy and use your technology, product or service offering.  This means you only have one to two minutes to sell the opportunity to your potential investors.  With the complexity of many product offerings, you need to focus on “tugging on the emotion” of your potential investors.  How would the customer use your technology, product or service offering?  This can often best be described with an example application.   This approach will get your investors attention, as they will be able to see how customers can use your technology, product or service offering.  As such, you are ultimately describing the end market application through the customers’ eyes.  This approach will allow your potential investors to empathize with the customer and better understand both the application and the opportunity that exists for your technology, product or service offering.  By creating the ability for your potential investors to understand investment opportunity through your end customers’ eyes, you quickly be able to create a lasting, positive impression in the minds of your investors, securing their interest to continue listening to your investment opportunity with intrigue and interest. 

Describe the Problem

Once you have defined the investment opportunity in the minds of your potential investors, you need to succinctly describe the problem. The “problem” is the opportunistic need you are solving with your technology, product or service offering. This problem description again needs to be clear in the minds of your potential investors. As such, they need to believe that you are serving an appropriate strategic opportunistic need in the market. So, take the time up front to properly describe the problem in terms that all potential investors can understand.  This will move these same third party investors one step closer to understanding the investment opportunity and again provide them one more time to see the investment opportunity from the “market needs” side of the equation and not from the technology, product or service “provider’s side” of the equation.  By being able to quickly and properly describe the problem from a “market needs” approach you will again be standing in the shoes of your potential investors and answering their questions – and at the same time allowing them to come to your conclusions on their own. This is the “best” way to approach investors from a “problem definition” point of view.  If they believe there exists a problem in the market, then they are more likely to believe in your solution.  Now, you are 80% there in securing their interest in you, your start-up company, and its technology, product or service offering.

Outline Your Solution

Finally, as an entrepreneur, describing your potential investment opportunity, you need to outline your solution to the problem you just portrayed.  This description needs to not only succinctly outline your solution, but it needs to outline the benefits of your solution in the market over any and all other solutions in the market.  Remember you are trying to quickly secure the interest in your technology, product or service offering from your potential investors, so they need to be able to quickly understand, in their minds, your solution and the competitive advantages it offers in the market.  So, as an entrepreneur you need to not only outline your solution, but you need to appropriately describe all of its competitive advantages and associated utility to the consumer or end user.  By doing this, you are making sure that your potential investors again come to the same conclusions that you have, and that they believe your start-up company offers a solution that provides a long term competitive advantage in the market.  So, properly outline your solution to your investors, as once you convince them that you offer “the solution” for the “problem” you are solving, all follow-on information provided during your presentation is now just back up support materials to justify the potential investment opportunity.

As an entrepreneur, typically you have an hour to present in front of sophisticated investors (e.g., venture capitalists).  This generally consists of a twenty minute entrepreneurial presentation and forty minutes of questions from these same potential investors. In reality, though, you only really have a few minutes to secure potential investors’ attention. To properly do so, you actually need to get their attention within the first three slides of your presentation by defining the opportunity, describing the problem, and outlining your solution.  If done properly and succinctly, you will secure their attention and the interest of your potential investors.  If not, your investors will “turn off” and move on to thinking about other investment opportunities.  So, as an entrepreneur, remember, you have need to secure the full attention of your investors quickly, or you risk the losing them and your ability to securing any funding from potential investors altogether.

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.

May 3, 2010 Posted by | Competition, Customers, Execution, start-up, Venture Capital, Venture Funding | , , , , , , , , , | Leave a comment

Military Contractors Looking to Move Their Products or Technologies into the Commercial Markets have a Lot to Learn

I have worked with many traditional military contractors that see the commercial markets as a panacea for their military-based products or technologies.  While there often exists an opportunity to take a military product or technology, commercialize it, and then address a broad range of commercial market applications, generally it is not a straight forward transfer of these same military products or technologies to the commercial markets.  This is something that traditional military contractor companies and their entrepreneurs have a hard time understanding.  Having only worked with customers that define their product needs through a “request for proposal” process, they need to step back and understand that the commercial market is much different.  As such, products or technologies that were necessarily developed for a given military application through the request for proposal process do not necessarily translate into products that are sellable in the commercial markets. This article outlines several items traditional military contractors need to consider before they jump into the commercial markets.

Military Products or Technologies do not Necessarily make Commercial Products

Military contractors traditionally developed products or technologies that address a focused military-based application. That is, the U.S. military is looking for a product or technology to solve an identified problem.  As such, they send out a request for proposal to a set of military contractors, which respond with an engineering services proposal to develop the products or technologies to solve the identified problem. Once completed, the military contractor usually ends up with a technology or a set of products and technologies that are to be used in a very specific military application. 

Some military products or technologies may have commercial value, but as defined by the U.S. military, more often than not, these products or technologies are not sellable as products in their current form in the commercial markets. This often means that the military product or technology as defined, is a not a complete product offering. That is, this product or technology will often require other technologies, products or services to make it a “product” for the commercial markets. So, as a military contractor, one should not expect that their military-focused product or technology is sellable in the commercial market in its current instantiation.  Yes, an existing military product or technology may have some commercial value, but often it will need to be substantially modified to be competitive in the commercial market space.

Military Price Points Do Not Cut it in the Commercial Markets

The price points defined for military products and technologies do not cut it in the commercial markets.  So often, an existing military-based product or technology will need to be cost reduced to make it viable in the commercial markets. This is something that needs to be realized by military contractors and addressed right away.  Trying to force fit a military-based product or technology into the commercial market, with a military price tag, is a losing proposition.  But, this is often the mentality of traditional military contractors and their entrepreneurs.  They often wrongly believe they have a “product” that is viable in the commercial markets and want to sell it “as is”.  What they really have is a product or technology with a price point that will not stand up to the competition of the commercial market place.  So, as a military contractor, realize the price points you are currently selling your products or technologies at, are not the price points that the commercial markets will support.

Military Products or Technologies Often Require Additional Investment

Military contractors typically want to sell their products or technologies “as is” in the commercial market.  They do not want to invest any additional monies to make their products or technologies commercially viable. This lack of desire to spend any of their own money comes from their military background where the government pays for all of their R&D, plus overhead, to secure a desired product or technology for a particular application. This is a “no risk” venture for the military contractor.  This is not the case in the commercial market.  The commercial market is a “risk” and “return” based opportunity.  So, as a military contractor and entrepreneur, you more often than not will have to invest some of your own money to develop a product that is targeted for the commercial markets. It may be a little bit of money, or in some cases, it may be a lot of money, but the capitalist-based commercial market requires one to take a “risk” by investing their own monies to properly commercialize a military-based product or technology offering.  If as a military contractor, you are not comfortable with this, then the commercial market is not for you and your products or technologies.  Remember, the commercial markets often require additional investment monies to make military products or technologies commercially viable.

Military contractors often want a piece of the commercial markets.  With the limited upside to their military contracts, they often have a desire to take their military-based products or technologies into the commercial markets and harvest the large financial rewards the commercial space has to offer.  What these same military contractors often do not understand is that their military products or technologies do not necessary translate into products that are sellable in the commercial markets.  In addition, these same military-based technologies or products usually have price points that are too high and at the same time usually require additional investment monies to make these same products or technologies a commercially competitive product offering. Therefore, traditional military contractors often have a lot to learn when moving their military products or technologies into the commercial markets.

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.

November 9, 2009 Posted by | Competition, Customers, Venture Capital, venture finance, Venture Funding | , , , | 1 Comment

Entrepreneurs, Putting a Stake in the Ground Early will Help Move your Start-up Company Forward

If certain items are not defined early in the development of your start-up company, things will tend to meander and not move forward in a coherent manner.  You will continue to have early meetings with customers, and potential strategic partners, etc., but your start-up company and its product offering will continue to be fluid and not coalesce into a defined market position and complete product offering with an associated roll-out schedule.  As these discussions continue, things will become more fluid and less defined as each potential customer or strategic partner you meet with will have their own product requirements, opinions and overall list of concerns regarding your start-up company and its potential product offering.  So unless you put a stake in the ground early, you will continue to move down an undefined path and the world will look murkier by the day or by the meeting.  Therefore, to help drive your company forward, as an entrepreneur, you need to address three things that will define your start-up company to your customer base and potential strategic partners. This article defines these three items which will help move your start-up company forward.

Position Your Company and its Product Offering

Defining the market position of your start-up company and its product offering early will help define you in the eyes of your customers and strategic partners. Having meetings with potential customers and strategic partners without a clearly defined market position for your start-up company is a big mistake.  If you continue down this undefined path, each meeting will end up with individual customers or strategic partners walking away with their own conclusions as to where your start-up company and its product offering fits in the competitive and market landscape. This is not good for your customers and definitely not good for your start-up company.  So, define your start-up company and its product offering early. Position yourself against your competitors. Leave your customers and potential partners with a clear idea of why your start-up company and its product offering is different and provides a value proposition that is important to them as either a customer or potential strategic partner.  Anything less will create confusion and leave these same individuals to define your start-up company on their own, with each customer and potential partner coming to a different conclusion.  Therefore, positioning your start-up company and its product offering early is definitely something you want to do as the entrepreneur.  It will help you create a smoother path forward.

  

 Define Your Product and its Key Features and Functions

Often entrepreneurs have a clear view of their product offering in their minds. They believe that they can do anything their customers want, and with each meeting, the list of required product features and functions only gets longer and longer.  Some of these features and functions are important, while many others are only a “wish” list of features and functions from these same potential customers.  So, it is the responsibility of the entrepreneur, early in their start-up company’s existence, to define the key features, functions and capabilities that will not only make their product offering competitive, but make it unique when compared to other product offerings in the market.  Once defined, it is an important to discuss your product’s key features and functions with your customers, as they may want you to prioritize certain features and functions over others. So once you have a clear product description, including features and functions, make sure you talk to your customers. This will validate the product definition you have defined and provide you with a clear path forward for developing your product offering.

 

Develop a Go To Market Strategy, Rollout Schedule, and Product Road Map

Your customers will also be interested in knowing what your go to market strategy is and how it will benefit them. If you have developed a unique go to market strategy that allows your customers to secure a competitive advantage in the market, this is surely something they will be interested in knowing about early.  So, define your go to market strategy early and share it with your customers.  If it is something that truly differentiates your start-up company from its competitors, this will definitely be something that will pique their interest and possibly allow you to secure a level of early commitments from your customer base.

 

It is also important to define a realistic rollout schedule early so that your customers will know when your product will be available in the market. This rollout schedule should necessarily include your start-up company’s initial product offering along with a product road map, which defines future product generations and their associated feature and functions.   Remember, customers need to know when your product will be available and what they can look forward to with future product offerings. One product, single generation product start-up companies do not cut it in the market. This is true for customers and for investors.

 

Entrepreneurs, you need to put a stake in the ground early to move your start-up company forward.  Doing anything less will cause your start-up company to meander and become ill defined for both your customers and investors.  So, define your start-up company’s market position and product offering early. Include in this process, the key features and functions of your product offering.  Finally, develop a realistic go to market strategy, rollout schedule and associated product road map.  Accomplishing these tasks early will help define your start-up company in your customers’ eyes and with potential strategic partners and help move you forward to achieve 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.

November 2, 2009 Posted by | Business Planning, Customers, Venture Capital, venture finance, Venture Funding | , , , , , , | Leave a comment

Entrepreneurs, A Breath of Markets Approach Will Lead You to the Right Conclusions

Having a business “idea” or “concept” does not necessarily provide the entrepreneur with much direction in getting started in developing a valuable and fundable business proposition.  This beginning point in the development of a start-up company often leaves first time entrepreneurs in the dark as to which direction to proceed forward with regard to their proposed technology, product or service offering.  They often ask themselves: “Where do I start?”  The best answer here is to begin by focusing on the markets.  Why, because it is the markets where you will sell your technology, product or service offering.  It also the markets that will determine the “problem” or “need” you will be solving.  This focus on the markets will also help you determine how to position your technology, product or service offering against your competitors.  In short, by focusing on a broad breath of markets and the possibility of potential opportunities they represent, you will come to the right conclusions as to where to take your initial “idea” or “concept”, how to develop a value added product offering, what your product offering will ultimately look like and it will in the end provide you with the ability to determine the best return on investment for your venture investors. This article addresses this breath of markets approach in determining how to take your product “idea” or “concept” into reality of a valuable business proposition.

Look at a Broad Breath of Markets

In the beginning of your product definition process, all markets look the same.  Why, because at this point you do not have any details on the size of the market, the growth of the market or the potential “market needs” you will be addressing for any particular market.  Therefore, you should look a broad breath of markets that can potentially be addressed by your technology, product or service offering.  Don’t pick a favorite market at this time.  All you need to do is to determine the baseline market characteristics (size and growth), and potential “needs” or “problem” you will be addressing for a given market.  This analysis will provide you with a high level overview of the market opportunity and at the same time give you the necessary background to determine if a particular market or a number of different markets may be of interest to you and your start-up company.  Remember, this is not the time to discount a given market.  Why, because you do not have enough information on the details that will make your product competitive in this space.  All you are trying to do is to determine, from all the markets you could address, which set of markets are of potential interest and why.  This preliminary market data will be useful in drawing your final conclusions as to which markets are of interest and how to prioritize these same market opportunities.

Review the Competitors for Each Market

Once you have a list of the targeted markets that are of interest, you should next look at the competitors in your potential target markets and review their positions and product offerings.  As such, the competitors for each market will most often be different and have unique product offerings to address the market needs and requirements for that specific market. Pay particular attention to the details of each competitor’s product offering by market. Why, because different markets will require different product features, functions and capabilities, and each given competitor’s product offering will provide you with the appropriate insight as to the necessary key differentiators that make their product offerings competitive for a particular market of interest. These key product differentiators are often unique to a particular market or they may be common across a number of potential markets.  This is something you need to pay attention to since you generally at this point are looking to address as many markets as possible with your product offering.  In addition, you are looking to determine the features, functions and capabilities that will give your start-up company’s product offering a competitive advantage over your competitors for a particular target market.  Here, it pays to be very detailed.  As it is these details that will ultimately lead you to the right conclusions in determining the competitive advantage of your start-up company’s technology, product or service offering.

Define the Product Requirements for Each Market

After you have had time to review the various competitor product offerings for each potential target market of interest, you need to spend time sweating the details on the necessary product requirements for each potential market of interest. Here, you need to develop a product feature, function and capability list for each potential target market. Why, because it is this product requirements list that will provide you with the necessary insight as to what it takes to not only be competitive in a target market of interest, but what it will also allow you determine what additional product capabilities are necessary to make your product a “complete” product offering.  This often requires you to add capabilities (e.g., software, hardware, services) to your start-up company’s “core” capabilities that are well beyond the scope of your company and will require you to secure these capabilities through a strategic partnership or by other means.  In the end, you will have a compelling and “complete” product offering that addresses the needs of each particular target market. This is your goal.  Finally, it is through this market driven product requirements process that you may determine that certain markets cannot be addressed by your start-up company or will necessarily need to be addressed in the future, with follow-on product offerings, once you first establish yourself in other markets. Therefore, defining the detailed product requirements, for each given market will give you the insight you need to not only determine the necessary feature and functional requirements, it will given you insight so setting your start-up company’s targeted market priorities.

Develop Focus for Your Targeted Markets

Once you have looked a breath of markets, reviewed your competitors’ product offerings and defined the product requirements for each potential market of interest, you need to focus in on your target markets.  Here, you need to first identify which markets you believe, based on the above information, you have a clear competitive advantage.  Then you need to identify which of these markets have the highest potential for return on investment for your potential investors.  That is, which markets are the largest and have the highest long term growth.  Finally, you need to prioritize these markets in terms of total financial investment requirements and associated risk.  Some, target markets may be attractive, but will require substantial up-front investment and result in much longer time-to-money and profitability. Alternatively, other target markets may not be as attractive, but are easier to penetrate and will allow you start-up company to generate early cash flow and at the same time provide higher potential near term returns while you establish your start-up company in these target markets.  The point here is to take a look at the whole breath of markets that are available to you and your start-up company and develop a focus for a given, limited number of target markets that make sense logically, strategically, financially and opportunistically. Doing so will provide your start-up company with the focus necessary to move forward with a targeted market driven plan and at the same time provide your start-up company with higher potential for success.

As a first time entrepreneur with a product “idea” or “concept” it is not always easy to see how to move forward to develop a compelling, value added business proposition.  To take this leap forward it is always necessary to start from the markets. This market focused approach requires the entrepreneur to identify a broad breath of markets that have the potential to use their start-up company’s technology, product or service offering to solve an unmet market “need” or “problem”.  Following this market opportunity analysis with a both a review of the competitors product offering and the development of listing of the product requirements for each potential targeted market will provide you with the necessary insight to determine which target market you will ultimately have a sustainable competitive advantage.  In addition, it will provide you with the ability to prioritize these same markets, based on market opportunity, investment requirements, potential risk, and projected overall return on investment.  So, take the time to use a breath of markets approach in the development of your start-up company’s “idea” or “concept”. It will lead you to the right conclusions and provide your start-up company with necessary focus to be successful in your final target markets of interest.

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.

September 21, 2009 Posted by | Business Planning, Competition, Competitive Analysis, concept, Customers, Target Markets, Venture Capital, venture finance, Venture Funding | 6 Comments

Six Things Venture Capital Investors Never Want to Hear from Entrepreneurs

Venture capitalists by their very nature are risk adverse and a very skittish bunch.  They do not like to hear things that do not ring true in their minds or underline the credibility of the entrepreneur. This is especially true for an entrepreneur when presenting their investment opportunity to venture capitalists or any venture investors for the first time.  More often than not these same potential investors do not know the entrepreneur, and while they are trying to understand the business opportunity being presented to them, at the same time they are making a realistic assessment of the CEO and the accompanying management team that will be running the start-up company. As such, there are six things that a venture capital investor does not want to hear from the entrepreneur during the start-up company’s first road show presentation.  These six items outlined here are not the only things that will get the entrepreneur off on the wrong foot with their potential investors. There are many other things that will get potential venture investors nervous regarding the potential investment opportunity.  But, in the whole scheme of things, the six items outlined here will often provide these same investors a reason to pause.  In addition, mentioning any one of these six items may also result in not receiving a follow-up call or sincere interest from these same investors.  This article addresses these six items and provides the entrepreneur the reasoning behind the investors’ concerns.

There is No Competition.

Many times entrepreneurs make the mistake of telling their potential investors that there is no competition for their technology, product or service offering in the market.  Investors never believe this statement. Why, because it is not a true statement.  There is always competition, whether it is established players, new entrants, or substitute products, etc.  As an entrepreneur you need to understand this and take it to heart.  Also, telling investors there is competition, undermines one of the underlying truths in capitalism, if there is money to be made, the competition will come. 

Claiming to your potential investors there is no competition in the market is an instant “red” flag for these same investors.  In addition, it is also an instant credibility killer.  This statement indicates to these same investors that the entrepreneur has not done their homework to understand the market and their position within this space. It also immediately informs these same investors that the entrepreneur is either naive or does not really understand the underlying difficulties, which face this same entrepreneur when bringing their product successfully to market.   So, as an entrepreneur, you need to know your competition when talking to potential investors. It will provide you with credibility and at the same time provide you with a realistic picture of challenges ahead for your start-up company and its technology, product or service offering.

I Need to Raise $1.0M to $3.0M in Funding.

Potential investors need to understand that you know exactly how much money is necessary to make your start-up company successful. Remember, investors always think it is going to take twice as long and two times the money to get your start-up company’s technology, product or service offering to market.  Therefore, if you provide them with a requested funding requirement of $1.0M to $3.0M, this immediately indicates to the potential investors that you have not done your homework on the funding needs of your start-up company and to not have a complete picture of what it will take to make your product successful in the market. 

It should be understood, that potential investors do not want to invest one more penny than they have to in order to get to a cash flow positive situation.  Why, because investing more money to make your start-up company successful substantially lowers their return on investment.  So your potential investors want to know that you, as an entrepreneur and CEO of your start-up company, have really studied your funding requirements and necessarily know where all of the invested monies are going to be allocated and in what associated timeframe.  Providing a range of funding requirements undermines your credibility as a sophisticated and fiscally responsible entrepreneur.  So, know your exact funding requirements.  As the fiduciary of your start-up company, this will provide you with the necessary credibility with your potential investors.

I Need to Be the CEO.

There is nothing more important to potential investors than to have a “first” rate team running their start-up company.  This is imperatively important to your investors and cannot be overstated.  As it is often said, investors would rather invest in an “A team and a B product than a B team and an A product”. Hence, they need to know that they can count on the start-up company’s management team both through thick and thin.  This is especially true for the CEO of the start-up company.  Therefore, never tell your investors that you necessarily need to be the CEO of the company. By doing so, you will immediately turn off your potential investors.  Why, because investors understand that the CEO who founded the start-up company is not necessarily the same person with the required skill set to guide it through the needed growth to make it a successful long term investment opportunity. Therefore, more often than not, potential investors necessarily believe going into an investment opportunity that they will have to replace the CEO at some point in time in the near future.  So, by telling your potential investors that you need to be the CEO, you are in effect tying your investor’s hands. This is something investors do not take too kindly to.  Remember it is the investor’s money and therefore they necessarily set the rules. So, be flexible, and look at the big picture.  As the founder of your start-up, you want the company to grow such that your equity position multiplies for both you and your investors.  This may require you to take another position within your company, but in the long run it will be beneficial to both you and your investors.

I’ll Have to Talk to the CFO About the Financials.

As the CEO of your start-up company you need to know and understand everything there is to know about your company.  This includes having a deep knowledge of your start-up company’s financials.  When presenting to investors, as an entrepreneur, you need to be aware that the first thing investors look at are the financials. Why, because potential investors are first and foremost, financial managers.  So, be aware, the financials are the first thing potential investors look at when considering a potential investment opportunity. If the underlying financial business model does not make sense to them, they will pass on the investment opportunity. Therefore, when presenting to potential investors you cannot tell these same investors that you will need to talk to the CFO regarding the details of your start-up company’s financial statements. This is a huge mistake and undermines your overall credibility as the CEO of your start-up company.  Hence, as the CEO of your start-up company, you need to intimately familiar with your financial statements from the income statement revenue projections, to the operational cash generation of the cash flow statements, to the accounts receivables of the balance sheet.  These are the details investors are interested in and will ask about to get an understanding of the underlying financial business model, as well as to get a better assessment as to the credibility of you as the CEO of the company.  So, as an entrepreneur familiarize yourself with the financial details of your start-up company.  It will serve you well when presenting to potential investors.

I Don’t Have a List of Significant Milestones.

Investors need to know that the money they are investing will be adding significant value to their start-up company.  Why, because investors know from experience, that there most likely are going to be multiple follow-on rounds of funding.  Hence, they want to be sure their initial investment will result the completion of significant milestones, enhance the underlying value of the start-up company, and in the end increase the stock price during these subsequent funding rounds. Therefore, as an entrepreneur, you need to be intimately familiar with the necessary significant milestones required to develop and bring your start-up company’s technology, product or service offering to market.  If you tell your investors you do not have a list of significant milestones that go along with your funding requirements, you will again lose instant credibility with your potential investors.  Remember, in the early stages of a start-up company it is the significant milestones define your company’s progress and are necessarily used a measurement tool by investors to ensure that the entrepreneur and its management team are meeting their defined objectives and goals to move the start-up company forward.  Therefore, know your significant milestones – they define the value of your company to your potential investors.

I Do Not Have A Go To Market Strategy.

More often than not, entrepreneurs solely focus on the development of their technology, product or service offering.  This, although extremely important to the success of your start-up company, is only half of the underlying problem facing these same entrepreneurs. The other half of the problem is securing market traction through the development of their target customers.  Therefore, investors necessarily want to know that you have a go to market strategy.  Why, because “time-to-revenue” is key to securing the return on investment necessary to meet the investor’s financial investment objectives. So, it is never good to tell potential investors that you do not have a go to market strategy or have not thought about it.  This again is a “red” flag, as the best technology, product or service offering in the world is no good unless your start-up company has the ability to secure paying customers.  Remember, investors are looking to mitigate their risks and at the same time ensure that you not only have a great product, but that you have a proven go to market strategy that will secure traction in the market. Therefore, spend the time to think through your start-up company’s go to market strategy, this will alleviate potential problems when talking with potential investors.

Presenting your start-up company and its associated road show to potential investors is always a difficult and trying task. In addition to being risk adverse, there are certain things investors consider deal breakers when reviewing potential investment opportunities for the first time.  As an entrepreneur, you need to be aware of these items and at the same time make certain you do not trip over things that raise “red” flags for your potential investors. This article has outlined six items that will make your investors pass on your start-up company and the associated investment opportunity.  You need to be cognizant of these same items and avoid them when presenting your start-up company to potential investors. This will provide you with a much smoother road ahead when looking to secure venture funding.

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.

August 31, 2009 Posted by | Competition, Customers, Finance, Funding Requirements, go to market strategy, Market Traction, Milestones, Venture Capital, venture finance, Venture Funding | 1 Comment

Entrepreneurs, No Matter Where You Start with Your Business “Concept” or “Idea”, Your Final Product Offering Will Often Be Quite Different

Many times entrepreneurs start with a business “concept” or “idea” with little or no real knowledge of the market, their competitors, potential strategic partners or the customer requirements. Accordingly, the genesis of an entrepreneur’s business “concept” or “idea” can be based on many different things, including a hunch, a gut feeling, a discussion with a friend or colleague, or even some real market-based experience.  Many times, this “concept” or “idea” initially envisioned by the entrepreneur is correct in terms of the underlying supposition regarding the market need or problem they are trying to solve.  But in the end, the final configuration of their product offering is often very different than their original “concept” or “idea”. The reason for this is that the market realities necessarily dictate the final configuration of a start-up company’s business “concept” or “idea”. Therefore, entrepreneurs often end up with a substantially different product offering than they originally begin with.  This is not a bad thing, and ultimately often results in a much higher level of success in the market.   This article addresses the underlying reasons that an entrepreneur’s original business “concept” or “idea” changes as they become more familiar with the realities of the market.  In the end, the result is a better final product offering that has a much high potential for success in the market.

Review the Markets

With the instantiation of their start-up company and their associated business “concept” or “idea”, entrepreneurs often have a target market in mind for their final product offering. From the beginning, this target market is their primary focus and often they are not to be dissuaded from their single market focus.  This myopic approach to looking at the market(s) is often a big mistake and can result in a failed start-up company. As such, many of these same entrepreneurs often forgo the opportunity to review all the potential market opportunities that can be addressed with their technology, product or service offering.

A much better approach is for the entrepreneur is to step back and review all potential markets from the 30,000 foot level.   With this level of market-separation, the entrepreneur can now take into consideration all of the other potential markets that may be complementary or supplementary to their initial, primary target market.  This approach of reviewing all of the potential markets available for the entrepreneur’s product offering is invaluable for many reasons, including:

  • It allows the entrepreneur to examine the underlying characteristics (e.g., size, growth, competition, etc.) of their primary target market and all other potential markets of interest on their individual merits,
  • It provides the entrepreneur with the ability to identify other new, potential revenue generating opportunities,
  • It provides a market-based approach for the entrepreneur to prioritize the necessary features, functions, and capabilities of their final product offering according to the market needs,
  • It allows the entrepreneur to prioritize all of their potential markets into primary, secondary and tertiary market opportunities, and
  • It provides the entrepreneur with necessary information to determine which markets will provide the highest potential return on investment for their start-up company.

This high-level market analysis is invaluable, as it provides the entrepreneur with the necessary knowledge to make an informed decision on bringing their technology, product or service offering to market.  Having now identified which target markets make sense for their product offering, the entrepreneur can now prioritize these same market opportunities appropriately.  As often is the case, from this high-level market review, the entrepreneur more often than not decides to target another, different market than they originally intended as their initial primary market focus for their start-up company’s technology, product or service offering.  Consequently, this change in market focus often drives the entrepreneur to develop additional and/or different features, functions, and capabilities for their final product offering than originally envisioned at conception. This is a good thing, as this enhanced final product offering can often support multiple revenue streams and a substantially higher return on investment than originally anticipated.

Study the Competition

Often, an initial business “concept” or “idea” by its very nature is half baked. The reason for this is that there is little or no market reality integrated into this initial business “concept” or “idea”.  Therefore, to get these same market realities into the features, functions and capabilities of their product offering and to further develop their start-up company’s business “concept” or “idea”, the entrepreneur must study their competition.

To most entrepreneurs the thought of developing a competitive analysis sounds like a difficult and painful task. More often than not, these same entrepreneurs do not want to spend the time necessary or the due diligence effort required to analyze the competition and their product offerings.  While it is true that developing a thorough competitive analysis is a difficult task that can take a significant amount of time, it can very beneficial to the entrepreneur and their start-up company.  Some of the benefits of developing a complete competitive analysis include:

  • Identifying all the necessary features, functions, and capabilities of their start-up company’s product offering. 
  • Defining the key features, functions and capabilities that differentiate their product offering to that of their competitors.
  • Determining how to position their product offering against their competitors based on these same defining features.

The end result is that through the development of a thorough competitive analysis the startup company’s final product offering is often much different than that of the entrepreneur’s original business “concept” or “idea”.  But, again, this is okay, because this same entrepreneur and their start-up company now has a product offering that provides a competitive advantage in the market and at the same time provides significant value to the end customers.

Identify Strategic Partners

Most start-up companies go to market with a core technology, product or service offering.  At the same time, from the customers’ point of view, this core technology, product or service offering is often “incomplete” and many times requires one or more complementary technologies, products or services to make it a “complete” product offering to properly service the market.  Therefore, to develop a “complete” product offering, it is often necessary for the entrepreneur to identify potential strategic partner candidates that can provide the necessary complementary technology, product or service offerings. These strategic partners can range from hardware providers, to software developers to service partners, etc. By identifying the appropriate strategic partners, the entrepreneur is taking the proper initiative to make their initial business “concept” or “idea” into a “complete” product offering, further ensuring their success in the market.

Finally, take the necessary time to identify and analyze potential strategic partners. Remember, great strategic partners will add significant value to your start-up company beyond their technology, product or services.  In addition, take the time to also consider their market position, customer base and channel access.  These items can add significant value to your start-up company and its ability to secure and create a long term defensible position in the market.

Talk to Your Customers

All of the market research and analysis in the world does not mean much unless it is verified with your start-up company’s customer base.  Also, it is this customer verification process that many times causes a start-up company’s final product offering to vary significantly from its initial business “concept” or “idea”. What an entrepreneur initially believes are both important and necessary features, functions, and capabilities for their product offering are often much different from the end-customers point of view.  This is a significant point, as often, entrepreneurs never talk to their customers and therefore do not really understand what is important to their customer base.  Obtaining customer feedback is invaluable to an entrepreneur and to their start-up company.  It not only allows the entrepreneur to validate or invalidate their initial business “concept” or “idea”, it provides them with the ability to prioritize the necessary features, functions and capabilities of their product offering. Therefore, by talking to their customers, entrepreneurs often find out that their final product offering will be much different than originally envisioned at the business “concept” or “idea” stage.  This is necessarily a good thing in that it provides the entrepreneur and their start-up company with a final product offering that targets the needs of their target customer base.

A business “concept” or “idea” is only the first step in the development of a valuable product offering.  As often is the case, a start-up company’s final product offering will be much different than the entrepreneur’s original business “concept” or “idea”. This is necessarily part of the process of developing a product that addresses a market need, and at the same time provide a long-term, sustainable competitive advantage in the market. So, as an entrepreneur you need to review the markets, study your competition, identify strategic partners, and talk to your customers.  Your start-up company’s final product, although much different than your original business “concept” or “idea”, will be much more valuable to your customers and at the same time put you on a path to 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.

August 24, 2009 Posted by | Business Plans, concept, Customers, Idea, start-up, Strategic Alliance, Target Markets, Venture Capital, venture finance, Venture Funding | 2 Comments

Entrepreneurs, “The Audacity of Hope” is Not a Path Forward for Securing Funding and Ultimate Success

Most entrepreneurs engage in the development of a start-up company to fulfill their hopes and dreams of being their own boss of a successful company and potentially becoming rich. This is the American dream and the primary reason America remains a powerhouse of both job and wealth creation in the world. At the same time, I often hear first time entrepreneurs say “If I only had a million dollars then I would be able to develop a successful start-up company.”  This hope is based on the false premise that money by itself will solve all of the problems of their start-up company.  Like in life, money does not solve your problems, and in business money will not necessarily make your start-up company successful.  Case in point, Teledesic was a start-up company founded in the 1990s to build a commercial broadband satellite constellation for providing Internet services. Teledesic originally planned on building a network of 840 active satellites and received multiple billions of dollars of venture funding only to officially suspended operations in October 2002.  As with Teledesic, the failure of any start-up company is inevitably not a money issue, but the combination improper planning, inept execution, and the inability to get market traction.  The misplaced “audacity of hope” that securing funding alone will solve all of your start-up company’s problems, is really based on an entrepreneur’s unrealistic expectations and unwillingness to do the hard work required to make their start-up company successful.  This article outlines the three things all start-up companies need to do on their path to securing funding and to ultimately make themselves and their start-up companies successful.

Dare to do Business Planning to Facilitate Funding Success

The most important thing an entrepreneur needs to do before they write their business plan and then go out to engage potential investors for the purpose of securing funding is to engage in business planning.  Yes, you need to first begin your start-up business by doing the appropriate amount of business planning.  Business planning, as investors know, is what differentiates successful start-up companies from unsuccessful start-up companies.  In addition, this is where most entrepreneurs fall short.  There are two primary reasons for this, including the following:

  • Entrepreneurs either chose to ignore, or lack the desire to put in the required effort to do business planning. They do not want to do the unavoidable hard work on their way to developing an investor quality business plan, including, the due diligence, research and overall planning that will ultimately define their start-up company.  This lack of desire to do this hard work will ultimately hurt you and your start-up company. 
  • Entrepreneurs do not have the proper backgrounds or do not have an understanding of the importance of business planning in the road to developing an investor quality business plan. In this case, again, a lack of knowledge can hurt you and your start-up company.

Whatever their underlying reason, entrepreneurs need to understand that the business planning exercise is where all of the required business plan details are formulated, developed and finalized.  Business planning is where you acquire the required knowledge regarding your proposed business proposition.  From the target markets, to competitor positioning, to the projected financial returns, this is where you become an expert in both your product offering and your business. By not engaging in the required business planning, in the near term, you will not impress your investors with the knowledge required to secure funding.  In addition, in the long-term, not knowing your competitors or the markets will not allow you, as an entrepreneur, to maximize the return on investment for your start-up company and for your investors. Therefore, dare to plan, as it will provide you with the necessary knowledge to secure funding and facilitate your start-up company’s success in the market.

Flawless Execution will Drive Success

There are many, many things that need to be accomplished for a start-up company to be successful.  In all cases, for any given start-up, there are too many things to do and not enough time to do them.  This is why the focus on flawless execution will help drive your start-up company to success.  Focusing on executing at all levels, and across all disciplines of your start-up enterprise is the lynch-pin that will drive success.  Therefore, as an entrepreneur, you need to properly map out your targeted, significant milestones and then hit these milestones with flawless execution.  Time is everything for your start-up company, and making sure that you execute in a timely manner will drive the ultimate success of your start-up company.

Potential venture investors also necessarily want to see flawless execution and that you are hitting your milestones in a timely manner.  This ultimately increases the value of your start-up company. In addition, nothing provides investors with more confidence in a start-up company’s management team than the timely execution of significant, value added milestones.  This is a big differentiator for start-up companies. As most investors know, for start-up companies, everything always takes twice as along and twice as much money.  Hence, the lack of execution, wastes both invaluable time and investors’ monies.  Therefore, clearly define achievable and significant milestones and then work diligently to execute and deliver.  This will impress investors and at the same time drive your start-up company to success in the market.

Market Traction a Final Key to Success

Achieving market traction is your start-up company’s final key to success.  Remember you are not in business to just to develop an interesting and unique technology, product or service offering.  You, as the entrepreneur of a potentially successful start-up company, are in business to acquire paying customers. Therefore, securing paying customers and achieving market traction early is a key to any successful start-up company.  To achieve this market traction means that you need to call and then engage with customers early. They need to know that your start-up company is out there in the market and that in addition you offer “value” to their end market application. 

Securing customers and acquiring early market traction, even before securing funding, is often where most start-up companies fail.  They have done their planning, have executed flawlessly, but they often fail to engage with their target customer base and secure customers.  This will not impress your potential investors.  One of the first questions these same investors always ask is whether you have any customers or interested customers. If your answer to this question is that you do not have any customers, then they will want to know who you have talked with and then determine their interest.  Remember investors are risk adverse by their nature and securing market and customer traction early goes a long way to addressing their risk tolerance and ultimately securing funding. This is especially true in today’s tough funding environment. 

Finally, as an entrepreneur,  you need to remember investors need to know that you have a product offering that provides “value” to the market and has the ability to secure customers, and quickly.  Venture investing is all about achieving the highest return on investment in the shortest period of time.  Acquiring paying customers early is the only way to achieve this objective.  Investors know this and therefore they necessarily will focus on your start-up company’s ability to acquire customers and achieve market traction in a timely manner.

“The audacity of hope” is not the path forward to securing funding, nor is it a key to success for you as an entrepreneur of your start-up company. As outlined here, doing the appropriate business planning, executing flawlessly, and then securing market traction are the best avenues forward in securing funding and achieving success for your start-up company. By addressing these three items, you are on the appropriate path to fulfill all of your hopes and dreams through the development of a successful 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 http://www.carlsbadpublishing.com

August 3, 2009 Posted by | Business Planning, Business Plans, Customers, Execution, Market Traction, start-up, Venture Capital, venture finance, Venture Funding | 2 Comments

A Successful Start-up Company uses its Business Plan to Provide it with Flexibility and Adaptability

Today, many entrepreneurs fail to see the real value of a business plan.  More often than not, their biggest concern is whether potential investors read their business plan and fully digest it.  This should not be of primary concern to an entrepreneur.  From an investor’s point of view, a business plan is generally considered a check-off point, to be used as a reference document, which is usually thoroughly reviewed during the due diligence process.  From the entrepreneur’s point of view, a successful business plan is to be used as a jumping off point.  It should be seen as document that memorializes the status of your start-up company, the markets, the competition, etc., as you begin to enter the market to roll out your technology, product or service offering to the market.  Additionally, your start-up company’s business plan should be viewed as a reference document, which, if written properly, provides your start-up with a strong basis in which to move forward, and at the same time provides the appropriate amount of flexibility and adaptability to transform with changes in the market.  This article outlines some of the reasons why both flexibility and adaptability are essential for a successful start-up company.

A Complete Business Plan Provides a Basis for Your Start-up to Move Forward

Developing an investor focused business plan takes a significant amount of effort on the part of the entrepreneur.  Having gone through all of the market research, due diligence and planning, your start-up company’s business plan should provide your investors with the best representation of your start-up company, the market, the completion, and your financial projections, etc. This document, as developed, provides a basis for your start-up company to move forward to address the following activities:

  • Raise venture capital,
  • Develop your technology, product or service offering,
  • Develop your sales channels,
  • Roll out your product to market,
  •  Secure customers,
  • Meet your financial pro forma projections.

 Your start-up company’s business plan should memorialize all of your research and knowledge into a single document and is to be used as your reference point in which to move forward for the next projected period of time, usually 3 to 5 years.  Being a forward looking document, your start-up company’s business plan represents your best estimates of the markets, and the associated competitive landscape in which you are venturing forward to roll out your technology product or service offering to the market.  As such, your business plan provides your start-up company with a strong basis and also provides a jumping off point in which to move forward and attack the market.

Business Plans are Out of Date the Day they are Completed

One thing that I have learned over the years is that business plans that are generated only reflect a “point-in-time”. Business plans are much like financial balance sheets; they represent the world as it exists at that point in time.  That being said, business plans are outdated the day they are put on paper. This may be hard for some first time entrepreneurs to realize or want to digest. The fact is that the market changes on a daily basis. There are new technologies and competitors, the emergence of new markets, as well as constant price and gross margin pressure. These constant changes in the market dynamics necessarily outdate your business plan the day it is completed. Many times these changes do not happen overnight, but rest assured, they do happen, and your business plan must evolve with these anticipated changes.  This is why many corporations, both large and small, institute annual business planning cycles.

As an entrepreneur, it is important to realize that your start-up company’s business plan is a “living document”. This means that changes in the market need to be reflected in your business planning process and ultimate business plan. Accordingly, not all changes will really affect your day-to-day business plan or planning activities. Generally, most changes in the market are evolutionary and if your did your homework from the beginning, your business planning and resultant business plan has taken care of this, as it is already necessarily a forward-looking document. It is the major changes in the market that may affect your company’s business planning process or business plan. These things can include a new competitor with disruptive technology, significant changes in the project market growth, substantial changes in the average selling price in the market, etc. These items may cause you to reconsider your business planning process and ultimate business plan. 

Always remember your start-up company’s business plan represents a reference “point-in-time” in which to move forward from. If done correctly, it will provide a solid basis in which to move forward and make the necessary changes required in the fast-changing dynamics of the market.

A Successful Business Plan Allows for Market Adaptability

Because the market constantly changes, a successful business plan will predict and allow for a given amount of flexibility.  At the 30,000 foot level, your business plan should anticipate the high-level macro-economic trends in the market.  These trends will affect your company to a certain extent, and as things change your start-up company will be able adapt to these long-term changes in the market. 

At the 100 foot level, your business plan should also reflect the anticipated competitive threats in the market and also provide your start-up company with the ability to also adapt to these changes in the market. Your business plan, being a complete document will more often than not, anticipate these changes and provide you a strong basis in which to move forward in a constantly changing and challenging market.

While most high-level and lower-level market and competitor changes will be anticipated in your business plan, often, even with all of the business planning in the world, there will be changes that cannot be anticipated or predicted. In these cases, your business plan can easily be modified to reflect these more extreme changes in the market.  This type of adaptability may be reflected in:

  • A significant price reduction,
  • A new competitor,
  • A significant reduction in anticipated market growth,
  • The emergence of a new market opportunity,
  • Etc.

All of these items can be integrated into your business plan, and as such it can be modified and adapted to reflect these changes in the market.  Therefore, the key to a successful start-up company is to develop a complete business plan that adequately and accurately reflects the market and at the same time is adaptable enough to roll with both the anticipated and unanticipated changes in the market.

A Product Road Map Supports Market and Customer Flexibility

Most often, the entrepreneur of a new start-up company has an idea on the appropriate technology, product or service offering in which to bring to market. At the same time, the ability of this same entrepreneur to accurately predict all of the appropriate and necessary features, functions and capabilities of their same product offering is virtually impossible. Therefore, as a start-up company you need to remain flexible and work closely with your customer base to develop the targeted features functions and capabilities for your initial and follow-on product offerings.  One of the best ways to integrate this flexibility into your business plan is to develop a product road map.  By developing and integrating a product road map into to your business plan you will be anticipating the evolution of your technology, product or service offering and its associated features, functions and capabilities as desired by the market and your customer base.  Then, as you engage with customers, you will have the flexibility to modify your product road map and the various generations of product offerings, with features, functions and capabilities that more accurately reflect the evolution of the market and your customers’ end market product offerings. Therefore, having previously anticipated the market evolution through the development of a product road map, the details of your business plan can then be easily modified and at the same time remain flexible enough to accurately reflect the market and customer requirements.

As discussed, developing a complete business plan is important to the success of any start-up company.  Doing so provides a strong basis in which to move in the market. That being said, your business plan only reflects a “point-in-time” and is necessarily out dated the day it is completed. Therefore, as an entrepreneur, your business plan needs to remain adaptable and flexible to address both changes in the market and the needs of your customer base.  If you do this you will have a much higher probability of 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 http://www.carlsbadpublishing.com

July 20, 2009 Posted by | Business Development, Business Planning, Business Plans, Competition, Customers, Venture Capital, venture finance, Venture Funding | 2 Comments

ROI versus Market Traction – Which is the Real Differentiator to Potential Investors?

Most entrepreneurs realize that their potential investors require a substantial return on investment (ROI) for the money they put at risk by investing in their start-up company. This is a given, and even to the most naive entrepreneur this makes sense.  On the other hand, what these same entrepreneurs do not often realize that it is market traction and not ROI that is the real differentiator for potential investors.  Gaining market traction early can definitively make the difference between a successful start-up company and one that languishes on and on, continuing to spend investor’s monies, with no real return in sight.  This article addresses some of the reasons why market traction is the real differentiator for your potential investors.

Is Developing a ROI for Your Company’s Sufficient to Secure Funding?

As part of promoting your start-up company to prospective investors, you need to determine what the potential financial return on investment is for these same investors.  This concept, although not foreign to most potential entrepreneurs, does cause pause for most first time entrepreneurs, as they rarely understand corporate financials and often leave this task for last, expending little effort to develop representative, defendable financial statements.   In general, it is well understood that to get the attention of potential venture investors it is necessary to present a return on investment opportunity that provides at least 5 to 10 times return on their invested capital in a 3 to 5 year period, respectively.  These numbers reflect expected venture-based financial returns and should be only used as a reference point, as venture investors seldom receive these types of returns on their investments. Some venture investors expect more, some will take less, but the key here is to develop financial pro forma statements that necessarily meet the expected returns of potential investors and at the same time are defendable.  Therefore, developing a ROI that represents these traditional industry accepted investment return norms is necessary for any entrepreneur expecting to get the attention of potential investors, but on the other hand your start-up company’s ROI may not be sufficient to secure an investment from these same investors. The reason for this is that these expected financial returns are only one baseline component for opening the door to secure investors attention and in general are not considered a real differentiator when considering the various investment opportunities that are available to your potential investors.

 ROI Projections May Not Stand-up to Financial Due Diligence?

As stated, ROI projections are expected by all potential investors when considering any start-up company as an investment opportunity.  Depending on the entrepreneur’s research and diligence in putting together their ROI projections, many times these same financial pro forma statements will not stand up to the scrutiny of a sophisticated investor.  Too often the financial projections, put together by inexperienced entrepreneurs, are unrealistic in their market penetration objectives, too optimistic in their gross margin projections, and more often than not, do not represent typical industry standards when compared to the market leaders in the same given market space. As an entrepreneur, you must realize, as a matter of first priority, by potential investors, that your financial pro forma statements will be subjected to a significant amount of financial scrutiny by these same sophisticated venture investors.  This should cause you to pause, as by not passing this initial financial review bar can make the difference between receiving a pass from potential investors or receiving an invitation for an initial meeting.

 It should be also noted that during their financial due diligence process most investors discount an entrepreneur’s start-up company financial projections by at least 40%, from the presented projected returns.  This discounting reflects their expected financial risk, the market risk, development risk, etc.  Therefore, your financial pro forma statements, as presented, are often deemed “rudimentary projections” by these same investors, and they will rely on their own financial management expertise and financial models to determine the potential expected returns for your start-up company. This financial due diligence analysis may cause your pro forma statement to not pass the smell test for these same investors. Therefore, again ROI statements are only used as one component in considering your start-up company as a potential investment opportunity, and more often than not are not a true differentiator.

Market Traction is a Key Differentiator for Potential Investors

Unlike financial projections that are based on an underlying set of assumptions that can be arguably acceptable or unacceptable to your potential investors, securing market traction with a customer base is one item that gets investors attention.  The fact that you have secured a paying customer or multiple paying customers gives investors some hard evidence, based on the realities of the market, in which to make an investment decision.  On the other hand, only relying on financial projections, based on a given set of assumptions, requires these same potential investors to take a leap of faith in the investment decision making process.  By securing customers early on, this gives your potential investors much more assurance that there is demand for your technology, product or service offering in the market and substantially reduces the investment risk, if only in their minds.  Therefore, as an entrepreneur, looking to secure funding for your start-up company, the one key differentiator that will set you apart from the competition is securing a customer or multiple customers early on in the funding process.    

 Market Traction Proves You Know the Market

Securing market traction early proves one thing to your potential investors – that you know the market.  Unlike financial ROI projections, securing paying customers is not based on assumptions, it is based on real interaction with your target customer base and can be used as a lynch pin to secure funding from venture investors.  This shows your investors that there is “perceived” value for your start-up company’s technology, product or service offering in the market.  By securing paying customers early, you have proved to these same investors, at a first level due diligence that you have at least indentified a market “need” and/or solved a “problem” in the market, and at the same time, customers are willing to purchase your start-up company’s same product offering. Determining the long term market trends and whether your technology, product or service offering provides a sustainable competitive advantage in the market must still be reviewed by your investors, but by securing customers early you have proven that your technology, product or service offering, as a minimum addresses a market need and can then be used as basis to secure additional market traction and expand your customer base.

Market Traction Necessarily Facilitates Your Start-up Company’s ROI

Securing market traction also necessarily facilitates your start-up company’s return on investment projections.  More often than not, start-up companies are unable to secure paying customers as early on as originally projected in their financial pro forma statements.  Given that ROI projections are all about generating revenue early in time, by securing market traction with your technology, product or service offering you are necessarily facilitating your start-up company’s ROI projections.  This is essential and a true differentiator, as having the ability to sustain your start-up company’s projected financial returns, in a timely manner, is the most important risk consideration for your potential investors.  Too often start-up companies get caught in the “Catch 22” in which they need to secure customers, but the market has not developed – both of which will have a detrimental effect on their financial projections.  Therefore, by securing customers early you can gain the necessary market traction in which to validate your start-up company’s projected financial returns and secure funding from investors. This is a true differentiator for your potential investors and substantially reduces investment risk.

As discussed, developing ROI financial pro forma statements are necessary to present your start-up company to potential venture investors.  But, due to the nature of financial pro forma statements, they may not sufficient to secure funding from these same venture investors.  On the other hand, securing paying customers early and proving you can gain market traction is a key differentiator for investors as it validates to these same investors that you know the market.  At the same time, securing customers facilitates your start-up company’s projected ROI and substantially reduces the investment risk for your potential investors. Therefore, if you want to get the attention of venture investors and differentiate your start-up company from the crowd, prove you can get early market traction with your customer base.

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 http://www.carlsbadpublishing.com

July 6, 2009 Posted by | Customers, Market Traction, Venture Capital, venture finance, Venture Funding | , , , , , | 2 Comments

Knowing Your Customers Can Help Drive Your Start-up Company to Success in the Market

Every year over 500,000 would be entrepreneurs in the United States prepare and present their business propositions in front of angel investors and venture capitalists. Many of these same entrepreneurs often over look one important item, knowing their customer base. This faux pes can be detrimental to their start-up company, as investors need to understand that you know your customers and their needs, intimately.  Also, by not engaging with their potential customers early on, start-up companies can miss the market by developing the “right” product with the “wrong” features, functions, and capabilities.  In addition, these same internally focused start-up companies may miss the best benefit of all, developing a strong strategic relationship with a customer that is a market leader. This article addresses some of the reasons it is always beneficial to engage with your customer base early and often.

Do You Know Your Customers?

As a potential entrepreneur interested in taking your technology, product or service offering to market, you need to “know” your customers. This includes identifying the market leaders, market laggards, and the up and coming rising “stars” in all of your target markets of interest. This type of familiarity with your customer base will allow you to develop an appropriate go-to- market strategy and associated tactics when addressing your targeted market space.  Market leaders of today are not necessarily the market leaders of tomorrow.  Therefore, doing your diligence on the various competitors in your market and understanding their status, product portfolio, market position, etc. is invaluable when presenting your technology, product or service offering to these same customers. What is important to one customer will not necessarily be important to the next. So, by familiarizing yourself with your customer base and you will be much more comfortable when you call on them and ultimately present your product offering to them.  Remember, Apple was not even in the cell phone market a few years ago, now they are a major player in the “smart phone” segment of the market.  Therefore, anticipating this and familiarizing yourself with your potential customers puts you and your start-up company in the driver’s seat when engaging with your potential customers.

 What Segments of the Market Are You Addressing?

Most markets can be broken up into several market segments.  This generally includes the following:

  • High tier segment,
  • Medium tier segment, and
  • Low tier segment.

These segments are often based on price, but also as such, usually have many different sets of features, functions, and capabilities for each product offering to each market segment.  Often, start-up companies entering a new market cannot afford to address all market segments of a given market space.  Therefore, as a new company entering the market you need to familiarize your company with the various sub-segments within a given market and then determine the product features, functions, and capabilities that are necessary to address these market segments and also at the same time have an understanding regarding those same features, functions and capabilities that are “nice to have”.  This market segment familiarity will drive the features, functions and capabilities of your technology, product or service offering.  Not trying to be everything to every market segment is often a key attribute of successful start-up companies.  When entering a market for the first time, it is much better to be focused on a given market segment than trying to do everything for every potential customer.  Therefore, knowing what market segment or segments you are addressing up front will provide you with focus and allow your start-up company to be successful when entering a new market.  Later on, after you are successful in your target market segment, you can expand your product offering.  This strategy worked very well for the Japanese car companies entering the US market in the late 1960’s and early 1970’s. Originally, they entered the low-end segment of the US car market. Today, these same Japanese car makers are dominant players in all US car market segments.

Develop A Strategic Alliance with a Key Customer

Historically, the most successful start-up companies have often had the good fortune of developing a strategic alliance or “close relationship” with a market leader in their target market space. This relationship can be mutually beneficial to both the start-up company and the market leader. From the start-up company’s point of view developing a strong relationship with a key strategic partner will allow them to focus their product features and develop a first product offering that has a guaranteed market.  This is invaluable to the start-up company, as this key strategic alliance partner knows the end market application better than they do, and at the same time will help them focus their development efforts to a product offering that will be market driven and as a result successful in the market. From the market leader’s perspective, developing a relationship with a start-up company with a unique technology, product or service offering, will often allow them to differentiate their end-product in the market, gain market share, and address new emerging market opportunities, much faster than they would be able to by developing the technology, product or service offering on their own. This mutually beneficial relationship results in a win-win opportunity for the start-up company as well as the market leader.

Allow Customers to Drive Your Strategic Road Map

Many start-up companies do not have a well defined product road map. This is generally seen by investors as a gaping hole within their business plan, as only presenting a single product offering often indicates to investors a lack of familiarity with the market, and the long-term general market trends.  Seldom are start-up companies successful with their first product offering. Often, given market competition and the rapid pace of a changing market, these same start-up companies only become successful, gaining significant market share, after their second or third generation product offering.  So, only presenting a single product offering to your investors is a recipe for disaster.  This is where your customers can have a large impact on the future product offerings of your start-up company.  By engaging early with your customers and listening carefully to their needs and the market requirements, you can allow these same customers drive your product strategic road map. This will provide you with a basis to move forward and although it may change over time, a customer driven product road map is invaluable when presenting to you potential investors.  Nothing is more valuable to an investor presentation than having real customer input, based on actual conversations with your target customers. This provides instant credibility and market expertise not available by any other means.

Develop Valued Customer Relationships for Your Future Success

Developing valued customer relationships is a key to the success of any start-up company. Doing so allows you to gather invaluable input, vet new ideas, and at the same time stay close to the market trends.  Remember a “market driven” company will have much more long term success in their targeted market than that of a “technology driven” company. So, as a start-up company you need to value your customers, listen to their input, and reflect this invaluable information in your product development plans and associated product road map.  Too often, companies tend to believe they know more about the market than that of their customers. This is not the case.  Since your customers are one step closer to the end market application they are the ones to drive the technology, product or service features for your current and next generation product offerings.  Remember to use these same customers as a basis for your decision making and learn to value this relationship, as it will provide you with invaluable insight to both the near term and long term trends in the market.   

Knowing your customers will help drive your start-up company to success in the market.  By knowing your customers, determining your target market segments, developing strong strategic alliances, presenting a customer driven product roadmap and ultimately valuing your customers, you as an entrepreneur will be miles ahead when presenting to potential investors.  This customer familiarity will help you develop successful product offerings, both near term and long term, and at the same time allow your start-up company to secure significant market share, ensuring your long term success in the market.  So get out there and talk to your customers, you can only benefit from such one-on-one interaction ant it will help drive your start-up company to success in the market place.

June 29, 2009 Posted by | Customers, Strategic Alliance, Target Markets, Venture Capital, venture finance, Venture Funding | , , , , | 1 Comment