Robert Ochtel’s Blog

An Experienced Approach to Venture Funding

Entrepreneurs, Nothing is Real Until You Start Product Development

I am a big fan of business planning. In fact, I truly believe that the business planning process is invaluable to a successful start-up company, as it provides a path forward for entrepreneurs and their executive teams to follow.  On the other hand, a business plan, the result of the business planning process, is a living document and is out of date the day it is completed.  Why, because the market and landscape are constantly changing. In addition, until you start the development of your technology, product or service offering nothing is real. It is the realities of the actual development that will cause issues and deviations from your original plan. These realities need to be indentified, understood, and managed in order to have a successful start-up company.  In what follows is a short discussion on issues to address once the realities of development begin and start to affect your start-up company.

Verify Your Original Assumptions

One of the first things to do when beginning development of your start-up company’s technology, product or service offering is to verify the original assumptions of your business plan.  Whether it is the development timelines, required product features, functions or capabilities, and any and all associated development costs (e.g., capital equipment, staffing, etc.), you need to spend the time to verify the original assumptions of your business plan.  With the initiation of development new issues will come up that were not originally planned for and these things can deviate substantially from your original business plan.  So, take the time to review and validate and modify as necessary, the original feature requirements as well as the associated development costs and schedule. In addition, in many instances there may have been a substantial amount of time that has elapsed between the completion of the original business plan and the funding of this same plan.  Consequently, many of the features, functions and capabilities, originally outlined in your plan, may no longer be required or on the other hand, there may be many new features, functions and capabilities required from your customer base that were not addressed in the original business plan.  So, in order to start fresh, take the time to verify your original assumptions. This will provide a clean jumping off point for development and allow things to move much smoother going forward with the initiation and execution of development.

Knock Down Unanticipated Development Road Blocks

Even once you begin the development process things can change substantially. The time and effort to develop a specific feature, function or capability may take much longer than anticipated.  You may be required to hire additional staff members to solve a specific problem.  Or, there may be a requirement to purchase additional capital equipment to solve a newly identified issue associated with your development.  As is always the case, when initiating product development, there are going to be new, unanticipated problems and road blocks that need to be addressed.  The trick is to identify and address these problems early.  You do not want these same problems and/or road blocks to spiral out of control, adversely affecting your development schedule and overall development costs.  In addition, you do not want to sweep any of these same potential problems under the rug, as issues identified and addressed early are much easier to solve and will have much less of an impact on your product development and delivery.  So, that the  time to knock down unanticipated development road blocks early, it can only help you in the long run to provide a timely delivery of your technology, product or service offering to the market.

Actively Manage the Development

As the CEO of a start-up company you need to actively manage and be involved in all aspects of your technology, product or service offering development.  Do not take a hands-off approach to managing the development of your start-up company’s key product offering(s).  This will only come back to burn you in the long run.  As the CEO of your start-up company, the buck stops with you, and as such investors will hold you accountable for any schedule delays, unanticipated increases in development costs, etc. In addition, as part of actively managing the development process, you need to understand all of the crucial parts of development, including educating yourself in areas they you are not technically familiar with or lack a basic understanding of the underlying development process.  This is education process is necessary, as it will provide you with the proper insight to ask the right questions, and understand when things just do not make sense, with regard to an unexpected development delay, etc.  By actively managing the development process, you will be able to hold all of your key development managers accountable and assure the timely and cost efficient delivery of your technology, product or service offering.

Product development is really where the rubber hits the road.  All of the activities up to that point have only been planning related and to some extent do not necessarily reflect all of the realities of an actual development.  As such, there are many things that will need to be addressed once you begin development.  To ensure a smooth development process you need to verify your original assumptions, knock down any unanticipated road blocks, and actively manage the development.  Anything less will not result in a successful development and result additional incurred development costs and a longer delivery schedule.  So take the time to address all of the issues associated with your development early on, as it will ensure a smooth, cost effective product development and delivery.

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.

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August 30, 2010 Posted by | Venture Capital | , , , , , , , | 1 Comment

Entrepreneurs, with Regard to Business Planning – Always Start from the Markets

Business planning is the first step in developing a proper business plan.  Often, entrepreneurs choose to skip this step in the business plan development process.  Why?  Because on day one most entrepreneurs want to begin by writing their business plans. This is a mistake, as this jump to the middle of the business plan development process will often require these same entrepreneurs to re-start their business plans by going back to the beginning of the process, business planning.  This being said, if done properly, where do entrepreneurs being their business planning process?  Do they look at their competitors? Do they define their go to market strategy? Do they determine their pricing?  No, one always begins their business planning process by looking at the markets.  In what follows is a short discussion on some of the things that need to be addressed when initiating your business planning process by starting from the markets.

Understanding the General Market Trends and Needs

The first thing you need to do to begin the business planning process is to step back and delineate the overall market trends and strategic market opportunistic needs.  That is, what are the long term general trends in the market?  Is there an aging population?  Are consumers moving toward mobility?  Will gas prices go up long term?  Properly identifying the near term and long term general market trends is very important, as it will define where the expected long-term growth is in the markets.  Understanding these general market trends will also allow you with the ability to identify the associated strategic opportunistic needs of the markets.  Will the elderly require at home care?  What are the data encryption requirements for mobile data, audio and video?  What technologies will be the required in a green economy?  By understanding the general market trends and the associated strategic opportunistic needs of the market you can better delineate where and how you want to participate in the market and how you can better position your start-up company to ride the wave of future these same future trends and needs. This is something investors will want know that you clearly understand and have a long term plan to address with your technology, product or service offerings.

Defining the Market Opportunities

Once you understand the general market trends and needs, you need to move on to defining the target market opportunities.  All markets are not equal. Some are large. Some are small. Some have strong growth. Some have slow growth. If the market is too small your investors will not have the ability to receive a proper return on their investment.  Or, accordingly, a small market will require your start-up company to secure an unrealistic percentage of market share, which will again not seem reasonable in the eyes of your investors.  In essence, here, by defining the market opportunities, you are determining not only the overall size of the target markets, but the expected growth of the markets themselves over the projected period of interest, usually three to five years.  Are the markets high growth markets or slow growth markets?  These are things you need to understand, as you investors generally want to invest in “large” markets that have significant growth potential.  Why, because a rising tide lifts all boats.  Here, if the market it not only large, but has substantial growth there is room for new competition. In addition, large, high-growth markets allow start-up companies to secure market share and create a position for themselves in the market.  So take the time to define the market opportunities that you will be addressing. As part of this planning process, it is also important to understand the unit volume growth numbers, not just the overall market size in total dollars.  These volume growth numbers are essential, as they will provide you with a basis to project your revenue from product sales, but also your market share growth over a generally accepted business planning period of three to five years. So make sure to clearly define the market opportunities, as this is an essential part of the business planning process.

Prioritizing Your Target Markets

As an entrepreneur of a start-up company, by definition you have limited resources.  Therefore, you cannot address all potential market opportunities that are available to you in the market.  Therefore you need to prioritize your target markets.  Some you will address immediately, and some you will address later.  This can be based on many things including:

  • Time-to-market, and near term revenue,
  • Ease of product development,
  • Long term growth potential, or
  • The competitive landscape.

All of these items will affect your decision on which markets to address up front.  The key here is to pick a single market or a limited market-segment space to address.  This will provide you with focus and at the same time allow you to put all of your resources toward a targeted and well defined market opportunity.  It may be that you are only addressing a small portion of a targeted market, say the high-end luxury car market.  Or it may be that you are developing a consumer product that has obvious future commercial market applications. The key here is to prioritize your identified market opportunities and only address those near term opportunities that provide near term market traction and also your start-up company with a unique, differentiated position in the market.  So, take the time to prioritize your target markets, it will provide you with focus and allow your clearly identify both near term and long term market opportunities for your start-up company.

Business planning almost always escapes first time entrepreneurs.  They more often than not they want to begin on day one writing their business plans.  This is a mistake, because if you do not understand the landscape of the potential market opportunities ahead of you, will not make informed business decisions that you can defend in front of your potential investors.  Therefore, as an entrepreneur you need to begin your business planning process by focusing on the markets. This includes understanding the general market trends and needs, defining the market opportunities, and prioritizing your target markets.  By doing this you will create a clear path forward and provide both near term and long term market success for your start-up company.

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.

August 9, 2010 Posted by | Venture Capital | , , , , , , , , , | Leave a comment

Entrepreneurs, Business Plans Often Do Not Reflect Reality

The development of a business plan should be only viewed as a “plan” as it is really out of date the day you put your pencil down.  On the other hand, the business plan is a useful tool for the entrepreneur to create a map of the opportunities they will be addressing in the market.  As such, it provides a baseline of the path forward in the market, a time frame as to when your product will be available, and a blueprint of your financial model, and how you are planning to provide your investors a substantial return for their investment.  That being said, after you secure funding and start development, is when reality sets in.  Many of the scenarios outlined in your business plan from the cost assumptions, to operations, to the target markets may require a dose of reality when you begin development and execution of your original business plan.   In what follows is a short discussion on some of the things that need to be addressed forge through these realities. 

Ferret Out Your Unforeseen Product Costs

Many entrepreneurs do not have a good handle on their product costs and associated margins as presented in their business plan.  The numbers they present are often marred with faulty assumptions and inaccuracies that will hurt their bottom line when they finally bring their product to market.  This is not unusual as “reality” often has a way of creeping in and changing your actual costs.  These realities can often affect your product costs, operating margins, etc.  As an entrepreneur you need to get a handle on anything that significantly affects your original planned costs.  As an example, in operating an on-line eStore there are costs associated with allowing customers to use their credit cards on line to purchase products and services (e.g. merchant and gateway costs). Your business plan may have originally assumed your credit card merchants will only charge you a set service charge of 1.6% of each purchase price plus a fixed fee for each transaction.  But, when you finally get your bill you see that the average charge for each purchase is 2.6% plus the same fixed fee.  This is a big reality for a couple of reasons.  The 1.0% affects your gross margins and your bottom line. In addition, if you have a micropayment based business, this slight change can affect your business model, and also cost your company thousands of dollars every year in unanticipated costs. What happened here? The business plan assumed that the merchant charged a fixed percentage for each online purchase.  The truth is that depending on the consumers credit card, their credit rating, and any rewards programs they participate in, these same merchants have over 490 different costs levels associated with the percentage they charge and the number initial provided is usually a low ball number and does not reflect the realities of the real credit card customer base.  So in the end, the start-up company will be hit with additional costs that will affect their margins and bottom line.

Understand Your Real Operations

Many start-up companies do not really understand the total costs of doing business. They assume they can produce their end products based on a set of assumptions that do not always take into consideration the total cost of production, including marketing and overhead.  They just look at the product cost and not all of the infrastructure costs associated with producing their product and getting it to market. Recently, I was involved with a start-up company creating electronic content from published books. They claimed that their costs were only $1.00 to create a single piece of electronic content. What they did not tell me is that much of upfront costs associated with converting the original content into electronic form were not taken into consideration with this presented cost number.  These conversion costs included extracting the text, properly formatting the files, and sizing the associated images that were to be used in the final product.  The costs they claimed were only associated with the cost of taking the electronic content, once it had been created, and putting it into a spreadsheet that was ultimately extracted automatically into the online database. As it turns out if you take into consideration all of the preparation steps this probably added $3.00 to $4.00 to the cost of producing this same electronic content. So again, when the reality hits the road, the associated operating costs were significantly higher than outline within the business plan. As it turns out, I worked with them to develop a standard format as well as a couple of text/image extraction and verification programs and they were able to get the total costs of creating this same electronic content to about $0.25 single piece of electronic content.  So, again the operational costs of the business plan did not reflect the realities of the real world.

Be Open to New Market Opportunities

Entrepreneurs and their business plans tend to be fairly myopic.  That is, they generally focus on a limited target market or small defined set of target markets in which to sell their product offering.  This is generally considered a good thing, since it provides your start-up company with focus.  On the other hand, often many of the technologies, products or services being developed by this same start-up company could be used in other, non-related markets which may drive new, larger near term and long term revenue opportunities for your start-up company.  As a recent example, I was working with a start-up company that was developing a product for a consumer application.  After talking to an expert in the industry, it turned out that they believed that this same product offering, with minor modifications, could be used for commercial applications. Here, the start-up company was aware of this, but did not focus on this as a near term revenue opportunity for the company.  After a limited number of discussions, what was presented to this same start-up company was a strategic partnership that allowed for immediate nationwide penetration into the targeted commercial market with the strategic partner’s nationwide sales force.  This commercial opportunity, although not originally a near term focus of the start-up company made sense both strategically and helped with their near term marketing tactics.  So, again the business plan did not outline this opportunity for the start-up company, but the realities of the market, drove this start-up company to be open to new opportunities in the market.

A business plan should be considered a useful jumping off point for start-up companies to provide an initial path forward in addressing the market.  In reality, a business plan is out of date the day it is completed and often many of the underlying assumptions of the business plan are either incorrect or change substantially once the realities of the market hits.  Entrepreneurs need to be cognizant of this and appropriately adjust to these same market realities by ferreting out unforeseen product costs, understanding their real operations, and being open to new market opportunities.  By doing this you will be able to navigate through the realities of the market on your road to success.

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.

August 2, 2010 Posted by | Venture Capital | , , , , , , | Leave a comment

Investors Don’t Fund Your Start-up Only to Have You to Figure Out What to do Next

Most entrepreneurs come to investors with an “idea” or “concept”, looking to receive investor’s monies only to allow them to figure out what to do next.    This is a very misplaced approach and is guaranteed to turn investors off.  With this approach, more often than not, you will get an immediate rejection with no explanation. Why? Because, investors are very busy and only interested in only the most well developed and presented investment opportunities. Something that is not well thought through and or properly presented will not get their attention or their monies.  This should be understood by all entrepreneurs that approach angel investors or venture capitalists. As such, investors don’t fund start-up companies only to have you figure out what to do next.  They fund you to execute a well thought through plan.  To accomplish this, you need to do your planning, develop a business plan and be ready to execute.  If you do this, you will greatly improve your potential for not only getting potential investor’s attention, and you will also increase your chances of receiving funding from these same investors.

Do Your Planning

Doing planning is the most important and time consuming, arduous task an entrepreneur needs to take on.  This is something you need to do early, as waiting to do your appropriate planning will only send your start-up company in the wrong direction and require you start over, causing you to lose valuable time.  Planning is difficult for most entrepreneurs, as more often than not they want to start writing their business plan day one.  This is a huge mistake, because if you do not have the appropriate information, at your disposal, you will not come to the right conclusions regarding how, and in what direction to move your start-up company and its technology, product or service offering forward. Therefore, take up to two months to properly research and secure the appropriate information that will help you develop a well thought through business plan.  This includes:

  • Determining your proprietary technology, product or service offering,
  • Identifying the general trends and strategic opportunistic needs of the market,
  • Identifying a set of target markets and their growth projections,
  • Analyzing the competitors within your targeted markets,
  • Developing basic market entry strategy and tactics, and
  • Understanding the basic financial model of the targeted markets.

By spending the appropriate amount of time doing your planning up front, you will develop a vision, focus, and direction for your start-up company. On the other hand, if you expect potential investors to fund you to do this early planning work, you will be sadly disappointed.

Develop a Business Plan

After you have spent the time to appropriately plan the early stages of your start-up company, you need to put together a well thought through business plan that takes in all of this planning information. This plan will be much easier to write at this point because you have taken the time to secure the necessary information.  Now, you just need to take the necessary time to put it on paper.  This is also a very big task, and it again will take a significant amount of time and effort. But, if and until, you put your business plan on paper, your start-up company will remain “in the ether”.  As, it is only when you begin to put your business plan on paper do you have the ability to identify issues, holes and other items that need to be addressed to complete your business plan. So, take the necessary time to develop a will presented and thought through business plan, you will learn a lot in the process and many times provide yourself will essential insights on how and in which direction to move your start-up company forward.  Finally, ignore those individuals that tell you that today investors do not read business plans.  While, in some cases, this may be true, it should be remembered the writing and development of a well thought thorough business plan will again provide you with the necessary insights that will provide your start-up company with significant advantages when you finally go to market.  Remember, take the time to develop a well thought through business plan it will serve you well when you go to secure funding from potential investors.

Be Ready To Execute

By the time you begin to talk with investors, you should be ready to execute your business plan. To be ready for this, you need to have:

  • Identified and talked with your target customers,
  • Secured a well seasoned “A- level” executive team,
  • Secured relationships with any necessary strategic partners, and
  • Developed a well thought through and developed go to market strategy and associated tactics.

By doing this you will have identified many, if not most of the issues that could possibly cause your start-up company to stumble out of the gate.  You will also have put your start-up company in a strong competitive position which will allow you to execute and rapidly secure customers and revenue. This will impress your potential investors and get their attention.  Remember, investors do not fund you to figure things out, they fund you to execute.

Most entrepreneurs come to investors with an “idea” or “concept”, only looking to receive investor’s monies to allow them to figure out what to do next.    This is a very misplaced approach and is guaranteed to turn investors off.  By taking the time up front and putting the effort to do your planning, develop a business plan, and being ready to execute you will impress your investors and more than likely get their attention.  In addition, by doing so, you are not expecting investors to fund you to figure things out, but putting your start-up company in the best position to receive funding from potential investors.  So, get in there and do the necessary work up front, it will serve you well when you begin talking with potential 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.

March 8, 2010 Posted by | Venture Capital | , , , , , , , , | Leave a comment

The Business Planning Process: Large Companies vs. Start-up Companies

During the early stages of development, many start-up companies overlook the business planning process. More often than not these same companies opt to focus on their proprietary technology offering as a basis for success in the market. This “technology-oriented” approach to addressing the market may not result in ultimate success for the company or maximize the return on investment for the shareholders.

The Business Planning Process

Business planning is a process. If your company does not engage in a well defined business planning process, many things can happen. But more often than not, the overall result is that your company will not achieve the financial success desired, because you do not know or understand where your company is going, how the market is changing, or how to appropriately respond to these changes.

Many times, companies that do not participate in the business planning process go after everything and anything that is in front of them. They do not have a clear roadmap to define where they are going, and why they will be successful in a given market or sub-market segment. In many cases, these same companies that do not engage in a diligent business planning process will ultimately end up investing in multiple, non-competitive products, addressing disparate markets, and consuming their limited resources. By doing this, these same companies end up foregoing any possibility of securing a strong, competitive position in their target markets, and ultimately will not be successful. In the end, they will not maximize their return on investment for their shareholders, either private or public.

To skip the business planning process means that these companies are willing to gamble with their shareholder’s money, and in many cases, angel or venture capitalists’ money, with no roadmap to success. It should also be mentioned that participating in the business planning process does not guarantee success in the market. After all, the day a business plan is written, it is obsolete. But, what it does is provide your company with is a roadmap to determine your next steps toward moving forward in the development of your technology, product, or service offering, to meet the market requirements, and obtain a sustainable, competitive advantage in an ever-changing environment.

Large Companies vs. Start-up Companies

Business planning for large, established companies versus start-up companies is not substantially different. Traditionally, the only real underlying difference for these two entities was the availability of human resources and market research sources. Today, and for approximately the last 15 years, the Internet has been a great equalizer in the business planning process for these two types of entities. Now, there are some exceptions regarding access to expensive market research reports, but through diligent research and time, start-up companies can develop business planning documents and business plans, equal in quality and content, to that of large corporations. In many cases, due to the ultimate importance of these planning documents to the overall success of the company, these same start-ups generate much better business plans. In addition, the advent of the Internet has allowed both large, established corporations and small start-ups to expedite their business planning process due to the relative ease of access to information.

Start-up Company Business Planning

In many cases in start-up companies and even in medium-sized or large companies, the business planning process is not well defined, or in many cases, even non-existent. This can be for many reasons, most often of which is due to lack of experience of having participated in such a business planning process in the past, and therefore, there is a lack of understanding of the merits of such a business planning process. I have worked for multiple start-up companies developing high-technology products, services, and technologies targeted for specific markets or market-sub-segments. In all cases, whether defining the next generation product’s functions and capabilities or determining competitive positioning within the market and ultimate revenue flow and return on investment, I engaged in a disciplined approach to the business planning process. This approach has allowed me to successfully raise angel and venture capital and to position these same start-up companies as strong participants in their targeted markets or market sub-segments.

Many times, start-up companies are only interested in focusing on their technology, product, or service offering. That is, they have an internal, “technology-oriented” focus that they believe will provide them with ultimate success in the market. This is a very narrow and uninformed approach to addressing the market, and generally does not provide a successful path forward. In working with start-up companies, my goal is always to move these same internally focused, “technology-oriented” companies to externally focused, “market-oriented” companies. This approach ultimately provides these same start-up companies a much higher probability of success in the market.

This “market-oriented” approach to addressing the needs of market for start-up companies begins with the business planning process. Inevitably, each time I begin working with start-up companies there are many skeptics, from the CEO all the way down to the engineering manager(s). They often firmly believe that they have the technology, product, or service offering that will provide them success in the market. Many times, these same skeptics cannot even define their target markets, let alone their target customers.

In addition, whether initially I thoroughly understand all aspects of the start-up company’s technology, product, or service offering is irrelevant. What is important is that through the business planning process, and ultimately the generation of the business plan, that I work to determine the market dynamics that drive the product features and capabilities that are required for the start-up company to be successful in the market. Often, through the business planning process, I identify multiple market segments or sub-segments that were not originally on the start-up company’s radar screen and that will ultimately provide for a much higher probability of success than originally anticipated. Also, it is through this business planning process that the start-up is able to determine and articulate their long-term and defensible competitive position in the market.

Therefore, as outlined, the business planning process is as important for large, established companies as it is for small start-up companies. Ultimately, it is this business planning process and not the end result, the business plan that determines a company’s technology, product, or service offering’s success in the market.

Same Process, Different Audience

I have developed business plans for large corporations and medium-sized corporations, and angel or venture capital-based start-ups companies. The thing that is common to all of these entities is that the business planning process is the same! Some people may believe that it is different for these various types of entities, but it is not. The truth is that if you do not do your homework, you have very little chance of being successful no matter what the size of your company. The business planning process does not differ due to the amount of resources available, the underlying technology, product, or service offering being developed, or your company’s current competitive position in the market.

What differs in the business planning process, between these two entities, is the ultimate target audience, including:
• Large Corporations: Corporate investment committees,
• Start-up Companies: Angel investors, venture capitalists, etc.

These different audiences, I have found, can be friendly or hostile. Therefore, during the business planning process, one must be very careful to develop all aspects of your technology, product, or service offering so that you are ready for all questions, comments, and underlying agendas within your target audience. It may be that the underlying purpose of your target audience is different than what you expect. Or it may be that individuals within your audience relate to the different aspects of the business planning process and your technology, product or service offering according to their background, experience, and current corporate concerns. But, the truth is that for each entity, big or small, the business planning process remains essentially the same. And in the final analysis, it is the marketing or business development person, team, or group that has spent the time to cover all aspects of business planning for their technology, product, or service offering that will best serve their target audience.

The bottom line is that through the business planning process, both large corporations and start-up companies have the same objective – that is, to maximize the return on investment of stockholders.

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.

March 2, 2009 Posted by | Business Planning, Venture Capital | , , , | 2 Comments