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, Putting a Stake in the Ground Early will Help Move your Start-up Company Forward

If certain items are not defined early in the development of your start-up company, things will tend to meander and not move forward in a coherent manner.  You will continue to have early meetings with customers, and potential strategic partners, etc., but your start-up company and its product offering will continue to be fluid and not coalesce into a defined market position and complete product offering with an associated roll-out schedule.  As these discussions continue, things will become more fluid and less defined as each potential customer or strategic partner you meet with will have their own product requirements, opinions and overall list of concerns regarding your start-up company and its potential product offering.  So unless you put a stake in the ground early, you will continue to move down an undefined path and the world will look murkier by the day or by the meeting.  Therefore, to help drive your company forward, as an entrepreneur, you need to address three things that will define your start-up company to your customer base and potential strategic partners. This article defines these three items which will help move your start-up company forward.

Position Your Company and its Product Offering

Defining the market position of your start-up company and its product offering early will help define you in the eyes of your customers and strategic partners. Having meetings with potential customers and strategic partners without a clearly defined market position for your start-up company is a big mistake.  If you continue down this undefined path, each meeting will end up with individual customers or strategic partners walking away with their own conclusions as to where your start-up company and its product offering fits in the competitive and market landscape. This is not good for your customers and definitely not good for your start-up company.  So, define your start-up company and its product offering early. Position yourself against your competitors. Leave your customers and potential partners with a clear idea of why your start-up company and its product offering is different and provides a value proposition that is important to them as either a customer or potential strategic partner.  Anything less will create confusion and leave these same individuals to define your start-up company on their own, with each customer and potential partner coming to a different conclusion.  Therefore, positioning your start-up company and its product offering early is definitely something you want to do as the entrepreneur.  It will help you create a smoother path forward.

  

 Define Your Product and its Key Features and Functions

Often entrepreneurs have a clear view of their product offering in their minds. They believe that they can do anything their customers want, and with each meeting, the list of required product features and functions only gets longer and longer.  Some of these features and functions are important, while many others are only a “wish” list of features and functions from these same potential customers.  So, it is the responsibility of the entrepreneur, early in their start-up company’s existence, to define the key features, functions and capabilities that will not only make their product offering competitive, but make it unique when compared to other product offerings in the market.  Once defined, it is an important to discuss your product’s key features and functions with your customers, as they may want you to prioritize certain features and functions over others. So once you have a clear product description, including features and functions, make sure you talk to your customers. This will validate the product definition you have defined and provide you with a clear path forward for developing your product offering.

 

Develop a Go To Market Strategy, Rollout Schedule, and Product Road Map

Your customers will also be interested in knowing what your go to market strategy is and how it will benefit them. If you have developed a unique go to market strategy that allows your customers to secure a competitive advantage in the market, this is surely something they will be interested in knowing about early.  So, define your go to market strategy early and share it with your customers.  If it is something that truly differentiates your start-up company from its competitors, this will definitely be something that will pique their interest and possibly allow you to secure a level of early commitments from your customer base.

 

It is also important to define a realistic rollout schedule early so that your customers will know when your product will be available in the market. This rollout schedule should necessarily include your start-up company’s initial product offering along with a product road map, which defines future product generations and their associated feature and functions.   Remember, customers need to know when your product will be available and what they can look forward to with future product offerings. One product, single generation product start-up companies do not cut it in the market. This is true for customers and for investors.

 

Entrepreneurs, you need to put a stake in the ground early to move your start-up company forward.  Doing anything less will cause your start-up company to meander and become ill defined for both your customers and investors.  So, define your start-up company’s market position and product offering early. Include in this process, the key features and functions of your product offering.  Finally, develop a realistic go to market strategy, rollout schedule and associated product road map.  Accomplishing these tasks early will help define your start-up company in your customers’ eyes and with potential strategic partners and help move you forward to achieve 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.  For more information on the book go to www.carlsbadpublishing.com.

November 2, 2009 Posted by | Business Planning, Customers, Venture Capital, venture finance, Venture Funding | , , , , , , | Leave a comment