Robert Ochtel’s Blog

An Experienced Approach to Venture Funding

Entrepreneurs, Self-Education the Key to Securing Funding

First time entrepreneurs often want to begin day one by writing their business plan and talking to potential venture investors about their “concept” or “idea”.  This is a big mistake.  As an uneducated participant in the start-up funding process, you have little chance of developing a compelling, investor focused business plan or securing venture funding.  This lack of preparation and self-education is pervasive among first time entrepreneurs and results in substantial frustration from both the investors as well as entrepreneurs.  As a result of this lack of self-education on the entrepreneurs’ part, investors always complain that they cannot find “good” deals and at the same time, entrepreneurs complain that there is no venture money available to fund their investment opportunities.  As with any story, the truth regarding this funding dilemma is often somewhere in between.  But, in this case, since entrepreneurs are the ones seeking investor money, the overall responsibility here lies with the entrepreneur.  They need to educate themselves so that they are properly prepared when talking to potential investors. This article discusses the importance the self-education of entrepreneurs and how this self-education is the key to securing funding for your start-up company and its technology, product or service offering.

Take the Time to Really Understand Your Own Investment Opportunity

It is never really good to “learn” about your business investment opportunity while you are talking to investors.  But, this is what many entrepreneurs do. Most entrepreneurs never really take the time to research all aspects of their investment opportunity from the market size, to their competitors’ positioning, to the details of their financials. As such, they go into their first venture capital investor’s meeting unprepared and get ripped apart by seasoned venture capitalists.  Not a fun experience.  There is an easy way around this scenario.  Take the time to really understand your own investment opportunity. This means, don’t start by writing your business plan on day one. Instead, do the opposite; take the time to research your own investment opportunity. This process usually takes about one to three months depending on your background, the number of markets you will be addressing and the breath of your product offering.

This research process is a valuable exercise.  It provides perspective and allows you as an entrepreneur to step back and evaluate which aspects of your investment opportunity that requires more work, before you begin writing your business plan.  Also, this research is a self-education process that ultimately provides you as an entrepreneur with the necessary knowledge and background to be prepared for the test –your first meeting with venture capital investors.  By having done your research on all aspects of your business investment opportunity you will be prepared and will then be able to answer the necessary questions investors ask to properly evaluate you as an entrepreneur and your associated investment opportunity. Remember, you need to be properly prepared to talk with investors about your business opportunity. The self-education process is the key to this preparation.

Understand the Investment Expectations of Venture Capital Investors

Most first time entrepreneurs falsely believe they are fundable, without really understanding the investment expectations of venture capital investors.  This false sense of entitlement is not based on any reality.  Instead it is based on an unrealistic premise – “if I have a “concept” or “idea” it must be fundable”.  Nothing is further from the truth.  Instead, investors have strict investment criteria and specific things they look for when considering potential investment opportunities. Remember, venture capital investors are “money managers” and have a board or directors to report to, so they necessarily have to be selective in the investment opportunities they consider as potential investments. So, as an entrepreneur, it is very important to educate yourself in understanding the expectations of venture capital investors. From the expected financial returns, to the requirement of strong team, to the necessity of creating a long-term sustainable competitive advantage in the market, it is necessarily important to develop a solid understanding of venture capital investors and their investment criteria. Therefore, take the time to read on the subject, attend seminars on venture funding, and go to business plan competitions. This will enlighten you as an entrepreneur with regard to the venture capitalist investor’s funding criteria and provide you with insight to what these same investors look for in potential investment opportunities.

Target Your Venture Capital Investors and Get a Warm Introduction

Most entrepreneurs believe they can send their start-up company’s executive summary to a venture capitalist they do not know and magically this same venture capitalist will read it and invite them to come in for a review session. This is not the case.  In fact, this rarely happens, if ever.  There are a couple reasons for this.  First, venture capitalists are very busy and rarely have time to review let alone read any business plans that come into their office “cold”.  Secondly, venture capitalists like anyone in business prefer to have investment opportunities introduced to them by people they know.  This is known as a “warm” introduction.  The reason for this is that if they know and respect the person that has introduced the potential investment opportunity to them; they know that this person’s reputation is on the line and they would not ask them to look at it unless it was a “quality” investment opportunity.  Remember, investors are always more comfortable in working with people they know and trust.  It is just human nature. Therefore, when looking to secure venture funding it is important to do two things. First, target venture capitalists that have a history of investing in similar start-up companies.  All venture capital firms have target investment criteria (target technologies, markets, investment amounts, etc.).  Spend the time to investigate and target those venture capital firms which meet your investment criteria.  This will provide you with a target list of potential investors. Second, work hard to get a “warm” introduction to these targeted venture capitalists. You can do this by:

  • Going to networking event in which a venture firm’s partner is a panelist,
  • Looking at the companies they have funded and determining if you know someone at these firms,
  • Working with a law firm that has connections to your target list of venture capitalists.

Remember, targeting specific venture capital firms and then working to get a warm introduction will get you a long way down the road to securing funding. 

As first time entrepreneur, you need to necessarily educate yourself.  This takes time, but in the end is the key to successfully securing funding from the venture capital community.  This self-education process includes understanding all aspects of your own business investment opportunity, having a realistic understanding of venture capitalists’ investment expectations, targeting specific venture capitalist firms and securing a warm introduction.  By doing your homework here, you will save yourself a lot of time and substantially increase your chances of securing 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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October 5, 2009 Posted by | Business Planning, Business Plans, Competition, concept, Idea, Venture Capital, venture finance, Venture Funding | Leave a comment

Three Things Entrepreneurs Absolutely Need to Know Before They Talk To Their First Venture Capitalist Investor

Being an entrepreneur is not a guessing game.  Like any successful endeavors in life, starting a business as an entrepreneur, which depends upon third-party venture investors for its ultimate success, requires time and lots of hard work, as well as considerable planning and preparation.  Much of this planning and preparation process is often overlooked by first time entrepreneurs.  Why, because many of these same first time entrepreneurs believe the following: “Hey, I have a business idea and why shouldn’t I receive funding from a venture capitalists no questions asked.”  This thinking will not get you too far with potential venture capitalist investors.  They expect you to be prepared, and have thought through your proposed business idea from all angles.  In this vain, as a minimum, there are three items you need to answer before you step foot in front of any venture capitalist investor.  This article addresses these three items and outlines why by answering these three questions, you most likely will succeed in getting a follow-up meeting with these same venture capitalist investors.

What Problem am I Solving?

Investors first want to know that you are solving a problem in the market.  They do not want to invest in start-up companies with a technology, product or service offering that is looking for a problem to solve.  Why, because unless there is a “defined need” for you start-up company’s technology product or service offering no one will buy it.  Remember, you are in business to acquire paying customers and not to develop a “cool” technology, product or service offering.  Venture capitalists understand this, and from the beginning they are looking for the underlying reason customers will pay for your product offering.  Is your product offering cheaper?  Does your product get your customers to market faster?  Does your product offering save your customers money?  There many underlying reasons customers will buy your product offering. You need to determine this reason.

All venture capitalists want to know is that there is a reason for customers to buy your technology, product or service offering.  Therefore unless you are filling a “need” in the market you will be hard pressed to convince these same investors that you have a fundable start-up business.  This is very simple and at the same time is more often overlooked by entrepreneurs.  So, before you decided to present your business plan to potential venture investors, take a self assessment and determine what problem you are solving.  Be realistic and practical in your assessment, as you should know your investors will be.

What is My Business Model and Projected Financial Returns?

Most first time entrepreneurs do not really understand the venture funding game.  That is, they really don’t take the time to understand venture capitalist and their objectives and goals. So, let’s be clear, venture capitalists are in business to make money – a lot of money. Therefore, they need to invest in business opportunities that make business sense from the financial point of view.  Therefore, a new start-up company with a proven business model will make sense to venture investors.  On the other hand, a new business venture with an unproven business model will not get any real attention from these same investors.  Why, because venture capitalists are in business to mitigate their financial risk, and having a business model with a proven track record in the market will give these same potential investors the level of comfort that they need to consider the investment opportunity.

In addition, as an entrepreneur it is necessary that you know your projected financial returns of your start-up company for your venture investors. The standard rule of thumb here is 5 times the initial investment in 3 years or 10 times the initial investment in 5 years.  These numbers, do not reflect any reality or are even close to the average returns venture investors receive on their investments, but are merely the standard financial hurdles venture capitalists use to judge different start-up business opportunities.   So, as an entrepreneur you need to know your financial returns and make sure they conform to these industry standard projections.  Anything less will not get you a follow-up meeting with these same potential investors. 

Finally, as an entrepreneur you need to remember that venture capitalists only invest in a limited number of start-up companies over their lifetime of their venture fund, so they need to be careful when vetting start-up company investment opportunities.  Understanding the business model and the projected financial returns is their first step to considering a potential investment opportunity.

Is My Product Offering Unique and Compelling?

As an entrepreneur, you need to have a product offering that is both unique and compelling.  Anything less, will most likely not get venture investors attention.  Why, because these two attributes will differentiate your start-up company’s technology, product or service offering in the market.  If your product offering is unique, it more than likely is patentable or has intellectual property associated with it.  This will differentiate your product offering to your investors.  Why, because it provides the opportunity to create value – something that will potentially bring much higher financial returns when the investors go to sell the company.  Also, being compelling provides a reason for customers to buy your product.  This will provide the ability to create market “buzz” and associated market traction.  Remember, “time-to-money” increases the financial returns for your investors.  So creating a product with compelling value proposition for your customer base will get your investors attention from the beginning. Therefore, as an entrepreneur, if you wish to secure funding from third-party venture investors you need to create a product offering that is both unique in the market and compelling to your customer base.

Venture capitalists see lots of investment opportunities every year. Many review thousands of executive summaries and business plans.  Very few, if any of these same investment opportunities get the attention of the venture capitalists.  Why, because they do not address necessary items that will make their investment opportunity successful from an investor’s point of view.  This article has outlined three necessary things that entrepreneurs need to know before they get in front of venture capitalist. If these three things are not addressed in detail during your first meeting with investors, you will not get a follow-up meeting.  Therefore, be aware these three items as they most likely will provide you with the ability to secure immediate traction with potential third party investors.

This information was taken from Robert’s new book: “Business Planning, Business Plans and Venture Funding – A Definitive Reference Guide for Start-up Companies”.  Available at www.amazon.com.  For more information on the book go to www.carlsbadpublishing.com.

September 14, 2009 Posted by | Business Planning, concept, Idea, Venture Capital, venture finance, Venture Funding | , , , , , , , | 2 Comments

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