Robert Ochtel’s Blog

An Experienced Approach to Venture Funding

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.

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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

A Unique go to Market Strategy Can Differentiate your Start-up Company’s Product Offering and Provide Long-Term Success in the Market

Entrepreneurs often forget or don’t realize that a unique go to market strategy may be all they need to differentiate their product offering and provide them with success in the market. Conversely, these same entrepreneurs are generally preoccupied with the development of their technology, product or service offering.  Putting all the hope and future success of their start-up company on the features, functions and capabilities of their product offering, they often lack the foresight necessary to consider a unique go to market strategy for their product offering. Whether your product is clearly differentiated or a “me-too” product, you need to develop a go to market strategy that will make your product offering successful in the market.  Therefore, focusing on a unique go to market strategy may be just the ticket to both differentiate your product offering and at the same time enhance the success of your start-up company in the market. This article addresses the need for all start-up companies to have a unique go to market strategy.  It also provides an example of a successful start-up company that took essentially a “me-too” product offering and created new, unique and successful market position by focusing on developing a differentiated, technology-based go to market strategy.  As presented, doing this will allow you to delineate to your investors how you are going to secure customers, gain market traction and ultimately be successful in the market.

Traditional Go to Market Strategies – Necessary, but not Sufficient

As the entrepreneur of a start-up company you are developing a technology, product or service offering to sell into the market. Therefore, you need to determine who your customers are and how you are going to gain access to these same customers is a cost effective, timely and efficient manner.  To do this, you must develop a go to market strategy to address the customers for the targeted markets of interest. To fully employ a go to market strategy, you need to determine what sales channels make sense for your customer base, will be cost effective, and at the same time provide you with a competitive advantage in the market.  Historically, there have been three types of traditional sales channels, including:

  • Direct Sales: This go to market approach requires the hiring of your own sales force to sell your product line into the identified markets of interest. This sales force can be divided geographically, by product line, etc. This direct sales approach, while very effective, is generally considered the most expensive approach to marketing and selling your start-up company’s product offering to your target customer base.
  • Indirect Sales:  This go to market approach uses independent sales agents and/or value added resellers to market and sell your start-up company’s product offering to market.  This more cost effective approach has its pluses and minuses, but is generally considered a good approach for start-up companies to establish their presence in the market.  Later, when your product is established, these indirect sales agents can be supplemented or replaced with your own direct sales force. 
  • Strategic Partnerships:  This go to market approach uses large established players as strategic partners to gain access to customers and end-markets.  This approach can provide a start-up company immediate access to large potential markets.  It can also be very cost effective and given the partner’s market position can be the best solution to establish an immediate market presence.  This approach will generally reduce your product offering gross margins, but this trade-off may be well worth it given the ability to establish your start-up company’s market presence in a timely manner.  Also, developing a channel relationship, with a well established strategic partner, necessarily provides your start-up company with immediate credibility in the market.

Developing one or more of these three traditional sales channels may be a necessary part of your start-up company’s go to market strategy.  But, in today’s market, with existence of the many different ubiquitous technologies (e.g., Internet, wireless, etc.), these traditional approaches may not be sufficient or the most cost effective or efficient sales channels to provide your start-up company success in the market. 

Using Technology to Develop a Unique go to Market Strategy can Enhance Your Competitive Position in the Market

A unique go to market strategy can differentiate your start-up company from its competitors and in some cases can be used to uniquely position your start-up company and its product offering in the market. Historically many very successful start-up companies have focused on developing a unique go to market strategy to differentiate an otherwise similar product offering in the market.  Many of these same companies have used a “disruptive” or new technology to uniquely position their “me too” product offerings in the market. These same companies understood the value of taking advantage of technology to uniquely position their product offering by addressing an unmet customer needs in the market, including the following:

  • Substantially lowering the cost of their product offering to their end customers,
  • Providing a level of product customization not available in the market, and
  • Providing customers with more accessibility, convenience and flexibility.

Therefore, through the access of technology and the development of a unique product offering, you as the entrepreneur of a start-up company, can better service your end customer through the development of a unique and differentiated go to market strategy.

Differentiate Your Product Offering by Using the Internet in Your go to Market Strategy

Today, many start-up companies use the Internet to promote their technology, product or service offering.  With the ubiquitous aspects of this technology, it is both a natural fit, as well as a necessary part of any start-up company’s go to market strategy.  But, very few of these same start-up companies use the Internet as an integral part of their product offering — creating a long-term, differentiated position in the market. Below, is an example of a start-up company that used the Internet as an integral part of its product offering – developing a unique go to market strategy and ultimately creating a unique and differentiated product offering for what is essentially a “me-too” product. At the same time, this market focused company has created a leading market position, as well as a long-term competitive advantage in its market.

NetFlix – A Clearly Differentiated Channel Strategy

Netflix clearly understood the needs of their target customers and the competitive advantage that a unique go to market strategy would offer them with their customer base.  So, Netflix went out to develop a whole new go to market strategy for the home video rental industry.  Recognizing the fact that customers who rent movies do not like the requirement of taking their movies back to the store or making late payments for turning in their rented movies a day or two late, Netflix developed go to market strategy that addressed these inconveniences. By using the Internet as a unique go to market channel for the home video rental industry, Netflix began to offer its customers a mail-in-based, monthly subscription service to rent multiple movies at a time with an unlimited number per month. There were no late fees and no requirement to go to the store to pick-up or drop-off the movie. Netflix’s Internet-based go to market strategy has been a disruptive force that has changed the competitive dynamics of the home movie rental industry, and to date has gained substantial market share by using the Internet to cater to the market demands. Now many of the large competitors in the home movie rental market have implemented the Netflix Internet-based channel model as part of their product offerings. To stay ahead of the competition, Netflix continues to innovate and provide leading, direct-to-home, Internet-based video-based products, content and services to the market.

Entrepreneurs often forget or don’t realize that a unique go to market strategy may be all they need to differentiate their product offering and provide them with success in the market. Many of these same individuals only focus on the traditional market channels.  These channels do not, by definition, allow for any unique differentiation in your start-up company’s product offering. By taking advantage of technology and making it an integral part of your start-up company’s  differentiated product offering, you can uniquely position your start-up company in the market and at the same time create a long-term competitive advantage. With this approach to developing a go unique go to market strategy, you can set your start-up company on its road 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 17, 2009 Posted by | go to market strategy, Market Traction, Venture Capital, venture finance, Venture Funding | Leave a comment

A Go To Market Strategy, and Associated Product Line Objectives and Tactics are Often Missing from a Start-up Company’s Business Plan

I have read and reviewed many business plans developed by first time entrepreneurs. While all of these plans focus on their technology, product or service offerings, many of these same plans leave out their start-up company’s go to market strategy. The lack of a go to market strategy within your start-up company’s business plan represents a glaring hole to potential investors.  After all, developing your technology product or service offering addresses only half of the problem.  The other half of the problem is getting your product to market, securing paying customers, and acquiring market traction and revenue in a timely manner.  Anything less will result in a failed start-up company. This article addresses the need for all start-up companies to have a go to market strategy, as well as associated product line objectives and tactics in their business plans.  Doing so, will allow these same start-up companies to delineate to their investors how and when they expect to secure paying customers, associated revenue and positive cash flow.

Do You Have a Go To Market Strategy?

As the entrepreneur of a start-up company you are necessarily developing a technology, product or service offering to sell into the market.  Therefore, you need to determine who your customers are and how you are going to gain access to these same customers is a cost effective, timely, and efficient manner.  To do this, you must develop a go to market strategy to address the customers within the target market(s) of interest.   As such, your start-up company’s go to market strategy must take into consideration the following:

  • What are the defining characteristics of your start-up company’s technology, product, or service offering for the target market(s) of interest?
  • Which target customers are market leaders and most important to the acceptance of your company’s technology, product, or service offering?
  • What is the “value proposition” of your company’s technology, product, or service offering to your customer base?
  • How do you plan on selling or promoting your technology, product, or service offering to the target customers of interest?
  • How can your company’s technology, product, or service offering best secure significant market share?
  • What are the costs associated with your go to market strategy and various sales channels?

By addressing all of these issues, you can develop a go to market strategy that uniquely fits your technology, product or service offering. This go to market strategy must be included in your start-up company’s business plan, as it is essential to secure customers and at the same time potential investors expect to see this as part of a complete, investor focused business plan.  So, spend the time to think through and then delineate your start-up company’s go to market strategy in your business plan. This will help you achieve success in the market.

What are Your Product Line Market Objectives?

Once you define your go to market strategy for your technology, product or service offerings, you need to develop product line market objectives for each product offering.  These product line market objectives are to be developed in congruence with your start-up company’s overall market strategy and need to have the following characteristics:

  • Align with your go to market strategy,
  • Address all aspects of the target markets and customer base,
  • Are attainable over a defined timeframe, and
  • Have several measurable tactics associated with them.

Therefore, your start-up company’s product line objectives, as defined, need to follow your start-up company’s go to market strategy and address the key issues regarding the implementation and execution of this strategy. 

As an example, let’s assume your start-up company’s go to market strategy is to become the market leader within a defined target market segment.  As such, an associated product line objective could be to: “Secure two tier one customers by the end of year one of operations.”  This objective, as defined, is commiserate with your start-up company’s go to market strategy.  In addition, from your market research and due diligence, you have defined your targeted customers and developed a list of the tier one and tier two customers within this target market segment of interest.  Therefore, having defined your objectives and developed a list of target customers, you can then easily develop a set of tactics that work in conjunction with your defined product line offering market objectives.

Develop Measureable Product Line Market Tactics?

Product line market tactics follow your company’s product line market objectives. Unlike a product line market objectives, previously outlined, a product line’s market tactics should provide definable tasks in order for your company to achieve the objectives of your product line that are in line with the overall go to market strategy. In addition, market entry tactics should also have a time frame tied to them. This provides one more dimension of measurable performance that is tied to meeting the overall corporate market goals and objectives of your company and its technology, product, or service offering.

Product line market tactics need to be definable tasks that are measurable both quantitatively (e.g., revenue growth, customer agreements) and in time. The underlying reason for this is that the business plan your start-up company has developed is based on distinct market objectives, with a time table that reflects a specific return on investment criteria for your company’s technology, product, or service offering. By developing measurable market entry tactics, one necessarily supports the requirements of the resultant objectives of the business plan.

Continuing with the previously outlined example, your start-up company’s product line market tactics could include:

  • Set up meetings with five tier one customers by month three,
  • Secure letters of intent from two targeted tier one customers by month six, and
  • Obtain a signed licensing agreement from two tier one customers by month 12.

These market entry tactics follow the company’s overall strategy and are in compliance with the associated objectives for its technology, product, or service offering. By executing these product line market entry tactics in a defined and commensurate time frame, one can be assured to meet the overall objectives of your start-up company’s business plan.

 First time entrepreneurs often over look the need to develop a clearly defined market entry strategy with associated product line objectives and tactics.  By doing this, you are effectively not addressing half of the problem associated with developing your start-up company’s technology, product or service offering — getting your product to market, securing paying customers and acquiring market traction and revenue in a timely manner. By developing a well defined go to market strategy and the defining the associated product line objectives and tactics to support this overall go to market strategy, you can set your start-up company on its road to success in the market.  Therefore, spend the time to develop your start-up company’s go to market plan. By doing so, you will facilitate both your start-up company’s short term and long term 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 10, 2009 Posted by | Business Planning, Business Plans, go to market strategy, Market Traction, product line objectives, product line tactics, Target Markets, Venture Capital, venture finance, Venture Funding | 3 Comments