Robert Ochtel’s Blog

An Experienced Approach to Venture Funding

Entrepreneurs, Finding Strategic Partners Can Create Significant Value for Your Start-up Company

One of the key issues to be addressed by start-up companies is the ability to gain credibility in the market.  You may have the greatest technology since sliced-bread, but if no one endorses it, the road to success in the market will be a long one. On the other hand, if you are able to secure one or more strategic partners early on, your road to success will be that much easier.  As strategic partners bring instant credibility in the market place and can open product distribution channels that will allow your start-up company to gain significant, early market traction.  So, it is in the best interest of you and your start-up company to work to secure one or more strategic partnerships early so that you can expedite your success in the market. In what follows is a short discussion on how to locate these same strategic partners as an early stage start-up company.

Go to Networking Events

One of the easiest ways to get your name out there is to go to networking events in your area that focus on start-up companies. These events are attended by entrepreneurs and investors from all backgrounds, including large corporations.  This provides you with the opportunity to meet individuals from various large companies that may have a strategic interest in your start-up company and its technology, product or service offering.  This contact point may be a direct contact from a panelist at the event or indirect contact through an individual who either currently works at a large company you are interested in talking with or has worked there in the past and is willing to introduce you to a key contact point.  Any way you slice it, it is worth getting out there and go to targeted networking events that cover start-up companies and their issues or a topical matter you are interested in for you and your start-up company.  So, put yourself out there and attend networking events, you never know who you are going to run into.

Work Your Own Network

Most entrepreneurs have a long career before they strike out on their own to start their own company. Often this career was spent working for or engaging with large corporate entities. So to help yourself as an entrepreneur, work your personal contact network. Call your past friends and colleagues to tell them what you are up to.  These conversations will often lead to follow-on discussions which allow them to help you with potential key contact points within their or another organization. Nothing is better than and direct introduction through a trusted friend or colleague.  This provides you with instant credibility and will often walk you in the “front door” of an opportunity that you would never have found out about by cold calling, let alone getting directly into the person in charge of the project or opportunity.  So, take the time to connect with your person network.  This type of networking has the ability to open doors that you would not have through cold calling and more often than not, will expedite the discussion process.

 Attend Trade Shows

Finally, you need to attend targeted trade shows.  You can attend as an exhibitor or just an attendee walking the floor.  This approach to getting your name out there will allow you to meet with individuals from targeted companies that may have an interest in your product offering from either a strategic or tactical point of view.  Take the time to “work the floor” by going up to the booth of targeted strategic partners and explain to one of the booth attendees what your company does and who you are interested in talking with. More often than not, if the appropriate contact person is not at the show, the individual you are talking with will provide you with the appropriate contact point within the company. Also, be sure to get the business card of the person you are talking with, as when you contact the appropriate individual within the company, you can tell them that you were referred by this individual.  This will instantly open the door and at the same time provide you with a certain level of credibility to initiate the conversation.  So, take the time to attend targeted trade shows, it can open doors to potential strategic partners for your start-up company.                                

Gaining early credibility in the market is one of the keys to success for a start-up company. This credibility is most often accomplished through developing a partnership with a large, established corporate partner.  To facilitate the engagement with potential corporate partners you need to attend networking events, work your own network and attend trade shows. This will allow you as an entrepreneur to get your name out there and engage directly with potential strategic partners.  It will also help propel your start-up company forward and ensure both near term and long term success 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.

August 23, 2010 Posted by | Venture Capital | , , , , , , , | Leave a comment

Entrepreneurs, Lower Investors’ Risk by Validating your Start-up Company’s Business Proposition

By their very nature, early stage company investors are risk adverse.  Seldom do they invest on a whim.  Generally, sophisticated investors take up to six months to do their due diligence when considering a potential investment opportunity. Angel groups also have a similar due diligence process, but it is often shorter, on the order of two to three months. The point of this due diligence process is to identify any potential investment risks so that these same investors can be assured, to the best of their ability that they are investing in a start-up company that can provide a substantial return on investment to their at risk monies.  That being said, it is impossible to eliminate all potential investment risk for any start-up investment opportunity. On the other hand, entrepreneurs can help minimize the effects of the risk adverse nature of their potential investors by validating their business proposition in the market place. This is best accomplished by doing your research, talking with customers, and validating your business model with your competitors. By doing such, entrepreneurs can lower their investment risk and at the same time make their start-up company and its investment opportunity more attractive to their potential investors.

Do Your Research

All entrepreneurs want to begin writing their business plans on day one.  This is a big mistake, especially when you are trying to lower your potential investment risk and at the same time validate your business proposition.  As such, spending the time doing the necessary primary research to validate your business model is the first and most important step to creating investor-focused business plan.  Why, because many times your first impressions regarding your start-up company’s business proposition can be improved upon, based on this same primary market research.  That is, what you first believe is a strong business proposition, can often be substantially improved upon and presented in a much stronger light, once you have taken the time to do your market research by analyzing the markets, your competitors, the general trends, and subsequently developing a go to market strategy.  Therefore, it is important to take the appropriate time up front to do the necessary research to validate your start-up company’s business proposition. This will make your technology, product or service offering much stronger and at that same time provide you with the necessary background information to properly defend your business proposition to your potential investors.

Talk to Your Customers

The best way to validate your business proposition is to talk to your customers. This step is often over looked by entrepreneurs.  These same entrepreneurs generally believe they “know best” and that customer will buy their technology, product or service offering sight unseen.  That is, in many cases entrepreneurs do not believe that they need to take the time to validate their business proposition by talking to their customers.  This again is a big mistake.  Why, because if your customers do not like your product offering or do not see the value of your business proposition in the same light as you do, you will never be able gain market traction and bring a successful technology, product or service offering to the market.  This is not really a surprise to most entrepreneurs, but being in a hurry to secure funding, they often skip this step in validating their business proposition.  This will come back to bite you, as some of the first questions from investors will be: “What customers have you talk with? Who is interested in purchasing your technology, product or service offering?”   If you have not talked with your customers, before they consider investing in your start-up company, your potential investors will require you to do so.  Therefore, take the time and make the effort to talk with your customers early to validate your business proposition, it will serve you well when engaging with potential investors.

Validate Your Business Model

Finally, being money managers, venture capitalists will want you to have validated your business model against your competitors’ to see what is substantially different, and where your business proposition provides your start-up company with a long-term, competitive advantage in the market.  At the same time, these same investors want to know how and why customers are going to buy your technology, product or service offering. Therefore, as an entrepreneur, you need to validate your business model in the market and against your competitors.  Seldom are start-up company’s business models unique in the market.  Generally, there is always a competitor or similar business model in a non-related industry that start-up companies model their business proposition upon.  As such, investors want to know this and at the same time be assured that your business model has had a history of success either in your targeted market or in other markets with similar product offerings.  So take the time to validate your business model. This will not only help you assure success in the market it will instill confidence with your potential investors.

Early stage investors are risk adverse by their very nature. They have to be, because investing in start-up companies is very risky.  To lower the investment risk for your potential investors you need to take the time to validate your start-up company’s business proposition to the market place. To properly do this you need to: do your research, talk to your customers and validate your business model. By doing this you will not only arm yourself with the proper information when presenting your business proposition and investment opportunity to your potential investors, you will also instill self confidence and confidence with your 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.

May 10, 2010 Posted by | Venture Capital | , , , , , , , , , , | 1 Comment

Entrepreneurs, Develop a Funding Strategy That Works for Both You and Your Investors

Most, if not all start-up companies, require third party funding to get their company off the ground.  Additionally, many entrepreneurs of start-up companies have no idea what it is like to deal with these same third party investors.  Although funding is a necessary evil of the start-up world, it not necessarily the panacea that most entrepreneurs believe it is.  With goals and objectives that do not necessarily align, entrepreneurs need to be aware that taking in third party equity necessarily changes the game. Why, because external monies come with outside rules, objectives and goals. So, as an entrepreneur you need to be aware of this. Therefore, take your time to develop a funding strategy that works for you and your investors.  This will minimize the pain associated with third party funding and make your engagement with these same third party investors a more pleasurable experience. 

Identify Significant Near Term Milestones that Focus on Market Traction

Third party investors are in business to make money.  As such, they want to be assured that your start-up company has the ability to secure traction in the market.  Therefore, as you develop your rollout plan and associated significant milestones, you need to focus on how you will get near term traction in the market. Nothing is more important to investors, as they need to be assured that once the monies are invested and the technology, product or service offering is developed, that your start-up company has the ability to secure market traction.  Anything less will not be attractive to investors. 

It should be remembered that angel investors and venture capitalists are really money managers and not risk takers. They need to understand that your plan focuses on significant near term milestones that focus on securing customers.  Therefore, you need to always take this into consideration with developing your rollout schedule.  If you do not do this, you will not get the attention of your investors.  Remember “time-to-money” is the name of the investment game and developing near term milestones with this in mind will help keep you focused on market traction, the number one issue for investors.  

Get a Realistic Handle on Your Total Funding Requirements

All potential investors want to know how much “total funding” is required for your start-up company to be successful. This is especially true if they are an early investor in your start-up company.  From an investor’s point of view they want to minimize any future dilution of their investment, so one of their biggest concerns is how much total money will need to be invested in your start-up company to get it up and running and be successful in the market.  As such, dilution is the main concern of all investors, as the more future dilution that takes place, the less return on investment they receive on their money.  So, as an entrepreneur you need to be aware of this, as investors’ self interest, protection and preservation of their invested monies is their main goal.  So, make sure you have a realistic handle on the total funding required for your start-up company.  This will provide you with credibility with your investors.  It will also provide these same investors with the ability to predict potential future dilution scenarios and their final equity position and hence return on investment in your start-up company.

Match Your Funding Requirements with Your Investors

Entrepreneurs need to be aware that there are multiple types of investors in the start-up funding world and that each type of investor has access to a given amount of capital to invest in your start-up company, depending on your development stage.  So, as an entrepreneur, you need to take the time and develop a funding scenario that makes sense for your start-up company and its funding stage, the development and rollout of its technology, product or service offering, and for your investors.  This funding scenario can include a single round of funding, or multiple rounds of funding, but the key here is to deliver significant milestones with each round of funding that raise the value of your start-up company when looking to the next round.  Also, you need to be aware of the amount of funding that is available from various funding sources for each round and company stage, as this will affect your funding strategy.  The list below outlines various funding sources, their 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

Therefore, as an entrepreneur, you need to match your funding requirements with capital resources of your potential investors and your stage of development. This will make your funding path much smoother and create an opportunity for you to increase the value of your start-up company as you rollout your technology, product or service offering and secure traction in the market.                                                                                              

Most start-up companies require some kind of outside funding to develop their product offering, secure market traction and get their company on the road to success in the market.  The funding road can be difficult and at the same time third party funding comes with outside rules, objectives, and goals.  As an entrepreneur you need to be aware of this and develop a funding scenario that takes in both your requirements and objectives, but the requirements and objectives of your potential investors.  So, focus on the things that will make you both successful, including, near term milestones with associated market traction, realistic total funding requirements, and matching your funding requirements with your investors’ resources.  By doing so, you will create a funding path that is much smoother and has a much higher potential for success.

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.

April 19, 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

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