Robert Ochtel’s Blog

An Experienced Approach to Venture Funding

Entrepreneurs, Trade Shows Can Be Useful Events to Move Your Start-up Company Forward

As the entrepreneur of a start-up company you need to take advantage of anything that will help move your company forward.  Trade shows are focused events that often only take place once a year.  Generally, these events bring together a broad set of senior management and other individuals with a common interest in technologies, products or services for a specific industry.  As a start-up company looking to get your name out there, you need leverage these trade show events to your advantage. To do this, as a start-up company with limited funds, it is most cost effective to just attend these events as a “registered attendee”. This does not cost much money and will provide your start-up company with the maximum amount of exposure for a limited amount of money. This article focuses on some of the things to consider and do when attending a trade show.  If done properly trade shows can be useful events to move your start-up company forward.

Focus on the Correct Trade Show Events

As part of your business planning process and ultimately outlined in your business plan, you need to focus on attending a limited number of trade shows each year.  If you are an industry insider you will know which trade shows that are important to your targeted industry.  If you are not, talk to your customers and ask them which trade shows they regularly attend on an annual basis.  All trade shows, even within the same industry, have different focuses, and as such, some trade shows, although similar in theme, are much more important and effective to attend than others.  Unless you have attended a specific trade show, you will not really know which events are more valuable to your start-up company and its technology, product or service offering.  Therefore, it is very important to not waste your time and money on trade show events that will not bring significant value and result in a productive experience for you and your start-up company. 

As a minimum, you should plan on attending three to four trade shows a year.  This will provide you with a broad exposure to what is going on within your industry and will also allow you to consider which trade show you will need to exhibit at in the future.  So, as an entrepreneur, you need to focus on the correct trade shows that will bring the most value to your start-up company. Generally, these are trade shows that are focused on your end customer base and at the same time are closest to the end market application that you are targeting as a vendor.  Doing this, will allow you to focus only the necessary trade shows that will help move your start-up company forward.

Set up Your Important Meetings Ahead of Time

One of the keys to having a successful trade show is to set up your meetings with important current and potential customers and possible strategic partners a head of time.  This is very important, as with most industry focused trade shows, they are widely attended by the senior management of virtually all customers and vendors that are important to that particular industry.  Therefore, you have the ability to meet with all of your potential customers and many possible strategic partners, and show them your technology, product or service offering by only having to travel to a single event. Therefore, you need to necessarily take advantage of this opportunity.  So, several weeks to a month ahead of time you need to get on the phone with your current and potential customers and set up times to meet with their senior management at the trade show.  These meetings generally last an hour and are often where start-up companies can meet “face-to-face” with their key senior management of their customers for the first time.  These events and associated meetings are often very productive for both parties and can be the beginning of a long term relationship. 

The same is true for potential strategic partners.  If you are aware of a company that has a technology, product or service offering that can complement or supplement your start-up company’s product offering, it is important to set up a meeting with the appropriate individual within senior management from this company so that you can meet them and properly explain the potential value and synergies of your company’s working together.  Therefore, for each trade show you attend, it is very important to get on the phone and set up as many potential meetings as possible. This will provide for a productive event and allow you to move your start-up company forward.  

Prepare and Attack the Trade Show Floor

As a start-up company, attending a trade show, it is important to set aside the appropriate amount of time to walk the trade show floor.  This walking the floor of the trade show should not be a random event.  To take the most advantage of your limited time available at the event you need to first prepare and then attack the trade show floor.  To do this, after you register, you need to sit down and spend the appropriate amount of time to go over the trade show guide and exhibitor map and identify those exhibitor booths that you would like to visit as potential customers and strategic partners. In addition, you need to identify all of your competitors and visit their booths to better understand what they are showing, and to pick up as much G-2 that you can on their technology, products or service offerings.  By diligently mapping out your targeted customers, strategic partners and competitors, you can then put together an attack plan to make the best use of your time while you are on the trade show floor.  Also, remember, it is very important meet and talk with the appropriate senior management at your targeted companies of interest. This should also include your competitors.  If these individuals are not available, get their card and contact information.  This will be invaluable for follow-up to the trade show and will allow you to contact them as appropriate after the event.  Therefore, it is very important to make the best use of your time while you are on the trade show floor by first planning and then attacking the floor to the best advantage of your start-up company.    

Trade shows can be very useful events to help move your start-up company forward. By focusing on the correct trade shows, setting up your important meetings ahead of time, and properly planning and attacking the trade show floor, even with a limited budget, you can make the most of these events. This can include meeting and engaging the appropriate potential customers, strategic partners and competitors.  Therefore, as an entrepreneur, you need to identify and attend a limited number of targeted trade show events each year.  By doing so, you will have the opportunity to identify and then develop and nurture the necessary relationships to move your start-up company forward in the future.

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.

January 11, 2010 Posted by | Venture Capital | , , , | Leave a comment

ROI versus Market Traction – Which is the Real Differentiator to Potential Investors?

Most entrepreneurs realize that their potential investors require a substantial return on investment (ROI) for the money they put at risk by investing in their start-up company. This is a given, and even to the most naive entrepreneur this makes sense.  On the other hand, what these same entrepreneurs do not often realize that it is market traction and not ROI that is the real differentiator for potential investors.  Gaining market traction early can definitively make the difference between a successful start-up company and one that languishes on and on, continuing to spend investor’s monies, with no real return in sight.  This article addresses some of the reasons why market traction is the real differentiator for your potential investors.

Is Developing a ROI for Your Company’s Sufficient to Secure Funding?

As part of promoting your start-up company to prospective investors, you need to determine what the potential financial return on investment is for these same investors.  This concept, although not foreign to most potential entrepreneurs, does cause pause for most first time entrepreneurs, as they rarely understand corporate financials and often leave this task for last, expending little effort to develop representative, defendable financial statements.   In general, it is well understood that to get the attention of potential venture investors it is necessary to present a return on investment opportunity that provides at least 5 to 10 times return on their invested capital in a 3 to 5 year period, respectively.  These numbers reflect expected venture-based financial returns and should be only used as a reference point, as venture investors seldom receive these types of returns on their investments. Some venture investors expect more, some will take less, but the key here is to develop financial pro forma statements that necessarily meet the expected returns of potential investors and at the same time are defendable.  Therefore, developing a ROI that represents these traditional industry accepted investment return norms is necessary for any entrepreneur expecting to get the attention of potential investors, but on the other hand your start-up company’s ROI may not be sufficient to secure an investment from these same investors. The reason for this is that these expected financial returns are only one baseline component for opening the door to secure investors attention and in general are not considered a real differentiator when considering the various investment opportunities that are available to your potential investors.

 ROI Projections May Not Stand-up to Financial Due Diligence?

As stated, ROI projections are expected by all potential investors when considering any start-up company as an investment opportunity.  Depending on the entrepreneur’s research and diligence in putting together their ROI projections, many times these same financial pro forma statements will not stand up to the scrutiny of a sophisticated investor.  Too often the financial projections, put together by inexperienced entrepreneurs, are unrealistic in their market penetration objectives, too optimistic in their gross margin projections, and more often than not, do not represent typical industry standards when compared to the market leaders in the same given market space. As an entrepreneur, you must realize, as a matter of first priority, by potential investors, that your financial pro forma statements will be subjected to a significant amount of financial scrutiny by these same sophisticated venture investors.  This should cause you to pause, as by not passing this initial financial review bar can make the difference between receiving a pass from potential investors or receiving an invitation for an initial meeting.

 It should be also noted that during their financial due diligence process most investors discount an entrepreneur’s start-up company financial projections by at least 40%, from the presented projected returns.  This discounting reflects their expected financial risk, the market risk, development risk, etc.  Therefore, your financial pro forma statements, as presented, are often deemed “rudimentary projections” by these same investors, and they will rely on their own financial management expertise and financial models to determine the potential expected returns for your start-up company. This financial due diligence analysis may cause your pro forma statement to not pass the smell test for these same investors. Therefore, again ROI statements are only used as one component in considering your start-up company as a potential investment opportunity, and more often than not are not a true differentiator.

Market Traction is a Key Differentiator for Potential Investors

Unlike financial projections that are based on an underlying set of assumptions that can be arguably acceptable or unacceptable to your potential investors, securing market traction with a customer base is one item that gets investors attention.  The fact that you have secured a paying customer or multiple paying customers gives investors some hard evidence, based on the realities of the market, in which to make an investment decision.  On the other hand, only relying on financial projections, based on a given set of assumptions, requires these same potential investors to take a leap of faith in the investment decision making process.  By securing customers early on, this gives your potential investors much more assurance that there is demand for your technology, product or service offering in the market and substantially reduces the investment risk, if only in their minds.  Therefore, as an entrepreneur, looking to secure funding for your start-up company, the one key differentiator that will set you apart from the competition is securing a customer or multiple customers early on in the funding process.    

 Market Traction Proves You Know the Market

Securing market traction early proves one thing to your potential investors – that you know the market.  Unlike financial ROI projections, securing paying customers is not based on assumptions, it is based on real interaction with your target customer base and can be used as a lynch pin to secure funding from venture investors.  This shows your investors that there is “perceived” value for your start-up company’s technology, product or service offering in the market.  By securing paying customers early, you have proved to these same investors, at a first level due diligence that you have at least indentified a market “need” and/or solved a “problem” in the market, and at the same time, customers are willing to purchase your start-up company’s same product offering. Determining the long term market trends and whether your technology, product or service offering provides a sustainable competitive advantage in the market must still be reviewed by your investors, but by securing customers early you have proven that your technology, product or service offering, as a minimum addresses a market need and can then be used as basis to secure additional market traction and expand your customer base.

Market Traction Necessarily Facilitates Your Start-up Company’s ROI

Securing market traction also necessarily facilitates your start-up company’s return on investment projections.  More often than not, start-up companies are unable to secure paying customers as early on as originally projected in their financial pro forma statements.  Given that ROI projections are all about generating revenue early in time, by securing market traction with your technology, product or service offering you are necessarily facilitating your start-up company’s ROI projections.  This is essential and a true differentiator, as having the ability to sustain your start-up company’s projected financial returns, in a timely manner, is the most important risk consideration for your potential investors.  Too often start-up companies get caught in the “Catch 22” in which they need to secure customers, but the market has not developed – both of which will have a detrimental effect on their financial projections.  Therefore, by securing customers early you can gain the necessary market traction in which to validate your start-up company’s projected financial returns and secure funding from investors. This is a true differentiator for your potential investors and substantially reduces investment risk.

As discussed, developing ROI financial pro forma statements are necessary to present your start-up company to potential venture investors.  But, due to the nature of financial pro forma statements, they may not sufficient to secure funding from these same venture investors.  On the other hand, securing paying customers early and proving you can gain market traction is a key differentiator for investors as it validates to these same investors that you know the market.  At the same time, securing customers facilitates your start-up company’s projected ROI and substantially reduces the investment risk for your potential investors. Therefore, if you want to get the attention of venture investors and differentiate your start-up company from the crowd, prove you can get early market traction with your customer base.

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 http://www.carlsbadpublishing.com

July 6, 2009 Posted by | Customers, Market Traction, Venture Capital, venture finance, Venture Funding | , , , , , | 2 Comments