Robert Ochtel’s Blog

An Experienced Approach to Venture Funding

Building a First Class Executive Team Requires Objective Focus and Sometimes Tough Decisions

Beyond the investment opportunity, venture capitalists evaluate the start-up company’s executive team when making their decision to invest in an early stage company.  This is the first thing they consider, once they determine the investment opportunity has merit.  It is often said that venture capitalists invest in “the team”, as they would rather have an ‘A-team’ and a ‘B-product’ than a ‘B-team’ and an A-product’.  Therefore, when developing an executive team for your start-up company, as an entrepreneur, you need to be very careful.  This is not a “friends-based” decision. It requires objective focus, as to get to where you need to be requires an executive team that has proven experience in the business area your start-up company is focusing on, has the ability to make prudent business decisions, and can execute at a high-level in both good times and in bad.  Also, in some instances, it requires the founder to make tough decisions and release certain individuals, as some executive team members may not work out in the long run. This article outlines some of the things that need to be addressed by entrepreneurs as you are building a first class executive team for your start-up company.

Executive Team – The Beginning

Start-up companies usually begin with an executive team that is composed of individuals that in their careers have worked together at one point in time or another.  More often than not, one individual comes up with an “idea” or “concept” and passes this by one of his friends, usually a business or technical colleague.  With this “idea”, these individuals decide to move forward and develop a start-up company.  Many times, neither of these same individuals have had any experience in starting a company, or for that matter running and managing a business.  But, they give themselves lofty titles, (CEO, CTO, and Vice President of Business Development) and are off to the races.   Often this same initial executive team consists of a technical person and a business or marketing person.  These two individuals, if they have the proper backgrounds, although not a complete team can take the start-up company quite far in developing an initial “idea” into a value added business proposition.  On the other hand, if these same individuals lack the proper background, experience and focus, they often just spin their wheels trying to decide how to move the company forward. Therefore, as an entrepreneur, if you are starting a company look objectively at what you are trying to accomplish and do not build your executive team with “friends”, but with first class individuals that have the necessary and proven experience and ability to move your start-up company forward to the next level, securing funding.  If you do not, investors usually pass on your company as they will not risk their money on executive teams with no or little experience.  Remember, investors are looking to secure a substantial return on their investment and cannot afford to risk their monies on unproven and inexperienced executive teams.

Executive Team – Must Consist of Members that Contribute

Start-up companies need to accomplish many things with very little resources. Often the only real things they have are a “good” business proposition and a talented executive team.  As such, from the beginning, all executive team members must step up and contribute at a high level.  As with all teams, the complementary backgrounds and skill sets of the individual team members are necessary to put together a compelling business plan and associated value proposition that will provide a sustainable competitive advantage in the market.  Anything less will not suffice.  Therefore, each executive team member must commit themselves and their time and effort to achieving their near term goal of securing venture funding. If individual executive team members do not have the time or the necessary commitment to achieve this objective, then they need to be let go and this often requires making tough decisions by the founder and/or CEO of the company.  Remember, securing venture capital is serious business and requires both commitment and significant contribution from all the members of your start-up company’s executive team. If you do not get rid of “slackers” your investors will once they make a decision to invest.  Also, it is better to make these tough decisions early, as non-contributors more often than not have an adverse affect on the whole team, and in some instances can derail the whole start-up company.  So, recognize this and build a strong, first class team, with individuals that have the willingness and desire to contribute in the effort and objective of securing funding.

Executive Team – Filling In the Holes

A start-up company’s executive team is almost always often incomplete.  That is, your start-up company may be missing several executive team members or just a have a couple key executive positions that need to be filled.  So, while you are building your start-up company, it is smart to keep your eyes open to new and talented executives that can fill in these holes in your executive staff, and at the same time help your start-up company to achieve both its business and technical objectives.  These individuals are often hard to find, but can make an immediate and substantial impact, and at the same time be a key to achieving some important near term corporate objectives.  Hence, by doing so, these same individuals can also heuristically move your start-up company forward in the venture funding process.  Finally, it should be remembered that venture capitalists do not necessarily require a full executive team to invest in your start-up company.  Consequently, these same venture capitalists would rather have a strong, incomplete and first class team that they can help develop with their contact base, than a complete team with questionable individual, executive team members. 

Building a strong, first class executive team often makes the difference between a start-up company securing and not securing venture funding. So, as an entrepreneur, you need to be aware that initially building your executive staff with “friends” is not necessarily a smart move.  Often it is smarter to wait and build an executive staff with key individuals that can have a substantial impact and at the same time help your start-up company to meet its goals and objectives.  If you do not take an objective and focused approach to building your team, you will often have to make tough decisions later on to get rid of these same executive team members, as non-contributors or sub-par talent will not allow your start-up company to grow to its potential. Finally, remember you do not have to have a complete executive staff to secure venture funding, so focus on developing the best first in class team you can find.  This will serve your start-up company well in the long run.

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 30, 2009 Posted by | Venture Capital, venture finance, Venture Funding | , , , , | 1 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