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