Robert Ochtel’s Blog

An Experienced Approach to Venture Funding

Entrepreneurs, Heart, Brains and Courage Do Not Come from Your Investors and the “Land of Oz”

Many entrepreneurs expect investors to solve their problems. They firmly believe that investors with their investment funds will provide them with the necessary heart, brains and courage to develop a successful start-up company.  In addition, more often than not, these same entrepreneurs believe that securing funding from investors is like the “Land of Oz” – anything is fundable and all you need to take the journey and in the end, the investors (or the “Wizard”), will solve all of your problems by providing your start-up company with the necessary funding that you require to be successful.  Nothing can be further from the truth.  In fact, once you receive funding that can be your worst day as an entrepreneur of a start-up company, as third party funding money comes with demands, rules, and expectations. So, don’t approach investors expecting that their investment monies will provide you with the necessary heart, brains and courage to develop a successful start-up company.  If you did not have these characteristics before you approach investors, any amount of funding in the world will not provide you with these same characteristics.  Therefore, before you approach investors, you need to step out of the “Land of Oz” and first convince yourself that you have the necessary characteristics to be a successful entrepreneur. This includes having the “heart” to follow your vision, the “brains” to properly develop the investment opportunity, and the “courage” to cold call your customers and execute your plan. If you do, you will ultimately be a successful entrepreneur, and that securing funding from third party investors is just a bonus on the road to creating a successful start-up company.

You Must Have the Heart to Follow Your Vision

Most opportunities do not create themselves, as they are often a result of an entrepreneur having a “vision” based on experience and a set of market truths.  More often than not, at the beginning this vision is not very clear, but with time and effort, an entrepreneur can develop their “concept” or “idea” into a clear vision that addresses an underlying strategic opportunistic need in the market.  Hence, as an entrepreneur, you need to follow this vision with all of your heart.  And often along the road you will have many “naysayers” telling you that you cannot accomplish your goals or that you that there is not use in trying as other, larger competitors will crush your start-up company.  This is exactly the time when you need to believe in yourself and have the heart to follow your vision, as more often than not this is what will drive you to success. And often as things evolve your vision will allow you to create a technology, product or service offering that is truly differentiated from your competitors and provides your start-up company with a long-term, sustainable competitive advantage in the market.  So, as an entrepreneur you need to have the heart to follow your vision, as no investor with all the money in the world can provide you with this.    

You Must have the Brains to Develop the Proper Investment Opportunity

One thing is for sure, most investors are generally “smart guys”.  Whether they have been through the school of hard knocks or are Ivy League educated MBAs, they often have the necessary insight to properly evaluate and quickly discern an appropriate investment.  So, as an entrepreneur, you need to have the “brains” to put together a “cogent” plan that creates a necessarily attractive investment opportunity for these same investors.  This means that you need to do the hard work and use your brains to do the research to develop a well thought out plan that makes both logical and financial sense from an investors’ point of view.  In the “Land of Oz” too often, entrepreneurs believe that anything is fundable and that their investors will not only provide the money, but the “brains” to help them create a successful start-up company. Nothing can be further from the truth. With only three percent of all start-up companies receiving outside investor funding on an annual basis, it does take a fair amount of “intellectual” savvy to develop a well thought through plan that is fundable form and investors’ point of view. So, take the time and use your brains to develop a well develop business investment opportunity.  Investors will not help you with this.  You need to develop this investor appropriate investment opportunity on your own.

You Must have the Courage to Cold Call Your Customers

Many entrepreneurs have all both the “heart” and “brains” to develop attractive investment opportunity, but lack the “courage” to cold call their customers and as such, they will not be successful in the market or have the ability to execute their plan. Cold calling customers is often the hardest thing to do for entrepreneurs. Why, because this is where thinking and planning hits the pavement and there is the always the potential for rejection.  Hence, cold calling often paralyzes these same entrepreneurs.  Even if you have a great plan, you need to be able to execute this plan and in a definitive time frame.  So, as an entrepreneur you need to have the “courage” to cold all your customers and generally do what it takes to “press the flesh” to close the necessary number of deals to develop a successful start-up company. Remember, as an entrepreneur you are in business to secure customers and not to develop a cool technology, product or service offering.  So, buck up and have the courage cold call your customers and execute your plan. Nobody else will do it for you; especially your investors and all the money in the world will not help you with this task.

Many entrepreneurs expect investors to solve their problems.  They firmly believe that investors with their investment funds will provide them with the necessary heart, brains and courage to develop a successful start-up company.  This is not the case, as securing funding does not necessarily result in success in the market.  Therefore, as an entrepreneur you need to step out of the “Land of Oz” and decide that only you have control over the ultimate success of your start-up company, not investors and their funding sources.  To do this you need to have the “heart” to follow your vision, the “brains” to properly develop the investment opportunity, and the “courage” to cold call your customers and execute your plan.  If you take these steps you will go a long way toward ultimately securing funding and developing a successful a 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.

March 22, 2010 Posted by | Venture Capital | , , , , , , , , , , | Leave a 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