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.

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

Entrepreneurs, What is Your Start-up Company’s “Value-Added” Proposition?

Simple questions from venture capitalists can be the most difficult to answer for entrepreneurs. Why, because they often require both a strategic vision and specific insights to the long-term nature of all aspects of the market, your competitors, and your customers.  This requirement often eludes entrepreneurs as more often than not they are tactically focused and do not really have a strategic vision for their start-up company and the long term business opportunity their investment represents to their customers and to these same investors.  Therefore, when asked “What is the value-added proposition of your start-up company?” they often stumble and in some instances cannot answer this most simple of probing questions.  Why, because they have not taken the time to really evaluate what they are trying to offer the market and their end customers. That is, “Why are customers going to buy your product?”  As an entrepreneur, there are four tenants that you need to address, which will provide you the necessary insight to address the issue of defining the “value-added” proposition for your start-up company.  This article addresses each of these tenants and their ultimate importance to the potential success of your start-up company’s product offering to the market and its end-customers.

What are the Strategic Opportunistic Needs of the Market?

When developing a product offering you need to start from the markets.  Specifically, you need to address the “strategic opportunistic needs” of the market.  That is, what is the “problem” or “need” you are solving.  If there is no “problem” or “need” to solve, then there is no particular reason for customers to buy your product.  Whether it is lower costs, lower power consumption, higher efficiencies, or better service, etc., there needs to be a strategic opportunistic customer need that you are addressing with your start-up company’s product offering. Therefore, to determine your value-added proposition to the market place and the end customer, you need to definitively identify and solve a market or customer need that is currently not being addressed in the market.  The basis of this strategic opportunistic requirement needs to be based on a real assessment of the customers and the market. Anything less, will not cut it, as customers are very discerning, and if they do not see a definitive need to buy your technology, product or service offer they won’t.  Therefore, take the time to define the needs of the market place. Write these needs down on paper, and verify them by talking to a number of potential customers. You will then be able to appropriately define the “strategic opportunistic needs” of the market and one important tenant of the value-added proposition of your product offering.

 Do You Have a Long-Term Competitive Advantage?

Investors need to know that as a start-up company that you have a long-term competitive advantage in the market. This is usually accomplished through the development and subsequent patenting of certain intellectual property as it relates to your start-up company’s technology, product or service offering. This intellectual property, as defined, needs to differentiate your start-up company’s product offering in the market, and at the same time provides significant value to the long-term competitiveness of your technology, product or service offering.  Remember, investors are looking to create long term value, so that they can ultimately cash-in by either selling your company to a third party or going public (not too often these days).  Therefore, you need to create and protect your value-added proposition with patented intellectual property.  Doing so, will provide your start-up company with a long-term sustainable competitive advantage and allow your investors to earn substantial returns on their investment.

What is the Competitive Positioning of Your Start-up Company?

Do you know the competitive position of your start-up company? More often than not, entrepreneurs do not really understand the value of creating a “unique” competitive position in the market.  By creating this competitive position in the market you are differentiating your start-up company in the market and at the same time creating a value-added proposition to your customer base.  Whether it is a lower cost solution, or a unique service offering, you need position your start-up company and its technology, product or service offering as differentiated from your competitors. Apple does this well with their entire line of product offerings.  By offering unique operating systems and value-added user interfaces, they provide a differentiated end-user experience.  Hence, Apple has developed a “value-added” and unique competitive position in the market.  As such, they are able to charge more for their products, as the customers believe that there is value in the Apple product offerings and the overall end-user experience. Therefore, as a start-up company you need to develop a unique position in the market, such that your customers believe there is significant and unique added value in your product offerings when compared to your competitors.

How Do You Define your Start-up Company’s Product Offering?

How you define your start-up company’s product offering can add significant value to your customers and their needs. As an example, many times there is significant value to your customer base in how you deliver your product to the market.  For example, take Netflix and the movie rental industry. By developing a new delivery channel for a “generic” product offering, the home movie rental market, they have been able to provide substantial “value” to their end-customers, and at the same time differentiate themselves in the market.  Therefore, take the time to properly define your start-up company’s product offering. Make sure you are doing this in the context of developing a differentiated product offering for your target customers and the market.  This will allow you to develop a product offering that is defined by market and the end customer needs.  Solving a customer’s problem by appropriately defining your product offering to the market can be a key to adding significant value to your end customer and at the same time differentiate your product offering in the market.

Creating a “value added” proposition for your target market and its customers requires vision and specific insight to the long-term nature of all aspects of the market, your competitors, and your customers. To do this, as an entrepreneur you need to address four tenants, including: identifying the strategic opportunistic needs of the market, determining your long-term competitive advantages, developing a defendable competitive position, and determining your unique product configuration.  These items together will allow you to develop a “value added” proposition to the markets you are addressing and your end customers.  This will also provide your potential investors with the necessary insight to develop a quick understanding of potential for success of your start-up company and its product offering in the market.

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.

October 12, 2009 Posted by | Business Planning, Venture Capital, venture finance, Venture Funding | , , , , , , | 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

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

Essential Element #3: Know the Funding Community- Angel Investors vs. Venture Capitalists.

There are various funding options available to entrepreneurs. This includes self-funding as well as funding from third-party equity sources. The funding options include bootstrap, angel, venture capital, and corporate partner funding. The bullet item list below outlines these various funding sources, the funding stage, and typical associated funding ranges.

  • Founders, Friends, and Family: Pre-Seed, Seed and Start-up; $25K – $100K
  • Individual Angel Investors: Seed and Start-up; $100K – $500K
  • Angel Groups: Start-up and Early Stage; $500K – $2.0M
  • Venture Capital/Corporate Partner Funds: Early and Later Stage; $2.0M and Up

For purposes of this article we will focus on angel investor and venture capitalists.

Angel Investor vs. Venture Capital Funding

Venture capital investing is generally the most well-known type of start-up investment services available in the market. Although many entrepreneurs are aware of venture capitalists and associated venture funding, many are not aware of the process, issues, and concerns that arise when engaging with venture capitalists. As a way of an introduction, the following bullet items outline some of the basic differences between angel investors and venture capital firms.

  • Personal Background: Angel Investors: Entrepreneurs; Venture Capitalists: Money mangers
  • Money Source: Angel Investors: Own money; Venture Capitalists: Fund provider’s money
  • Firms Funded: Angel Investors: Small, early-stage; Venture Capitalists: Medium to large, Later stage
  • Amount of Investment: Angel Investors: Small; Venture Capitalists: Large
  • Due Diligence: Angel Investors: Minimal; Venture Capitalists: Extensive
  • Contract: Angel Investors: Simple (10 pages); Venture Capitalists: Comprehensive (!00 pages)
  • Monitoring of Investment: Angel Investors: Active, hands-on; Venture Capitalists: Strategic
  • Exiting of Firm: Angel Investors: Of lesser concern; Venture Capitalists: Very important
  • Rate of Return: Angel Investors: Of lesser concern; Venture Capitalists: Very important

As noted above, the underlying characteristics that delineate angel investors are much different than that of venture capital firms. This is primarily a function of nature of the organizations and background of the two types of investors. Where angel investors generally invest smaller amounts of money with the goal of facilitating the start-up company’s move to the next level of third-party investment from venture capital firms, venture firms generally invest large sums of money with the goal of cashing out in three to five years through an initial public offering (IPO) or through an acquisition by a large corporation. The following bullet items provide a comparison of the investment statistics between angel investors and institutional venture capital financing sources.

  • Funding Sources (U.S): Angel Investors: 234,000; Venture Capital Firms: 1,830
  • Annual Investments: Angel Investors: $25.6 B; Venture Capitalists: $35B
  • Total Transactions: Angel Investors: 51,000+; Venture Capitalists: 2,910
  • Seed Stage Transactions: Angel Investors: 25,000+; Venture Capitalists: 128
  • Mean Investment: Angel Investors: $500,000; Venture Capitalists: $8.9M

As noted above, statistically, angel investors focus much more on seed and early stage company funding. With over 51,000 total transactions a year, and over 25,000+ transactions in seed stage companies, entrepreneurs are in a much stronger position in receiving funding from angel investors than venture capitalists, which only funded 128 seed transactions in 2005. So, as outlined, with 234,000 independent angel investors in the US and only 1, 830 professional venture capital firms, entrepreneurs should focus their seed stage funding efforts on securing money from angel investors.

In addition, the interaction between the angel investor and the start-up company versus that of the venture capital firm and the start-up company are generally very different. Where the angel investor(s) are more nurturing and patient toward the start-up company, the relationship between venture capitalists and the start-up firm can many times be better characterized as an “adversarial” relationship based on meeting financial projections with unrealistic expectations. It has been my experience that the underlying difference between the two relationships is that many venture capitalists are MBAs from top business schools with little or no experience in developing a start-up from the ground up. They concentrate on the “should be projections” of the financial statements, as opposed to the realistic issues in developing a business. Given this difference, and the necessity of working with the venture capital community, it is highly recommended that entrepreneurs and their start-ups work with venture capitalists that have “hands-on” start-up experience. This will facilitate a much more mutually beneficial relationship between the two parties, the entrepreneur and the investor.

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.

February 9, 2009 Posted by | Venture Capital | , , , , | 1 Comment

Essential Element #2: Take Time to do Business Planning before You Jump.

More often than not start-up companies do very little product planning or basic product or market due diligence before they decide what path is best for their company. This “read, fire, aim” approach to business planning has caused many start-up companies to fail or at best restart their planning process after multiple failed efforts in meeting with investors. The old adage “you never get a second chance to make a first impression” is true – especially in the private equity funding community. More often than not, given the small, insular characteristics of the finance community, you will not get a second chance to restart your company and secure investor interest. So take time to do business planning before you jump.

Business Planning and Business Plans – What’s the Difference?

The difference between business planning and a business plan is that one is a process – business planning – and the other is the result of the business planning process – a business plan.

The Business Planning Process
Business planning is a process. Many large- and medium-sized corporations go through their business planning process on an annual basis. This process determines where they are going to spend their resources (capital equipment, human resources, etc.) in the future based on the dynamics of the market place. This annual process is sometimes very well defined, with an end date and deliverables that are provided at all different levels of management. In other cases, the business planning process is very informal and does not require the same level of due diligence. In small companies, especially start-ups, the business planning process can be non-existent. Whether well defined or informal, the objective of the business planning process is to set the direction of the corporation for the next three to five years based on the dynamics of the market place. Business planning provides a process that all levels of the organization can review and agree to, such that everyone from the lowest to the highest level of the organization is moving in the same direction.

With the stated goal of optimizing the return on investment for the corporation, and ultimately the shareholders, the business planning process is the key for successful start-up companies. By going through this business planning process, you can determine the best way to spend the company’s resources for the next three to five years. Many times, various technology, product, or service ideas or concepts do not make it through the business planning process. This is the “stated goal” of the business planning process – to weed out those technologies, products, or service offerings that do not provide a sufficiently high enough return on investment opportunity for which a company should spend its valuable resources.

The Business Plan
The business plan is the end result of a start-up company’s business planning process. The business plan is a document that delineates, in detail, the technology, product, or service offering that is being funded for the next three to five fiscal years and possibly beyond. The business plan is a single document that provides all the details of the technology, product, or service offering, from expected development costs to projected market penetration over the foreseeable period of interest to the expected financial return on investment. The business plan is often developed over a period of time and goes through multiple iterations. The end result is a “complete” document that provides all of the necessary details for a given technology, product, or service offering.

Why Both Business Planning and Business Plans are Necessary

The business planning process, and the result, the business plan, are necessary for companies to rationally determine where to spend their valuable resources, over the projected period of interest. For large corporations, the business planning process can result in the development of multiple technology, product, or service business plans. Refer to the following figure. On the other hand, for start-up companies the business planning process generally results in the development of a single business plan. Refer to the following figure.

The Business Planning Process – “Provides the Roadmap”
The business planning process is used to provide the “roadmap” for your corporation. If not done, your corporation, public or private, has no rational path forward in which to invest its resources. In addition, there is no ultimate understanding of the “topography” of the market. The result is that your corporation is walking down the road with a “blindfold” on, not knowing what to do or where to invest its resources. Even if the blindfold is taken off and there are multiple paths in which to take, your corporation does not know based on a rational planning process, which path forward will be the best for the company. There are no defined strategies or tactics that allow your company to navigate the turns or bumps in the road. In addition, there is no way to define your company and how you plan to position yourself, relative to your competitors, in the market.

The exercise of going through the business planning process and at the same time using this process as a tool in which to vet your company’s business ideas, resulting in a focused business plan does several things for your company. First, this process allows all business concepts and ideas to be reviewed on a level playing field. This gives each business idea and resulting business plan the ability to be presented and evaluated on its own merits. Second, this process provides the ability for the company to review each business plan on its investment requirements and return on investment. This provides a financial basis in which to evaluate all business plans. Finally, once completed it provides a corporate-level vetted roadmap in which your company can move forward to introducing its new technologies, products, or services into the market.

The Business Plan – “Sets the Bar”
The business plan “sets the bar” in which a corporation measures itself and its overall performance. Based on a business plan or multiple business plans, a corporation then has a way to determine if it is performing up to the its own projected goals and standards, as well as the generally accepted standards that define a successful company in the industry in which they are participating. These can include, but are not limited to:
• Revenue growth objectives,
• Market share gains,
• Gross margin targets,
• Sales and marketing objectives,
• Customer traction goals,
• Operational margin goals,
• Earnings growth objectives, and
• Return on investment targets.

The business plan can also determine if the technology, product, or service offering is maximizing the return on investment for your corporation by comparing projected and actual performance over a given period of time.

By going through the business planning process and developing the resultant business plan, your corporation can then develop a proactive, rational plan for addressing the market for its underlying technology, product, or service offerings.

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.

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February 2, 2009 Posted by | Venture Capital | , , , , , | 2 Comments