Robert Ochtel’s Blog

An Experienced Approach to Venture Funding

Entrepreneurs, Legacy Costs Can Hurt Your Start-up Company’s Fund Raising Efforts

Start-up companies, by definition, need to be nimble and have the ability to change direction as the market changes.  Often with the development and maturation of a start-up company, things can change significantly from the original direction, mission and focus of the company.  This is especially true, if this same start-up company has been through multiple incarnations to develop a differentiated and long-term sustainable competitive position in the market.  These changes in direction do not come without costs to the start-up company itself.  And, often these costs can hurt your start-up company’s fund raising efforts.  Therefore, as you move forward and your start-up company changes direction, strategy, and its market entry tactics, you need to step back and understand what legacy costs need to be let go or changed to successfully move your start-up company forward in your fund raising efforts.  This can include replacing old executive team members, restructuring the company’s capitalization, and shedding old, irrelevant contracts, as all of these things if not appropriately addressed will hurt your start-up company’s fund raising efforts. 

A Change in Direction May Require a New Executive Team

Significant changes in direction for a start-up company may result in requiring new executive team members to move your start-up company forward.  Often these changes in direction come with a new CEO.  As such, the executive team members that were relevant for the old company and its original focus are not appropriate for the new company and therefore this often requires the new CEO to clean house and secure a completely new executive team.  This significant level of change within the executive management team of a start-up company can be very traumatic and should not be made over night. If there are some team members that have relevant capabilities and skills that add significant value to the new direction of your start-up company, then they should be given a chance to move forward with new direction of the company. On the other hand, if there are executive team members that lack the proper motivation and appropriate skill sets to add any value moving forward, then they will need to be let go and replaced with new executive team members that have the skill sets, motivation, and ability to move your start-up company forward.  Nothing is worse for a start-up company than to have legacy executive team members hanging around that add no value to your start-up company and its current direction. So, make the decision to bring on new executive team members and let go the legacy executive team members that do not any value regarding the new direction of your start-up company.  This will clean the slate and provide for a better path forward for securing funding.   

A Legacy Capitalization Structure Often Needs to be Changed

One thing that will immediately diminish the interest of potential investors is a legacy capitalization structure that does not support your required funding efforts. This legacy capitalization structure can take many forms and can include the following:

  • Too many small investors with tiny equity positions,
  •  Too much debt,
  • Too much equity for legacy team members,
  • Too much of a “hangover” in the stock option pool,
  • Not enough equity for multiple investor rounds,
  • Other.

These legacy capitalization structure issues need to be addressed before you talk with investors.  If you do not do this, you may risk losing potential investors.  So, take a look at your legacy capitalization structure before you engage with your investors.  If you do not know what makes an attractive capitalization structure which will facilitate the venture funding of your start-up company, find a financial consultant that has worked with venture capitalists. They will be able to provide you with the appropriate advice regarding recapitalization of your start-up company to make it more attractive to investors. 

Old Contracts May be Inappropriate or Irrelevant

Often with significant changes in direction, start-up companies should take the time to review old contracts and strategic relationships.  Contracts that were once important to your start-up company may be inappropriate or irrelevant to your start-up at its current point in time.  So, make sure that you clean up old contracts and relationships before you engage with your investors. This can include:

  • Discontinuing certain strategic relationships,
  • Cancelling old irrelevant contracts,
  • Reviewing and modifying existing contracts,
  • Other.

As an entrepreneur of a start-up company you must take the necessary steps to eliminate any risks moving forward. This includes reviewing all of your outstanding contracts and strategic relationships.  By doing so, you will facilitate third party angel or venture capital funding.

Often start-up companies go through multiple incarnations to develop a differentiated and long-term sustainable competitive position in the market.  These changes in direction do not come without costs to the start-up company itself and often require this same start-up company to shed some of its legacy costs to move forward in its fund raising efforts. To do this, an entrepreneur must often secure a new executive team, change its capitalization structure and cancel old, irrelevant contracts.  This is often necessary, as in doing so, you will be putting your start-up company in a much better position to secure venture funding from angel investors or venture capitalists.

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 29, 2010 Posted by | Venture Capital | , , , , , , , | 1 Comment

Entrepreneurs, to Build a Successful Start-up Company You Must Create Value Everyday

Entrepreneurs need to necessarily focus on creating value for their start-up company.  From an initial “idea” or “concept”, entrepreneurs need to continually focus on moving their start-up company forward to the next step in its development. This is accomplished by creating value for your start-up company and focusing on those items that necessarily make a difference to both your targeted customers and to your investors.  As an entrepreneur, you are not in the business of developing technology for technology sake or the “cool” factor.  You are in business to acquire paying customers.  To do this, you must create attractive value that facilities customers’ desire to buy your technology, product or service offering.  From the initial concept, to identifying your business proposition, to developing and delivering your first prototype, to acquiring your first paying customers, entrepreneurs need to focus on value added activities that move their start-up company forward from inception, through funding, to a functional, cash flow positive functioning entity.  This article focuses on the necessity to create value everyday to facilitate both the short term and long term success of your start-up company.

Think About Your Start-up Company 24/7

As the entrepreneur of a start-up company you will have a lot of challenges along the way.  With both short term problems to address, as well as long term corporate objectives, you need to focus on your start-up company 24/7.  Why is this focus necessary?  Because as you try to successfully guide your start-up company through the maze of daily problems and opportunities, you are trying to identify the proper and best path forward that servers your near term objectives and at the same time does not necessarily cause issues that may hurt your start-up company in the long run.  Near term problems may turn out to be significant long term opportunities, and your initial long term objectives may not necessarily be right for your start-up company as it evolves and develops from instantiation to a functioning and profitable company. In addition, what was an obvious decision yesterday may be a total miss-step tomorrow.  Therefore, you need to constantly think about your start-up company from bottom to top, 24/7.  This type focus will allow you to mull over changes in the market and at the same time provide you with the necessary insight to continually create the value that moves your start-up company successfully forward not only addressing day-to-day activities, but over the long term.  So, as a budding entrepreneur, you need to think about your start-up company 24/7.  This will provide you with the necessary focus to guide your company through the trials of a successful start-up company.

Identify Your Start-up Company’s Value Proposition

One of the key items that differentiates a successful start-up company is the ability to succinctly define its underlying value proposition that targets the needs of its customer base.  By identifying a significant value added proposition for your target customer base, you are in essence solving an unmet need or problem in the market.  In addition, by identifying your value proposition early, this will allow your start-up company to create and develop a differentiated product offering in the market.  It will also allow you as an entrepreneur to succinctly define your start-up company and its technology, product or service offering to your potential investors.  This is necessary, as investors need to quickly discern how what problem or need you are solving in the market and how you are differentiated, long term from your competitors’ product offerings.  In addition, by identifying your value proposition early, you will necessarily provide a path forward for your start-up company.  This does not mean that your value proposition will not evolve or change as you engage with your customers and continue to define your technology, product or service offering.  It is okay to refine and enhance your value proposition as you engage your customers and the market. This will necessarily allow you to create additional value to your targeted customers and enhance your long-term success in the market.

Focus on Significant Value Added Activities

As an entrepreneur of a start-up company you need to focus on significant value added activities to constantly move your company forward.  This is very important, as it is often too easy to get caught up in insignificant day-to-day activities that do not add value to your start-up company.  Significant value added activities can include:

  • Calling your customers to validate the necessary features, functions and capabilities or your initial product offering and your long term product roadmap,
  • Focusing on securing the necessary strategic partners to complete your product offering,
  • Streamlining your business and financial models to ensure success in the market,
  • Minimizing time-to-money and focusing on early revenue sources, and
  • Securing initial customer commitments.

By focusing on significant value added activities, you are creating the necessary value that will get investors attention and at the same time raise your start-up company’s valuation.  It addition, you are creating a path to success in the market.  Therefore, as an entrepreneur, you need to focus on value added activities that are significant and will create long term success for your start-up company.  By doing so, you will help create a smooth path forward and at the same time enhance your probability of securing funding and success in the market. 

As an entrepreneur, to create a successful start-up company, you need to focus on creating value every day. This is necessary, as the road from inception to funding, and ultimately a successful functioning and profitable company is often difficult and treacherous.  Bad near term decisions, can often have significant consequences on the long-term success of your start-up company.  To continually add value every day, as an entrepreneur, you need to think about your start-up 24/7, identify your start-up company’s value added proposition, and continually focus on significant value added activities.   By doing so, you will enhance your ability to create and fund your start-up company and ultimately be successful 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.

January 4, 2010 Posted by | Venture Capital, venture finance, Venture Funding | , , , | Leave a comment