Robert Ochtel’s Blog

An Experienced Approach to Venture Funding

Some “Truths” About Networking for First Time Entrepreneurs

The term networking itself and networking as an activity can be very intimidating to first time entrepreneurs.  Many of these same individuals have never have had to network or believed that they needed to network to enhance their career, and as such, are unfamiliar with networking and its benefits.  In fact, many first time entrepreneurs, not only need to learn what “networking is and is not”, but they need to learn “how to network” to benefit of both themselves and their start-up companies.   This article outlines some basic “truths” regarding networking and how it can benefit entrepreneurs and their start-up companies.

Networking is Really Focused “Socializing” 

Networking is really no different than any other socializing activity.  In fact, if it were referred to as “socializing”, instead of networking, I believe it would be less intimidating to first time entrepreneurs.  The word “networking” seems to have an underlying performance-based stigma associated with it. That is, to be a success at each networking event they attend, one needs to come away with something that they value for themselves or their start-up company.  This, “what can I walk away with mentality”, with virtually no effort on their part, is not really productive for the first time entrepreneur, as promotes undue pressure that requires this same entrepreneur to actively seek a “quality” connection each and every time they attend a networking event.  This is a non-realistic expectation and definitely not a “good” networking mentality.  A better approach is to attend each networking event with a positive attitude and hope to meet one to two individuals you can possibly create a personal connection with.  This is really what should be the expected “positive” result of a successful networking event.  Therefore, if you look at networking as focused “socializing” you will be more relaxed and ultimately more successful at each networking event you attend.

Not all Networking Organizations offer the Same Level of Benefit to the Entrepreneur

First time entrepreneurs need to be very particular regarding which networking events they decide to attend.  The reason for this is that all networking organizations have a particular focus. In addition, each networking organization also has unique presentations and participation formats. Therefore, out of the gate, first time entrepreneurs should first identify the various networking organizations in your area. After this, one should ask their friends if they have attended any of these networking events and get their overall opinion on the networking organization and its utility, effectiveness and friendliness.  Also, as a new participant, one should take time to attend at least one to two events, for each targeted group, before they decide to join any one networking organization. This will give you a true feeling for the networking organization and how it operates.  Finally, one should make an effort to meet the individuals that run each networking organization.  To do this, just introduce yourself and tell them that this is the first time that you are attending.  This is important, as each group has their own “personality” and that personality always comes from the individuals who run the network organization.  As you will learn through this process, one networking organization will most likely “fit” you and your personality better than the others.  This comfort level will allow you to be more effective and enjoy the events you attend. 

In Business, People Like to “Work” with People They “Know”

Have you ever noticed that entrepreneurs that start companies surround themselves with people they know?  In fact, many start-up company’s founders have worked together, in the past, at one or more companies.  This collegial bond and common experience base allows these same individuals to “know” each other, their personalities and most importantly their skill sets. 

To take this “known entity bond” a bit further, there have been whole industries that have developed based on personnel from a single company. In fact, the wireless industry in San Diego, Ca was founded, developed, and expanded by insiders that originally worked together at a single company, Linkabit. Since the early 1980’s there have been hundreds of wireless start-ups, in San Diego, that come from this lineage, most notably including: Qualcomm, Hughes Network Systems, ViaSat and many others.   This provides you with an understanding of the “basic” desire and “need” for people to “work” with individuals they “know”.  As such, this is what networking is all about — it provides a forum for you, as a first time entrepreneur, to present yourself and your start-up companies, so that others can get to “know” you and your start-up company.

Networking is Not a “One Time” Activity

Many first time entrepreneurs mistakenly believe that they can attend a “single” networking event and will walk out with funding and many “great” contacts. This is far from the case.  In fact, only by attending targeted networking events multiple times, do the individuals at these socializing functions get to “know” you and your company, its technologies, products or services, and your needs. Realistically, it usually takes three to six months or more, of continually attendance, for people begin to “know” you, and recognize you as a quality, reputable individual.  Only after this amount of time, individual effort, and interaction will other fellow networkers be willing to open up their networks and contacts with you.  This may seem like a long time for first time entrepreneurs, but look at it this way — you would not introduce someone you don’t know to your best friend unless you “know” them and can be assured it is a “quality” introduction.

 Getting Involved is the Best Way to Start

The best way to become quickly recognized and known among a networking organization you are interested participating in, is to become involved in their “executive committee”.  As most networking groups are volunteer networks, they are always looking for individuals to: organize events, recruit new members, run committees, etc.  This is done by the executive committee members.  This type of volunteer work generally only takes a few hours a month and you then have access to all of the “key” individuals within the organization and their networks, which are generally extensive. 

The Long Term “Benefits” from Networking are Many

The long term benefits of active networking are many for you and your start-up company.  Remember, no entrepreneur can successfully develop and expand their start-up company in a vacuum.  All start-up companies require “key” individuals with broad and deep skill sets, industry connections, and a continually expanding network to ultimately be successful in the market. As a minimum, some of the long term benefits of successful networking to entrepreneurs include:

  • Meeting new acquaintances,
  •  Acquiring new friends,
  •  Being exposed to new ideas,
  •  Expanding your industry contacts,
  •  Securing long-term business contacts,
  • Developing strategic business partners, and
  • Securing an extensive amount of resources at your immediate disposal.

So, as a first time entrepreneur, get out there and network, both you and your start-up company will benefit substantially from your efforts. 

March 30, 2009 Posted by | Business Development, Nwtworking, Venture Capital | , , , , , , , | 3 Comments

Venture Capital – It’s Not “Welfare” for Start-up Companies

Most of the time, when I first meet with entrepreneurs and their start-up companies, they are usually focused on the money they think they “need” to make themselves successful. More often than not they say, “If I just had a $1.0M to get my company off the ground that would solve all my problems.” This “money-focused” mentality often makes these same entrepreneurs take their eye off their real objective — making their company an attractive investment opportunity for potential investors. As I always tell them – “money never solves your problems, either in your personal life or in business, but being prepared, focusing on your company and securing customers will.”

Venture Capitalist focus on the “Best in Class” Investment Opportunities

Venture capitalists and other private equity investors, by the nature of their business, are “risk adverse” and not “risk takers”. This line of thinking seems to escape entrepreneurs and their start-up companies. This is especially true for “first-time” entrepreneurs. These individuals do not take the time to look at their start-up company and its associated “investment risk”, from the venture capitalists point of view.

A venture capitalist has a fixed amount of money in their private equity fund. This fixed sum is used to invest in a limited number of companies over a given period, usually 7 to 10 years. With these limited number of investments, the venture capitalists and their funding sources (e.g. pension funds, private individuals, etc.) know that a number of them will fail, a number of them will break even or do a bit better, and a couple will be highly successful. Therefore, from their point of view, venture capitalists are taking a traditional “portfolio management” approach to minimizing the inherent “risk” of their individual investments. As such, venture capitalists only look for the “best-in-class” investment opportunities to ensure that their “portfolio risk” is minimized and their individual investments succeed over the life time of their investment fund.

Not all Companies are Candidates for Venture Funding

All of the entrepreneurs I meet believe that their companies are fundable by third-party equity investors, be it angel investors, venture capitalists or other private equity sources. The truth is that very few of these same companies will be able to secure monies from these same funding sources. The statistics show that only about 3% of start-up companies, which are reviewed annually by venture capitalists, secure funding from these same funding sources. Therefore, it is not hard to believe that the other 97% are either not fundable or have to secure funding from other sources (boot strap, friends and family, etc.).

As an example, recently, I received a request to help secure funding for a start-up company that was looking to develop a service offering addressing a new, bleeding-edge market that had yet to develop. They were looking for $1.0M in investment capital, but were only projecting $5.0M in revenue in their fifth year of operations. This company is clearly not a candidate for venture capital or any other third party equity funding. On the other hand, suffice it to say, that if a company, at some point, succeeds in generating revenue of $5.0M a year, with high gross margins, this will end up being a fine “life-style” company for its founders. This type of start-up company and investment opportunity is not a bad deal for the founding team over the long term, but is definitely not a candidate for third-party equity investors.

Start-up Companies are in Business to Secure Customers

As a start-up company, entrepreneurs need to remember that they are in business to secure customers and not just to develop a technology, or service offering. By focusing on securing customers early on, these same start-up companies will provide substantial benefits to themselves in both the short and the long runs. In the short run, the start-up company will have demonstrated to potential investors that there is a “market need” for its product and that customers are willing to pay for it. This is very attractive to investors as it reduces their investment risk and demonstrates the potential for market traction. Also, by securing customers early, this will provide this same start-up company with a “lead” customer. This is often key to securing long-term success in the market. A lead customer will help drive a start-up company’s technology, product or service features, functions and capabilities. This is very important to a start-up company’s success in the market, as end customers always know more about the market application requirements than the start-up company developing the technology. Finally, by securing customers early, this will allow a start-up company to generate revenue. This will reduce both the start-up company’s short term and long term capital needs, requiring the founders to give up less equity over the long term.

Planning, Preparation and Securing Customers is the Best Plan for Receiving Funding from Venture Capitalists

Entrepreneurs should not expect that angel investors, venture capitalists or other private equity investors will provide them with money, just because they have an idea. This is an unrealistic expectation. Entrepreneurs need to work hard in planning and preparing themselves and their company to be ready to present their investment opportunity to potential investors. Remember, venture capital is not “welfare” money for start-up companies. Investors are looking to secure a significant return on their investments in a predictable time period. If an entrepreneur and their start-up company do not offer, as a minimum, the following, it will most likely not secure funding.

  •  A “best-in-class” team,
  • A disruptive technology, product or service offering,
  • A sustainable long-term competitive advantage in the market,
  • The ability to secure customers and market traction,
  • A proven business model, and
  • The ability to scale and dominate the target market(s) of interest.

So, as an entrepreneur, focus on your start-up company. Take the time to plan and prepare yourself and your start-up company for the rigors of securing funding in this tough environment. This includes securing customers as early as possible. This will substantially increase your odds of securing funding and make your start-up company a much more attractive investment opportunity for venture capitalists or other private equity investors.

The information outlined in this article comes from my new book entitled “Business Planning, Business Plans and Venture Funding – A Definitive Reference Guide for Start-up companies.” Signed copies of this book are available at http://www.carlsbadpublishing.com. Robert also provides business planning, and venture funding consulting services to start-up, small and mid-sized companies.

March 23, 2009 Posted by | Venture Capital | , , , , , , , | 4 Comments

Essential Element #3: Know the Funding Community- Angel Investors vs. Venture Capitalists.

There are various funding options available to entrepreneurs. This includes self-funding as well as funding from third-party equity sources. The funding options include bootstrap, angel, venture capital, and corporate partner funding. The bullet item list below outlines these various funding sources, the funding stage, and typical associated funding ranges.

  • Founders, Friends, and Family: Pre-Seed, Seed and Start-up; $25K – $100K
  • Individual Angel Investors: Seed and Start-up; $100K – $500K
  • Angel Groups: Start-up and Early Stage; $500K – $2.0M
  • Venture Capital/Corporate Partner Funds: Early and Later Stage; $2.0M and Up

For purposes of this article we will focus on angel investor and venture capitalists.

Angel Investor vs. Venture Capital Funding

Venture capital investing is generally the most well-known type of start-up investment services available in the market. Although many entrepreneurs are aware of venture capitalists and associated venture funding, many are not aware of the process, issues, and concerns that arise when engaging with venture capitalists. As a way of an introduction, the following bullet items outline some of the basic differences between angel investors and venture capital firms.

  • Personal Background: Angel Investors: Entrepreneurs; Venture Capitalists: Money mangers
  • Money Source: Angel Investors: Own money; Venture Capitalists: Fund provider’s money
  • Firms Funded: Angel Investors: Small, early-stage; Venture Capitalists: Medium to large, Later stage
  • Amount of Investment: Angel Investors: Small; Venture Capitalists: Large
  • Due Diligence: Angel Investors: Minimal; Venture Capitalists: Extensive
  • Contract: Angel Investors: Simple (10 pages); Venture Capitalists: Comprehensive (!00 pages)
  • Monitoring of Investment: Angel Investors: Active, hands-on; Venture Capitalists: Strategic
  • Exiting of Firm: Angel Investors: Of lesser concern; Venture Capitalists: Very important
  • Rate of Return: Angel Investors: Of lesser concern; Venture Capitalists: Very important

As noted above, the underlying characteristics that delineate angel investors are much different than that of venture capital firms. This is primarily a function of nature of the organizations and background of the two types of investors. Where angel investors generally invest smaller amounts of money with the goal of facilitating the start-up company’s move to the next level of third-party investment from venture capital firms, venture firms generally invest large sums of money with the goal of cashing out in three to five years through an initial public offering (IPO) or through an acquisition by a large corporation. The following bullet items provide a comparison of the investment statistics between angel investors and institutional venture capital financing sources.

  • Funding Sources (U.S): Angel Investors: 234,000; Venture Capital Firms: 1,830
  • Annual Investments: Angel Investors: $25.6 B; Venture Capitalists: $35B
  • Total Transactions: Angel Investors: 51,000+; Venture Capitalists: 2,910
  • Seed Stage Transactions: Angel Investors: 25,000+; Venture Capitalists: 128
  • Mean Investment: Angel Investors: $500,000; Venture Capitalists: $8.9M

As noted above, statistically, angel investors focus much more on seed and early stage company funding. With over 51,000 total transactions a year, and over 25,000+ transactions in seed stage companies, entrepreneurs are in a much stronger position in receiving funding from angel investors than venture capitalists, which only funded 128 seed transactions in 2005. So, as outlined, with 234,000 independent angel investors in the US and only 1, 830 professional venture capital firms, entrepreneurs should focus their seed stage funding efforts on securing money from angel investors.

In addition, the interaction between the angel investor and the start-up company versus that of the venture capital firm and the start-up company are generally very different. Where the angel investor(s) are more nurturing and patient toward the start-up company, the relationship between venture capitalists and the start-up firm can many times be better characterized as an “adversarial” relationship based on meeting financial projections with unrealistic expectations. It has been my experience that the underlying difference between the two relationships is that many venture capitalists are MBAs from top business schools with little or no experience in developing a start-up from the ground up. They concentrate on the “should be projections” of the financial statements, as opposed to the realistic issues in developing a business. Given this difference, and the necessity of working with the venture capital community, it is highly recommended that entrepreneurs and their start-ups work with venture capitalists that have “hands-on” start-up experience. This will facilitate a much more mutually beneficial relationship between the two parties, the entrepreneur and the investor.

The information outlined in this article comes from my new book entitled “Business Planning, Business Plans and Venture Funding – A Definitive Reference Guide for Start-up companies. This book is available at www.carlsbadpublishing.com.

February 9, 2009 Posted by | Venture Capital | , , , , | 1 Comment

Know the Rules of the Venture Capital Funding Game!

Have you ever tried to play a new sport or game and win, without knowing the rules, expectations or having been trained in the basic skill requirements of the game?  Well that is what 99% of new entrepreneurs do for their preparation in raising venture capital, angel funding or other third party private equity.  In addition, they have no idea on the time commitment, expense and length of time until they can expect to receive funding.  So why do these same entrepreneurs play this game called ‘venture capital funding” and expect to be successful?  The short answer is most believe they can get rich quick and then retire.  But the truth and reality are very different.  

 

 

Over the next three weeks I will outline what I believe are five essential elements that provide the entrepreneur with the necessary insight to being successful in the venture capital funding game.

 

 

All information provided comes from my new book entitled “Business Planning, Business Plans and Venture Funding – A Definitive Reference Guide for Start-up companies.  This book is available at www.carlsbadpublishing.com.

 

 

Best,

 

 

Robert

January 22, 2009 Posted by | Venture Capital | , , | 2 Comments