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

Creating Confidence will Carry the Day with Potential Investors

Many times entrepreneurs are ill prepared when presenting their technology, product or service offering to potential investors.  Even if you have created a business proposition that is unique, provides a long term sustainable competitive advantage in the market, and at the same time supports a scalable business model that provides superior returns on invested capital, you still need to convince your potential investors that you can execute and secure near term revenue with your target customer base.  In addition, you also have to prove to them that you can do this in an expedited time frame.  To accomplish this, you need to know your financials, have customer references and develop a strong go to market strategy.  By doing so, you will create a level of confidence that will carry the day with your potential investors and allow you to move to the next level of due diligence discussions.

Know Your Financials

Many entrepreneurs are not financial experts and often rely on third parties to help them develop their financial models.  This is fine, but even so, you need to spend the time to learn the details of your start-up company’s financials.  This is important, as most potential investors are financial experts that will immediately go to your financial statements to identify holes in your financial model. So, you need to “know your financials” to the level of detail that will gain the confidence of your potential investors.  Telling them “I don’t know” or “I need to ask my CFO” will not provide your potential investors with the level of confidence that they require to understand that you know your business.  On the other hand, if you are able to answer all initial financial and business model questions with ease and confidence you will impress your investor and more than likely get them to move to the next level of due diligence. 

Have Customer References

Potential investors need to know that your business plan is solid and has been vetted with potential customers.  One of the best things to do when presenting to investors is to mention the customers you have talked and/or met with that have expressed an interest in you technology, product or service offering.  Provide them with real customer feedback on your technology, product or service offering.  More often than not, many entrepreneurs have not talked with their target customers and do not have any reference discussions or customers they can introduce their potential investors to, so that they can call them and ask about their potential interest in your technology, product or service offering.  Having customer references that are interested in your technology will not only tell your investors that you have the motivation to get in front of customers and determine their interest and desires, but you have developed a base of interested customers that are willing to be potential beta customers once your technology, product or service offering is available. In addition, the fact that you have vetted you business proposition with your potential customer base is always a strong confidence builder with potential investors.  Now, they know that you have customers that are interested in your technology, product or services offering. This will again help create confidence with your potential investors.

Develop a Strong Go to Market Plan

Having developed a strong go to market plan is one of the best recipes for building investor confidence.  This is often “the differentiator” that will carry the day for investors.  One of the most nagging questions a potential investor’s mind is a concern regarding the ability for a start-up company to create initial traction in the market.  If there is not clear path for attacking the market and securing early customers and revenue, potential investors will more often than not walk away.  These same potential investors need to be assured that once they invest, there will be near term revenue and that it can scale appropriately.  This increases their potential return on investment and at the same time provides them with confidence that they need to make that “jump-of-faith” to invest.  Therefore, as an entrepreneur you need to develop a strong go to market plan the will instill confidence with your potential investors. This will provide you with the necessary basis for investors to move forward to the next level in their due diligence process.

Entrepreneurs that are ill prepared to present in front of their potential investors will not carry the day with these same investors.  On the other hand, those entrepreneurs that have created a business proposition that is unique and provides a long term sustainable competitive advantage in the market, and at the same time are prepared to create confidence in their investors will. To do this, these same entrepreneurs need to know their financial statements, have customer references and develop a strong go to market plan.  This will provide the entrepreneur with confidence and at the same time instill this same confidence with their potential investors. By doing so, these entrepreneurs will more often than not move to the next level of due diligence with these same 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 1, 2010 Posted by | Venture Capital | , , , , , , , , | Leave a comment

Three Things to Focus on Before You Get in Front of Investors

Entrepreneurs have a lot of things to focus on when developing their business concept into a fundable business plan.  Assuming you have a solid business proposition and long term competitive advantage in the market, there are three things you need to focus on before you get in front of your first angel group or venture capitalist. By focusing on these three things, you will be able to provide investors with an initial level of assurance that you can help drive your start-up company to success in the market. If you do not do so, this will eliminate any chance of receiving venture funding from angel groups or venture capitalists.

Bring Your “A” Team to Play

Investors want to know that your executive management team is a seasoned team that has the experience, background, and knowledge to successfully execute your business plan.  In fact, they insist on this. This is so important that investors would rather invest in an “A” team and a “B” product than a “B” team and an “A” product.  As such, the first thing they focus on, after they determine they “like” the proposed investment opportunity, is the executive management team.  Here, you must have a seasoned team that has the appropriate level of experience in the targeted market(s) of interest.  This is very important, as investors believe that it is the team and not the product that will make your start-up company successful in the market.  Therefore, if you do not have a seasoned team, go out and identify and then secure the appropriate executive team members that can lead your start-up company to success.  Here, you need to make a critical assessment of not only your personal skills and capabilities, but the skills and capabilities of your other team members.  If you do take the time to secure the appropriate team members, your investors will either pass on the investment, or decide to invest and then clean out the existing executive team members, only to put in their own seasoned management team.  This is not a threat, but the reality of how investors work. Remember, they have the money and money writes the rules.  So, take the time to put together your best “A” team.  This will serve you will in front of your investors.

Focus on Developing Defendable Financial Projections

It should be remembered that venture capitalists are really “glorified” financial managers.  This means that they only make money if you make money.  So, generally, they are experts at analyzing financial statements to identify the holes within your start-up company’s financial projections.  Therefore, as an entrepreneur, that will be presenting your business proposition to “financial-focused” investors, you need to make sure your financial projections are defendable.  That is, you have to properly rationalize your development costs and the ramp up of your revenue projections.  In addition, your start-up company’s financial pro forma statements need to follow standard, generally accepted accounting rules, and at the same time present financial pro forma statements that are similar in structure to other competitors within the same market space.  If you do not do so, investors again will either pass on your investment or require you develop appropriate financial projections that represent acceptable norms within your targeted industry.  Remember, venture capitalists only get paid if your start-up company is financially successful. Therefore, their initial focus will be on your financial projections. So, take the time to develop defendable financial projections, this will provide you with a much smoother road in front of investors.

Determine Your Plan to Secure Near Term Market Traction

Your start-up company may have a great technology, product or service offering, but if you cannot convince investors that you can get near term traction in the market, these same investors will pass.  Let’s be clear, investors focus on “time-to-money”, as this provides them with the highest return for their investment.  Hence, these same investors want to see that your plan to secure near term market traction is not only logical, but provides the best path forward for your start-up company.   Therefore, before you get in front of investors, you need to determine a near term, go to market plan that will provide you with traction in the market. That is, you need to secure customers as soon as possible, as investors want to know how you are planning on doing this. So, before you get in front of your investors you need to not only identify your target customers, go market strategy and tactics, and sales channels, you have to have mapped out a plan that provides your start-up company with the ability to execute appropriately.  Anything less will not impress your potential investors.  Remember you are in business to secure customers and having developed a plan to secure this near term market traction is a key increasing investors’ interest.

Assuming you have a solid business proposition and long term competitive advantage in the market, there are three things you need to focus on before you get in front of any investors. This includes, bringing your “A” team to play, developing defendable financials and determining your plan to secure near term traction in the market.  Anything less will fail to impress your investors and at the same time will provide them with an excuse to pass on your start-up company and the investment opportunity it offers.  So, take the time to focus on these three things, by doing so you will substantially improve your chances of securing funding.

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 25, 2010 Posted by | Venture Capital | , , , , , , , , | 1 Comment