Robert Ochtel’s Blog

An Experienced Approach to Venture Funding

First Time Entrepreneurs, Developing a “Capital Efficient” SaaS Company Requires Work, Dedication and Diligence

Every five years or so, venture capitalists develop a new mantra with regard to their investment philosophies. In the late 1980’s and early 1990’s the mantra was “synergy”.  Towards the turn of the century and shortly thereafter, the new mantra was “scalability”.  Today, in a risk adverse environment, venture capitalists’ new mantra is “capital efficiency”.  This is especially true for start-up companies looking to develop Software as a Service (SaaS) companies. What does this really mean to entrepreneurs – spend less and so that venture capitalists can achieve a higher return on their early stage investment.  With the development of the SaaS business model, there has been a simultaneous emergence of offshore software development houses in India, Russia, Pakistan and other countries that provide Internet-focused software development services that support significantly lower labor rates that can provide equivalent services at a much lower cost than can be achieved with local software development teams in developed countries.  This is very attractive to both investors and entrepreneurs as it provides a means to facilitate capital efficiency with the delivery of a high-quality product.  In what follows is a short discussion regarding some of the issues facing entrepreneurs looking to take advantage of this offshore “capital efficient” business model on their way to developing a successful SaaS product offering.

Understand the Details

Given the geographic and time differences required by using offshore talent to develop your start-up company’s SaaS product offering, you must take the time and effort to understand the details of your SaaS product requirements.  This includes developing a proper functional specification. This document must be detailed enough to outline all of the capabilities and requirements of the website application and database. This is very important, as you need to provide a basis for which your offshore development team with the ability to analyze the needs and requirements from the technical side so that they can provide proper estimates of the total development costs and associated schedule.

During this process you also need to make a clear delineation between design and development activities.  Both are clearly different in focus and function.  During the design, generally done locally, you need to have a designer focus on the website look and feel and he necessary user interactivity that makes your website function as desired.  This needs to be accomplished before development begins. The end result or delineation point is generally the delivery of a complete architectural specification with an appropriate number of design files (.psd files) to your offshore development team.  The offshore development team then takes these results and does the necessary programming in the appropriate language for the targeted end application (e.g., website, Smartphone app, or tablet app).  The key here, to achieve successful results, is to proper delineate your requirements in a functional specification, understand the details of the design development process, and identify the proper handoff point so that both parties can do their respective jobs appropriate and deliver a successful SaaS product offering.

Get Multiple Quotes and Understand Their Differences

As in any business transaction it is important to get multiple quotes from different service providers.  If this is your first time developing a SaaS product offering, you will need to ask a lot of questions to fully understand the differences between the various quotes, their costs, and delivery schedules.  You also necessary need to understand what is required from you as the customer.  Questions you need to answer can include:

  • Do you require a project manager with the appropriate expertise to manage the process from on-shore?
  • How often will you interface with the development team?
  • What are the development milestones?
  • What do you need to deliver so that that development can proceed as required?
  • Is this a “platform” based development or a “custom” development?
  • Is there any license fees (one-time or recurring) associated with final product?
  •  What does the development contract look like?
  • What are the service and support terms, conditions and costs?
  • Where will the development be hosted?
  • Who will host the production product offering and what are the costs?

As delineated above, there are several different scenarios that you can run into when looking to source your offshore development overseas.  Make sure you get multiple quotes and that you thoroughly understand each quote and the differences between each.  Remember, the most inexpensive quote and shortest schedule may cost you more in the long run. In addition, you need to make sure you do not enter into a development contract that will tie you hands when you try to sell your start-up company. 

Check References

You need to do a reference check on your service provider(s). This is necessary and appropriate.  Remember you are putting the future of your start-up company in the hands of a stranger.  So, unless you get a recommendation from a trusted source, you need to do your due diligence and check at least three references.  In addition, develop a list of questions that covers all of your bases. This will do two things. First, it will allow you to ask the same questions to different reference sources to see how each responds. Second, it also provides you with a dialog in which to drive the conversation. During your reference check discussions, you may get off track, but you will have your reference list of questions keep you going forward as you move through the reference check.  Finally, ask tough questions to see how the references respond. This can include:

  • “What didn’t you like about the development team?”
  • “What would you do differently in the future?”
  • “Would you use them again for a future project?” 

 These types of questions provide the reference person with the ability to respond honestly to things that they would not necessarily bring up on their own.  These same questions will also provide you with a comfort level that cannot be achieved any other way.  Hence, by the time you are finished with your reference checks you will have a good feeling as to whether you want to move forward with this service provider or not.

The development of the SaaS business model and the requirement for “capital efficiency” from venture capital investors has required entrepreneurs to look overseas for their software development.  With the low cost of labor and the highly skilled readily available labor force, using an overseas software development team can significantly lower development costs and provide for the necessary capital efficient model deemed necessary by today’s venture capital investors. When looking to source their development from overseas, entrepreneurs need to necessarily understand the details of their development get multiple quotes and understand the differences, and check references.  By going through this process you will help facilitate a successful development and the delivery of a product offering that meets your requirements.

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 12, 2010 Posted by | Venture Capital | , , , , , , , , , | Leave a comment

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