Robert Ochtel’s Blog

An Experienced Approach to Venture Funding

First Time CEOs Must Continue to Learn to Become Functionally Autonomous on the Road to Building a Successful Start-up Company

Many first time CEOs of start-up companies do not have a broad background or skill set.  More often than not, these same first time CEO’s have spent their careers in a job function that has had a specific focus, including, engineering, marketing, sales, etc.  In addition to this, often these same first time CEOs have worked their whole careers in a large corporate environment where other individuals, within specific niche functions of the organization (e.g., Finance, Contracts, etc.), have had responsibility for tasks not germane to their specific job function.  This “cocoon” type functional existence, within a large organization, has not only limited one’s skill set development, but hurt their ability to function autonomously as dictated in the start-up company environment. In order to function as the CEO of a start-up company, an entrepreneur needs to be able to see the whole picture.  This includes understanding the details across all functional disciplines and being able to make important, sound decisions on issues that are not germane to their backgrounds. This requires these same individuals to continue to learn and grow in order to build a successful start-up company.   In what follows is a short discussion regarding the requirements of first time CEOs learning to become functionally autonomous on the road to building a successful start-up company.

Understand Financial Statements

Most first time CEOs lack any understanding of financial statements. This is truly a hindrance to budding entrepreneurs. Why, because venture funding is driven by financial experts and money managers.  Financial statements are their language of communications.  As a first time CEO, if you do not understand financial statements you will not be able to talk intelligently to angel investors or venture capitalists.  This will be a red flag and more than likely hurt your chances of securing venture funding. So in order to interface with the financial community, as a first time CEO you need to take the time to know and understand financial statements including the balance sheet, income statement and statement of cash flows. You not only need to learn these statements and how they interact, but you need to understand the specifics of your own start-up company’s financial statements.  More often than not world be, first-time CEO’s do not know the details of their own start-up company’s financial statements.  This will not impress your potential investors. So during the process of writing your business plan take the time to understand financial statement. It will broaden your skill set and allow you to make more effective decisions for your start-up company.

Developing a Critical Eye on Contracts

Contracts are another area where many first time CEOs do not have any background or experience. This again will hurt both their short term and long term success in building a successful start-up company. Why, because all formal business relationships require contracts.  In the corporate environment, contracts and this associated responsibility is often left to a legal team of corporate lawyers. But, as a first time CEO of your start-up company, if you do not understand the basics of “good” contract structure and what constitutes acceptable terms and conditions for specific legal relationships (e.g., employee stock options, venture funding, strategic partnerships, sales channels, technology licensing, etc.) you will be at a loss in determining if a legal contract is beneficial or detrimental to your own start-up company.  So take the time to review and learn all you can with regard specific types of contracts for various legal relationships.  Your start-up company’s lawyer can provide you with a basic contract structure, but all deals are different, and it is the details of the individual contract that require a critical eye in order to make them successful for your start-up company.  So, do not depend solely on your legal counsel for all of your legal contracts and legal issues. They all have good intensions, but remember your legal counsel should be used as the final “reviewer” of a given legal contract, and not solely responsible for all of the critical terms and conditions of a given contract.  As the CEO of your start-up company, you need to take the lead and drive all critical content into any given legal contract.  If you do not, you will not end up with a contract that serves your needs and will not ultimately benefit your start-up company.  Therefore, as a first time entrepreneur, you need to broaden your skill set to understand the basics of contract law; it will help facilitate the success of your start-up company.

Understand All Corporate Operational Functions

With a narrow background (e.g., engineering, sales, finance, etc.), most first time CEOs know very little regarding the all of the other corporate operational functions of a start-up organization. This again will be detrimental to your ability to function as an effective CEO. Why, because a successful start-up company must have all corporate operational functions running smoothly and within the defined parameters of your given industry.  So, as a first time entrepreneur you need to take the time to understand all of the details of the various operational functions within your organization.  You should not rely solely on your functional heads (e.g., Vice President of Engineering, etc.) to be the first and last say in important operational decisions.  The buck stops with the CEO. If you do not understand the details of each of the operational functions of your organization you will again not be able to ask the hard questions, make important trade-offs, and ultimately make the prudent, effective decisions that are required to make your start-up company successful.  So, as a first time CEO, learn the details of all the operational functions. This will require you to:

  • Review the corporate financials and understand the details,
  • Sit in on engineering development meetings,
  • Go on sales calls to visit with customers,
  • Go over market strategy with you business development team,
  • Review all contracts with your legal counsel,
  • Other

By doing the work to become an informed and autonomous CEO, this will allow you to make better decisions and help put your start-up company on the path to success.

Many first time entrepreneurs have very narrow backgrounds and know little about the details of running a successful start-up company.  To enhance their skills and broaden their backgrounds they need to continue to learn in order to function autonomously and make informed decisions in steering their start-up companies to success in the market.  This includes, understanding financial statements, developing a critical eye for contracts, understanding the details of all of the operational functions within their organization.  Anything less will hurt your chances of success in the market.  On the other hand, by taking the initiative to continually learn and broaden you skill set and background you will substantially increase your chances of becoming an effective and successful CEO of 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.

July 5, 2010 Posted by | Venture Capital | , , , , , , | 3 Comments

Contract Negotiations Require Three Things to be Successful

Start-up companies often look to partner with third party companies to help them create become a successful company and at the same time create a presence in the market.  Whether it is a strategic technology partnership, a sales channel development relationship, or a key customer, all of these potential engagements will require contract negotiations to ultimately secure the relationship. As such, it is often at the contract discussion point of the relationship when one party tries to negotiate an advantage over the second party, and is where these same potential relationships often break down.  This jockeying for the upper hand does not work in any contract negotiations and often results in one or both parties walking away from the contract negotiations. In the end, both parties lose, since neither party will then have the ability to use their unique technologies, products, or services to bring value to the relationship and create a unique position that brings ultimate economic benefit to the parties involved.  This resultant breakdown in contract negotiations can often be avoided if both parties are honest, respectful and negotiate in “good faith” during their contract discussions.  The following addresses the importance of these three important tenants of successful contract negotiations.   

Honesty is the Best Policy

As in any personal or professional relationship, honesty is the best policy. If either party is not honest, then the other party cannot “trust” the first party and hence there is no solid basis for developing a strong relationship.  This is especially true for start-up companies.  Often entrepreneurs, in an effort to close an important strategic deal for their start-up company, present themselves, their company or their technology, product or service offering in a manner that does not always represent their true status of their underlying technology, development progress or competitive advantage in the market.  This intentional misrepresentation can cause problems down the road and may end up killing any contract negotiations.  In addition, if the other party finds out that your start-up company has not been honest regarding its representation, then all bets are off and often any contract negotiations will incur irreparable damage.  As such, one party will walk away, because their confidence in their potential partnership has been undermined.  So, as a start-up company it is best to be totally honest during contract negotiations, as the risk associated with the misrepresentation of you, your  company and its technology, products or service offering will often result in severed contract negotiations and a failed relationship.

All Successful Relationships Require Respect

All successful relationships require respect. This is especially true regarding the relationship between start-up companies and their potential partners. If this respect does not exist on the behalf of both parties, then there is no real reason to enter into a relationship. One party may respect the other company’s technology prowess and the other company may respect the other company’s marketing genius. In the end, both parties have to believe that they are engaging with a company that they respect and ultimately brings a technology, product, or service offering to the table that results in a strong competitive advantage in the market.  This mutual level of respect is required and is the true essence of a successful relationship. So, as a start-up company engaging in a number of potential relationships, you need to be sure that you engage with companies that earn your respect and bring significant value to your potential relationship.  

Always Negotiation in “Good Faith”

Negotiation is an art.  It also can ultimately be the downfall in contract discussions.  From the beginning of contract negotiations, both parties must enter in to all associated discussions in “good faith”.  This means that both parties must be negotiating to develop a mutually beneficial relationship, in which in the end both parties will ultimately benefit as a result of the relationship.  This necessity to negotiate in good faith will bring both parties to the table weighing not only the benefits of entering into such a relationship, but the downside of not securing a relationship. These “good faith” negotiations should not be clouded by jockeying for an advantage, misrepresenting the truth, or unfair legal contracts. No, negotiating in “good faith” is exactly what it means – negotiating with a potential partner such that both parties will ultimately benefit from the final relationship.  By negotiating in good faith, you will gain the respect of your partners and ultimately end up with a stronger contract and relationship.

Contact negotiations can be a long and arduous task.  All start-up companies that seek to enter in to a mutually beneficial relationship with a third party will need to enter in to contract negotiations with this same third party.  To help the process along, run smoothly, and in the end ultimately be successful, during negotiations, both parties need to be honest, respectful and negotiate in “good faith”.  By taking this approach to all of your contract negotiations you will ultimately end up with a much stronger relationship and a contract that is mutually beneficial to both parties.

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 24, 2010 Posted by | Venture Capital | , , , , , , | Leave a comment

Entrepreneurs, Get Your House in Order Before You Present to Investors

Many start-up companies go through one or more incarnations before they are ready to engage with potential investors.  As such, more often than not, a tremendous amount of history exists that may have detrimental effects on your start-up company and its ability to secure funding from these same investors. Often, with changes in corporate vision and strategy, redirection in product focus and new executive teams along the way, there exist significant amounts of baggage that can have an adverse affect on how potential investors view your start-up company.  In order to make sure you put your best foot forward, you need to make sure that you have your house in order before you engage with investors. To accomplish this, you should review all of your start-up company’s outstanding contracts, update your capitalization structure, and secure a committed team.   If you do this, you can avoid any potential missteps with your investors and at the same time increase your chances of receiving funding.

Review Your Contracts

If your start-up has been through one or more incarnations, more often than not there exist old contracts that need to be reviewed and then determined if they are still applicable to your start-up company, its vision and product offerings.  Often, old contracts were based on completely different sets of assumptions and circumstances and must be voided or dissolved appropriately. If not disposed of properly, these outstanding contracts can have a detrimental effect on your company moving forward.  In some cases, these same contracts need to be renegotiated, since at the present time, your start-up company may have a completely new business model that significantly changes the role or importance of a contractor and their technology, product or service offerings.  Accordingly, many times, going back and renegotiating a contract can be a difficult and time consuming task.  So, before you open up a can of worms, you should spend the time to thoroughly review the contract to see if you can live with it as originally structured. If you can, keep the contract as is.  If you cannot, you need to go back and properly explain to the contracted party, that there have been significant changes in the direction of the company and you need to either renegotiate the contract.  If they are not willing to renegotiate, you need to find other sources for their technology, product or service offerings and immediately cancel the contract.  It should be noted that often when you try to renegotiate a contract, the contractor will have decided that the original contract was not fair to them and try to get a much better deal.  If this is the case, you need to understand if you can live with the updated demands.  If you cannot, then cancel the contract and move on.  Remember, you investors will want to review all of your contracts and old contracts that could have an adverse effect on your start-up company and have not been updated or voided will be an issue with your potential investors.

Update Your Capitalization Structure

Many times a start-up company that has been through several incarnations will need to be recapitalized to properly reflect the new debt and equity structure of the company and its present executive team.  Often old, executive team members and corporate structures will need to be modified, in order to move your start-up company forward. This is one of the most difficult tasks to accomplish, as old executive team members will want to retain their equity ownership and new executive team members will want their “fair” share of equity for their anticipated future contributions to the company.  So, you need to take a look at the whole picture, including previous contributions by old executive team members and their importance to your start-up company at the present point in time, and then come up with a new capitalization structure that works for all parties involved.  Many times, this includes changing the equity ownership of old team members.  In addition, you need to address any debt on the books and determine, if this debt is associated with any significant and present aspect(s) of your start-up company’s business moving forward.  If so, you will have to live with it, and if not you need to try to get this debt off the books through negotiations and/or voiding of any associated contracts. Remember, investors do not invest in your start-up company to pay off old debts.  So, if you can remove any old debt, do so, as it will help your start-up company moving forward.  Finally, in some instances, a start-up company with a long history, minor changes in the capitalization structure will not improve the situation.  In this case it is better to take your start-up company into bankruptcy and restart the company with a new capitalization structure.  Although not recommended, sometimes this is unavoidable. 

Secure a Committed Team

As often stated, investors invest in the “team” and not the “product”.  As such, for a start-up company with a history of several incarnations, often original team members, at the present time, do not add any significant value to your start-up company.  As such, these team members need to be removed and replace with new committed team members that will add significant value to the new direction of your start-up company. If you do not do this, you will end up with a bloated team and several non-contributing team members. This will de-motivate your contributing executive team members and bring the performance level of your start-up down.  Remember, it is better to clean up your start-up company’s executive team before you engage with investors. Many times these conversations are difficult, but necessary.  Accordingly, you need to have the best executive team you can possibly have and get their commitment to move your start-up company forward to success in the market before you talk to investors.  If you do not, you will not be successful in securing funding from potential investors.

A start-up company that goes through several incarnations often has a significant amount of history that can adversely affect the company moving forward.  To avoid this, and before you begin talking to potential investors, you much get your house in order. This includes reviewing your contracts, updating your capitalization structure and having a committed team.  If you do this before you engage with investors you will greatly improve your chances of securing funding from these same 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 15, 2010 Posted by | Venture Capital | , , , , , , , , , , | Leave a comment