Robert Ochtel’s Blog

An Experienced Approach to Venture Funding

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

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

Venture Capitalists Prefer Large Established Markets!

Many entrepreneurs only focus on bleeding-edge, burgeoning markets when developing their company’s technology, product or service offering. This is done for several reasons, including:
• Burgeoning markets have limited competition,
• Ability to establish an early foot-hold to increase the perceived “value” of their company, and the
• Difficulty in developing a differentiated, long-term competitive advantage in an established market.

I recently published this article on http://www.ezinearticles.com . It outlines why this burgeoning market approach may be too risky for many venture capitalists and then provides five reasons why venture capitalists prefer large established markets over bleeding-edge technology markets.

The access the content this article go to http://www.carlsbadpublishing.com and click on the Articles and Book Press page.

All 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 http://www.carlsbadpublishing.com .

January 29, 2009 Posted by | Venture Capital | , , , , | Leave a comment

Essential Element #1: A Technology Does Not Make a Product.

In my experience in raising private equity for start-up companies, there exist two types of companies: technology-oriented companies and market-oriented companies. Both types of companies believe that they will be successful in the market. But it has been my experience that the market-oriented companies will ultimately provide their company with a highest, long-term return on investment.

Become a Market Oriented Company
The “technology-oriented” company focuses on its technology as the only means that will provide them success in the market. This type of company, often a typical profile of many start-ups, believes that it is their technology that will provide them with success in the market. They are not concerned with the size or growth of the markets, their competitor offerings, their customers’ needs, or what it takes to be a success in the market. All they know is that they believe that they have “unique” technology that will provide them with the ability to be successful in the market. Technology-oriented companies are blinded by their own thinking. They are “internally focused” companies that do not have the ability to bring their heads up from their technology and survey the landscape that they are intending to address. In many instances, it is these same technology-oriented companies that do not even know who their customer base is and cannot describe their needs in a succinct, well thought through manner. The technology-oriented company focuses their success solely on the success or failure of their technology. These same companies many times have great technology in the laboratory, but never succeed in bringing a great product or service to the market.

The “market-oriented” company takes a much broader focus on the attributes that potentially define their success in the market. The market-oriented company, like the technology-focused company, has “unique” technology that may provide them with the underlying ability to be successful in the market. But, unlike the technology-oriented company, the market-oriented company understands a technology that is successful in the laboratory may not be sufficient to be successful in the market. The market-oriented company generally believes that it is their technology that may provide them with success in the market, but they are genuinely concerned about all other aspects that will define the success of their product or service offering, including the size or growth of the markets, their competitor offerings, their customers’ needs, or what it takes to be a success in the market. Market-oriented companies are not blinded by their own thinking. They have the desire to learn all they can about their market and the attributes that define success in their target markets. Market-oriented companies are “externally focused” companies that do bring their heads up from their technology and survey the landscape that they are intending to address. In many cases, it is these same market-oriented companies that intimately know their customer base. This can be through experience, but most likely is due to the amount of research and due diligence they have done regarding their target markets. The market-oriented company can describe their customers’ needs in a succinct, well thought through manner. Finally, market-oriented companies have a much higher probability of being a success in the market. These companies have great technology in the laboratory and generally succeed in ultimately bringing a complete product or service to the market.

So given you have a choice, engage in the business planning process and make your start-up company an externally, market-focused company. This will increase the probability of success for your company securing venture capital funding and ultimately provide for the highest return on investment for your company’s shareholders.

January 27, 2009 Posted by | Venture Capital | , , , , | 1 Comment