Robert Ochtel’s Blog

An Experienced Approach to Venture Funding

Entrepreneurs, Your Funding Strategy will Change When You Start to Engage with Potential Investors

All entrepreneurs believe or at least want to believe that they are fundable.  As such, they work hard to develop their business plans, executive summaries and investor pitches so that they can engage with potential investors. With their funding scenarios, product development plans and rollout schedules clearly defined, they are sure investors will see their vision, like their product offering, get behind their go-to-market strategy, and after a given amount of due diligence, invest in their start-up company, putting them on the path to potential success in the market. What nobody tells these same entrepreneurs — life if not that easy and even if you start-up company is “fundable.” The road to funding is a rough one, often mired with many bumps, and pot holes.  Often, today, what was a “fundable” start-up company 10 to 15 years ago will not even be looked at today by potential investors, be it individual angels, angel groups or venture capital firms.  As such, once entrepreneurs begin to engage with potential investors they often will need to be ready to change their funding strategy as the original anticipated road to funding will not be the ultimate road they take to get there. In what follows is a short discussion regarding what issues need to be continually addressed as you work to secure funding for your start-up company in today’s funding environment.

It’s Not the 1990’s Anymore

Back in the 1990’s the entrepreneur’s road to funding seemed so much easier.  Why, because it was much easier!  This was a time when venture capitalists and angel investors alike were willing to invest in pre-revenue, early stage companies with a great concept and a first class team.  Life was easier. The concept of requiring a working product and generating revenue was not considered venture investing.  In fact, it was considered later stage investing and investment groups or individual that invested in these types of companies were not “real” venture or angel investors.  But, toward the end to the 1990’s venture capitalist and angel investors alike caught the dot com (.com) early-stage company investing fever, and invested in anything and everything related to the Internet.  Brick and mortar companies were the past, and with a hyper investment mentality, no longer did traditional revenue models matter.  Everything and anything was fundable and if you did not get in you either had cold feet or you did not see the vision of the future, the Internet. 

In 2000, the market crashed and everything changed. No longer were investors willing to invest in any Internet-based business concept that came across their table.  In fact, venture capitalist had consciously moved up stream.  No longer were they willing to invest in pre-revenue, early stage companies, but armed with large funds ($500K to $1.0B) they decided to move their focus to later-stage investing. This move substantially reduced their investment risk and at the same time often required them to invest larger sums of monies, right in line with their large investment portfolios.  Accordingly, angel investors, especially angel groups, began to follow suit and again moved up stream to primarily entertain lower risk investments.  So, today entrepreneurs armed with a pre-2000 mentality, need realign their expectations, if they do not, once they engage with potential investors they will learn the hard way — early stage investing is all but dead.   As such, as an entrepreneur, you need to change your funding strategy to move your start-up to the next level.

In Today’s Venture Funding Market Revenue is King

Today, in the venture and angel investment community, revenue is king.  Therefore, as an entrepreneur you often need to figure out how to self-fund your technology, product, or service offering, at least to a point where you have a working product such that you can engage with customers and generate near term revenue.  This does not have to be a complete product offering, but something that you can use to generate early revenue into the company. In fact, you might want to consider an alternative early product offering, just to engage with customers immediately so that you can prove to investors that you have the ability to create early revenue.  Often, entrepreneurs secure consulting deals in their targeted “space” not only to generate early revenue, but to gain company exposure in the market and sell services related to the end product offering.  This road to early revenue does two things for potential investors. First, it shows them that you are creative in your ability to generate early revenue. Secondly, it provides a source of revenue from potential customers that may be willing to buy your product offering once it becomes available in the market. So, in a market where the rules to early stage investing has changed, today you need to focus on securing early revenue with an early product offering or related services in your targeted market of interest. This will allow you to secure the attention of today’s venture and angel investors. If you do not, you most likely will be passed up to another company that is generating early revenue.  

Those with the Money Write the Rules

Today’s rules to early-stage, company investing may seem a little weird to an entrepreneur that is trying to raise capital for the first time.  Well, if the truth were told, they are! But, you have to remember one thing, “Those with the money write the rules.” Fair or unfair, that is the nature of the today’s early-stage company funding game.  Therefore, as an entrepreneur you need to be aware and prepared for this.  Yes, it is frustrating and not often fair.  But, from an investor’s point of view they are just trying to protect their investment by doing everything and anything they can do to mitigate potential risk.  Yes, you have a great plan, a first class team and differentiated and demonstrable product offering with multiple revenue streams that are highly scalable.  But, that may not be enough.  The next question will be, “Where is your revenue?”  This again may not seem like venture capital or early stage company investing.  But in the current state of venture investing this is what is expected from potential investors. So, as an entrepreneur you can fight it or do everything and anything to prepare you and your start-up company for this scenario.  As once you begin to engage with potential investors, it will come and it is better to be prepared than not to be prepared for the new rules of the funding game.

Historically venture capital funding has changed considerably over the last 10 to 15 years. What used to be considered the “sweet spot” for early-stage venture investing has moved up stream considerably. As such, the angel investment community has followed suit. With the desire to mitigate investment risk, an existing product offering with the ability to generate revenue is now considered to be the bar to pass in which to be considered to be a “fundable” start-up company. There are exceptions to the rule, but entrepreneurs need to be aware that it is not the 1990’s anymore and armed with a pre-millennium funding strategy, you most likely will not get too far in today’s funding environment.  So, as an entrepreneur looking to raise funding, you will learn fast to change your funding strategy according to the desires of your potential investors, or you will passed over to by these same investors for other, what are considered more mainstream investment opportunities.

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.

June 21, 2010 Posted by | Venture Capital | , , , , , , , , , | Leave a comment

Entrepreneurs, Make the Tough Decisions Necessary to Move your Start-up Company Forward

Start-up companies by their nature are very volatile. As such, things change rapidly and need to in order to stay ahead of the game.  Unlike large companies, many daily decisions can have an inordinate affect on both the short term and the long term success of a given start-up company.  Accordingly, entrepreneurs often need to make tough decisions that will have a material impact on their start-up companies.  These decisions should not be taken lightly. On the other hand, due the fast paced nature of start-up companies, and the need to focus on creating significant value in an accelerated time frame, many of these same decisions do need to be made and quickly.  Often delays in decision making can create missed opportunities, and at the same time wreak havoc on a start-up company’s potential for success in the market. This article outlines several examples of tough decisions that need to ultimately be made by entrepreneurs that can significantly affect the long-term success of their start-up companies.  Here, quick decisions are welcomed, as prolonging the decision making process can often lead to a failed venture.

Changes in the Executive Team

The executive team is the key component that drives the success of any start-up company.  Therefore, this is the first thing, beyond the business opportunity, that venture capitalists look at when deciding to invest in a start-up company.  As such, if there is a member of your start-up company’s executive management team that is not working out or not adding significant value to the start-up company and its ultimate goals and objectives, the best thing to do is to remove this person from the team.  Why, because for start-up companies, there is no room for “non-contributing” executive team members. This situation only puts more burdens on the rest of the executive management team. Also, with each executive team member having more than enough to do, everyone needs to be pulling their own weight.  Anything less is a drain on the start-up company and its overall performance.  So, as an entrepreneur, if you recognize that your team has an executive member that is not working out, a quick decision needs to be made to cut your losses.  Here, removing the executive team member and having an empty position is much better than having a non-contributing team member.  Non-performance, by a single team member will lead to resentment from the other executive team members and pull the performance of the overall company down.  So, as an entrepreneur, once you recognize that one member of your executive team is not performing, it is important to remove this person, and quickly.  If you do not do this, your investors will.

 Changes in Strategic Direction

From their inception, start-up companies often go through multiple changes in strategic direction. More often than not, there are good reasons for this and it is necessarily part of the process to support the long-term success of the start-up company.  What is important here is that as an entrepreneur, you need to recognize that sometimes a significant change in strategic direction is necessary to enhancing the overall value of your start-up company. In addition, once the decision has been made to make a significant change in the strategic direction of a start-up company, the executive team needs to fully embrace this decision and commit the company to this new direction. Anything less will cause the start-up company to fail.  A one foot in, one foot out commitment to changes in the strategic direction of a start-up company will not work.  Finally, it is important that any significant changes in the strategic direction of your start-up company are not taken lightly, and do not happen too often, as too many changes in the strategic direction of your start-up company will kill the overall momentum of your start-up and as such will result in disaster. Therefore, once a decision has been made to change the strategic direction of your start-up company, get buy-in from all of the executive team members and move quickly to make it happen.  This approach only will benefit your start-up company.

Deciding on Strategic Alliances

Strategic alliances can help create phenomenal success for start-up companies and at the same time significantly enhance their overall value with investors and in the market.  By providing access to markets, sales channel support, complementary technologies and services, all value added propositions, strategic alliances can be used to create significant value for your start-up company.  That being said, a bad strategic partnership can have the opposite impact on your start-up company.  Therefore, when determining the value of a strategic partnership, look at the market credibility of the strategic partner.  Are they a significant player in the market? Does their name add credibility to your start-up company? Will they be able to deliver on the promises of the strategic partnership?  Often it is often better to step back and make an overall assessment of the potential long-term benefits of the partnership before committing your start-up company’s future on a particular strategic partner.  This will provide you with perspective and allow you as an entrepreneur to make a better decision.

Sometimes it is the case that as an early stage start-up company, you will not be ready for a strategic alliance relationship.  Here, be honest with yourself.  Does a strategic alliance partnership make sense at this point in time?  If it does not, then it pays to walk away, as it may only serve as a distraction to the important immediate goals and objectives of your start-up company.  Therefore, take the necessary time to properly evaluate any potential strategic alliances.  Move quickly, but remember to make an informed decision as the wrong strategic alliance can be detrimental to the overall performance of your start-up company.

Determining a Funding Strategy

Determining a funding strategy is often a difficult task for entrepreneurs. Do I go after all of the required funding now and give away more of my start-up company to investors, or do I look to secure funding in multiple tranches?  This is a very difficult question to answer and how it answered is specific to the each start-up company, their overall funding requirements and their ultimate value at a given point in time.  The key thing here is to outline your start-up company’s significant deliverables for the various funding scenarios and then make a decision as to whether at the end of each funding scenario, if significant market value has been created to secure addition funding from either existing investors or new investors. Remember, investors want to see significant value at the end of each funding round.  So, take the time and map out your start-up company’s significant milestones their associated time frame and then overlay the funding requirements.  This will allow you to determine that natural break points in securing funding and provide your investors with the insight necessary to determine if your start-up company’s funding strategy makes sense.  Remember, determining a funding strategy is often one of the most difficult decisions an entrepreneur can make.  So take the time to make an informed decision, but do not dwell on, as investors will often dictate the overall all funding terms and tranches of your start-up company.  The key point here is to make a decision and then move to secure funding to push your start-up company forward to the next level.

Entrepreneurs need to make tough decisions every day. These decisions often have a significant impact on the start-up company and its long term success in the market. For each decision presented here, whether it changing the make-up of the executive team, moving the start-up company in a new strategic direction, deciding on alliances, or determining a funding strategy,  it is important to make an informed decision.  Also, the quicker the decision is made that more likely you will get your start-up moving forward, and creating momentum for your start-up company. Therefore, as an entrepreneur, make the tough decisions it will only benefit 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.  For more information on the book go to www.carlsbadpublishing.com.

October 26, 2009 Posted by | venture finance, Venture Funding | , , , , , | 1 Comment