Robert Ochtel’s Blog

An Experienced Approach to Venture Funding

Entrepreneurs, Lower Investors’ Risk by Validating your Start-up Company’s Business Proposition

By their very nature, early stage company investors are risk adverse.  Seldom do they invest on a whim.  Generally, sophisticated investors take up to six months to do their due diligence when considering a potential investment opportunity. Angel groups also have a similar due diligence process, but it is often shorter, on the order of two to three months. The point of this due diligence process is to identify any potential investment risks so that these same investors can be assured, to the best of their ability that they are investing in a start-up company that can provide a substantial return on investment to their at risk monies.  That being said, it is impossible to eliminate all potential investment risk for any start-up investment opportunity. On the other hand, entrepreneurs can help minimize the effects of the risk adverse nature of their potential investors by validating their business proposition in the market place. This is best accomplished by doing your research, talking with customers, and validating your business model with your competitors. By doing such, entrepreneurs can lower their investment risk and at the same time make their start-up company and its investment opportunity more attractive to their potential investors.

Do Your Research

All entrepreneurs want to begin writing their business plans on day one.  This is a big mistake, especially when you are trying to lower your potential investment risk and at the same time validate your business proposition.  As such, spending the time doing the necessary primary research to validate your business model is the first and most important step to creating investor-focused business plan.  Why, because many times your first impressions regarding your start-up company’s business proposition can be improved upon, based on this same primary market research.  That is, what you first believe is a strong business proposition, can often be substantially improved upon and presented in a much stronger light, once you have taken the time to do your market research by analyzing the markets, your competitors, the general trends, and subsequently developing a go to market strategy.  Therefore, it is important to take the appropriate time up front to do the necessary research to validate your start-up company’s business proposition. This will make your technology, product or service offering much stronger and at that same time provide you with the necessary background information to properly defend your business proposition to your potential investors.

Talk to Your Customers

The best way to validate your business proposition is to talk to your customers. This step is often over looked by entrepreneurs.  These same entrepreneurs generally believe they “know best” and that customer will buy their technology, product or service offering sight unseen.  That is, in many cases entrepreneurs do not believe that they need to take the time to validate their business proposition by talking to their customers.  This again is a big mistake.  Why, because if your customers do not like your product offering or do not see the value of your business proposition in the same light as you do, you will never be able gain market traction and bring a successful technology, product or service offering to the market.  This is not really a surprise to most entrepreneurs, but being in a hurry to secure funding, they often skip this step in validating their business proposition.  This will come back to bite you, as some of the first questions from investors will be: “What customers have you talk with? Who is interested in purchasing your technology, product or service offering?”   If you have not talked with your customers, before they consider investing in your start-up company, your potential investors will require you to do so.  Therefore, take the time and make the effort to talk with your customers early to validate your business proposition, it will serve you well when engaging with potential investors.

Validate Your Business Model

Finally, being money managers, venture capitalists will want you to have validated your business model against your competitors’ to see what is substantially different, and where your business proposition provides your start-up company with a long-term, competitive advantage in the market.  At the same time, these same investors want to know how and why customers are going to buy your technology, product or service offering. Therefore, as an entrepreneur, you need to validate your business model in the market and against your competitors.  Seldom are start-up company’s business models unique in the market.  Generally, there is always a competitor or similar business model in a non-related industry that start-up companies model their business proposition upon.  As such, investors want to know this and at the same time be assured that your business model has had a history of success either in your targeted market or in other markets with similar product offerings.  So take the time to validate your business model. This will not only help you assure success in the market it will instill confidence with your potential investors.

Early stage investors are risk adverse by their very nature. They have to be, because investing in start-up companies is very risky.  To lower the investment risk for your potential investors you need to take the time to validate your start-up company’s business proposition to the market place. To properly do this you need to: do your research, talk to your customers and validate your business model. By doing this you will not only arm yourself with the proper information when presenting your business proposition and investment opportunity to your potential investors, you will also instill self confidence and confidence with your 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.

May 10, 2010 Posted by | Venture Capital | , , , , , , , , , , | 1 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