Robert Ochtel’s Blog

An Experienced Approach to Venture Funding

Being a Successful “David” in a World of “Goliaths”

Entrepreneurs need to fight the good fight every day.  Often the situation you find yourself in is much like the story of David versus Goliath.  As in this story, you are going up against insurmountable odds.  Accordingly, you are taking on a challenge that most individuals would not attempt.  As with David, the odds are long and the probability of success is small. In addition, you do not necessarily have all of the tools your competition has to be successful in the upcoming battle. This will make your road to success that much harder. But you take on the task anyway, because something inside of you tells you that you can be successful and create a product offering that is substantially better than that of the Goliath competition and at the same time be a success in the market.  In what follows is a short discussion on how to be a successful entrepreneur as a “David” in the world of “Goliaths”.

Believe in Yourself

As with any entrepreneur, the first thing you need to do to be a successful “David” in a world of “Goliaths” is to believe in yourself and your vision. Hoping that others will believe in you and see your vision of the future is not something that will happen. More often than not people will tell you that you cannot accomplish your goal of competing in a market of players that are much larger than you.  In addition, they will try to convince you to give up your plans and follow the road more traveled.  This, they will tell you, is a much easier road and much more reliable.  In this situation you need to ignore your critics.  They do not understand your will and desire to build a successful company, and more often not are telling you what they are comfortable doing.  So, ignore your critics and believe in yourself.  More often than not, in your journey as an entrepreneur, you will be the only one that believes in your vision and you ability to accomplish your task of building a successful product offering to compete in the market against your much larger “Goliath” competitors.  Many times, during this journey, colleagues will fall by the wayside, customers will tell you they are not interested, and vendors will not take the risk of working with a small start-up company.  Ignore them all and keep moving forward, it is your belief in you and your vision that will make your start-up company successful. 

Invest In Yourse

With the changes in the investment community, you need to do a lot more work to get investors’ attention and ultimately secure funding for your start-up company. The old “back of the envelope” investment scenario is all but non-existent in today’s funding environment.  If fact, having a strong plan, a differentiated product offering, and a first class team will not necessarily get you funding in today’s investor environment.  In addition, investors want to see that you have “skin in the game”.  This will not only include non-monetary time and effort, but they will also expect you to have invested “hard money” into your company.  Today’s investors do not what to be the only ones putting money into your company.  They will expect that you and your team will have invested not only time and effort, but hard money into your start-up company to move it forward.  Like “David”, you have very little funding resources at your disposal compared to your “Goliath” competitors. Therefore, you need to be prudent and “capital efficient” with your monies in order to get to a prototype early on, the general expectation of today’s angel and venture capital investors.  So, take the time, to come up with a plan and the necessary funding resources to move your start-up company to the next level. If you do not invest in yourself and your start-up company, more often than not, your potential investors will pass, as there are many other entrepreneurs that have invested their own monies to get them to the point of having a working prototype in today’s environment.

Take Your Product to Your “Goliath” Competitors

Often entrepreneurs do not put in the effort to contact their customers early on.  As a “David” in the world of “Goliaths”, this is something you necessarily need to do.  You are not walking in the door with “Intel” on your back, and as such setting up meetings with potential customers will be a much more difficult task than that of your “Goliath” competitors.  But, as the entrepreneur and “chief evangelist” of your “David” start-up company, you need to contact your customers and find a way to get you and your product offering in front of them. In addition, you need to remember to differentiate your product from your “Goliath” competitors. This is very important, as being the small player in a market dominated by large “Goliaths”; you need to convince these same skeptical customers to purchase your product offering.  So, take the time and effort to introduce your product offering to your customers and at the same time create a differentiated position yourself against “Goliath” competitors.  This will provide you with confidence in front of your investors and provide you with much more insight as to what will make your “David” start-up company successful in a world of “Goliath” competitors. 

As an entrepreneur, you need to fight everyday to move your start-up company forward. Being a “David” in the world of “Goliaths” you will often find yourself being the only one that sees your vision.  In order to be successful in this situation, you need to necessarily believe in yourself, invest in yourself, and take your product to the competition. Only by taking this approach will you be able to create a path forward to success in the market.  Remember the business world is full of “Goliaths”, but it only takes one “David” to slay the giant and change the world.

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.

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July 26, 2010 Posted by | Venture Capital | , , , , , , , | Leave a comment

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

Three Things to Consider When Developing a Successful Strategic Partnership for Your Start-up Company

Strategic partnerships can be extremely beneficial and profitable for both large and small companies.  In addition, for start-up companies, a well conceived and executed strategic partnership can be the difference between ultimate success and probable failure in the market place.  Accordingly, strategic partnerships are invaluable to start-up companies as most if not all of these same companies are resource limited.  This can affect many of the necessary requirements for success in the market, including their product offering, go to market strategy, availability of development resources, as well as their ability to establish a market presence and create market traction.  As such, a well conceived and executed strategic partnership can create significant value for your start-up company. It can also provide high levels of value for your strategic partner, large or small.  To develop a successful strategic partnership, as a start-up company you need to consider three things, including:

  • Does your strategic partnership help to complete your product offering?
  • Does your strategic partnership enhance the value proposition to your customers?
  • Is your strategic partnership a “win-win” for both parties?

If you answered “yes” to these three questions, you are well on your way to a valuable and successful strategic partnership.  On the other hand, if you answered “no” to any of the above questions, you should reconsider entering into this strategic relationship, as it most likely will not ultimately provide your start-up company with the necessary success you desire in the market.

Does your Strategic Partnership Help to Complete Your Product Offering?

As a start-up company, more often than not you do not have all of the necessary resources to develop the complete product offering you desire to bring to the market.  Accordingly, you will need to look for potential strategic partners to help complete your product offering.  A simple example of this would be a strategic partner that offers “protocol stack” software to complete your start-up company’s “chipset” hardware product offering.  More often than not, the cost of developing a protocol stack can be significant to a chipset hardware vendor. On the other hand, in order to have a “complete” product offering in the market, your start-up company requires a proven, bug-free protocol stack that will allow your customers to drop the chipset in to the end product application design.  The value of providing a complete “protocol stack/chipset” offering to your end customers can differentiate your product offering in the market and at the same time accelerate your end customers development time and allow them to get their end-product(s) to market much faster.  Therefore, as exemplified here, looking to identify a strategic partner to help “complete” your product offering can provide your start-up company a significant competitive advantage in the market.  It also significantly reduces your time to market and overall development costs.  So, as a start-up company looking to identify potential strategic partners that can help “complete” your product offering can provide you with s significant short- and long-term advantage in the market place.

Does Your Strategic Partnership Enhance Your Value Proposition?

One item to step back and consider before you enter into a strategic partnership, with any company, large or small, is the ability for the strategic partnership to enhance your start-up company’s value proposition to your customers and the end market.  Often, when considering your start-up company’s value proposition, it is best to be honest with yourself and put yourself in your customers’ shoes to better understand the reason(s) they would consider buying your technology product or service offering.  If your “value position” is not significant enough, potential customers will pass on your product offing, leaving your start-up company with the inability to secure traction in the market.  On the other hand, if you can identify a strategic partnership that can not only change your start-up company’s value proposition, but also enhances it to increase its overall attractiveness to your customer base, you have increased the value to your end customers and at the same time enhanced your ability to secure market traction.  So, when considering a strategic partnership only consider those strategic partners that can enhance your start-up company’s value proposition. This will provide significant value to your start-up company and to your target customer base and at the same time also ensure higher levels of success in the market place.

Is Your Strategic Partnership a Win-Win for Both Partners?

Finally, a strategic partnership needs to be a “win-win” for both parties.  If not, one party will feel slighted; that is they are bringing more value to the relationship than they are receiving in return for their contribution to the strategic partnership.  As an entrepreneur of a start-up company you need to go into any potential strategic partnership with your eyes wide open.  As such, you need to work to construct a strategic partnership that provides “significant” and “fair” value to both parties according to their contribution to the end product being offered to the market.  If you do not do this, your strategic partner will not see the relationship as fair and ultimately not provide their full effort to make it a successful partnership.  This type of strategic relationship is “doomed” from the beginning, and will ultimately cost you more in time and energy to manage the strategic relationship than you will actually get out of it.  Therefore, it is very important that you initially construct a strategic partnership that is fair upfront to both parties and creates a win-win atmosphere in both perception and reality.  This will provide you with short- and long-term success in the market.

Successful strategic partnerships can be the life-blood for start-up companies.  With limited resources, these same start-ups often need to look outside of their companies to create and bring a successful technology, product or service offerings in the market.  To create a valuable strategic partnership start-up companies must identify a potential strategic partner that can help to complete their product offering, enhance their value proposition to their customer base, and creates a win-win for both partners.  If you are successful in accomplishing this, your start-up company will substantially enhance their potential for success in the market both in the short- and long-term.

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 17, 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, You Need to Get the Attention of Your Investors within the First Three Slides to Secure Funding

When meeting potential investors for the first time entrepreneurs need to quickly secure their attention.  Although, the standard thinking is that you have an hour, with 20 minutes to present and 40 minutes of questions, you really only have a few minutes to secure their attention and hold their interest. As such, if you do not secure your potential investors attention within the first three slides of your presentation, you will not secure funding.  Why, because like with any presentation, especially in the case of potential investors, if you do not secure their attention quickly, you risk the likely hood of turning them off completely to your investment opportunity.  So, as an entrepreneur looking to secure funding from third party investors, you only have three slides and a few minutes to secure their interest.  This includes, defining the opportunity, describing the problem and outlining your solution.  If done appropriately and succinctly, you will secure your potential investors’ attention for the next hour.  If not, your investors will turn off and move on to thinking about other potential investment opportunities.  So remember, you need to secure the full attention of your potential investors very quickly, or you risk the losing them and your ability to securing funding altogether.

Define the Opportunity

When presenting to investors, you first need to define the opportunity to be able to get your investors’ attention and their “buy-in” that your target customers will buy and use your technology, product or service offering.  This means you only have one to two minutes to sell the opportunity to your potential investors.  With the complexity of many product offerings, you need to focus on “tugging on the emotion” of your potential investors.  How would the customer use your technology, product or service offering?  This can often best be described with an example application.   This approach will get your investors attention, as they will be able to see how customers can use your technology, product or service offering.  As such, you are ultimately describing the end market application through the customers’ eyes.  This approach will allow your potential investors to empathize with the customer and better understand both the application and the opportunity that exists for your technology, product or service offering.  By creating the ability for your potential investors to understand investment opportunity through your end customers’ eyes, you quickly be able to create a lasting, positive impression in the minds of your investors, securing their interest to continue listening to your investment opportunity with intrigue and interest. 

Describe the Problem

Once you have defined the investment opportunity in the minds of your potential investors, you need to succinctly describe the problem. The “problem” is the opportunistic need you are solving with your technology, product or service offering. This problem description again needs to be clear in the minds of your potential investors. As such, they need to believe that you are serving an appropriate strategic opportunistic need in the market. So, take the time up front to properly describe the problem in terms that all potential investors can understand.  This will move these same third party investors one step closer to understanding the investment opportunity and again provide them one more time to see the investment opportunity from the “market needs” side of the equation and not from the technology, product or service “provider’s side” of the equation.  By being able to quickly and properly describe the problem from a “market needs” approach you will again be standing in the shoes of your potential investors and answering their questions – and at the same time allowing them to come to your conclusions on their own. This is the “best” way to approach investors from a “problem definition” point of view.  If they believe there exists a problem in the market, then they are more likely to believe in your solution.  Now, you are 80% there in securing their interest in you, your start-up company, and its technology, product or service offering.

Outline Your Solution

Finally, as an entrepreneur, describing your potential investment opportunity, you need to outline your solution to the problem you just portrayed.  This description needs to not only succinctly outline your solution, but it needs to outline the benefits of your solution in the market over any and all other solutions in the market.  Remember you are trying to quickly secure the interest in your technology, product or service offering from your potential investors, so they need to be able to quickly understand, in their minds, your solution and the competitive advantages it offers in the market.  So, as an entrepreneur you need to not only outline your solution, but you need to appropriately describe all of its competitive advantages and associated utility to the consumer or end user.  By doing this, you are making sure that your potential investors again come to the same conclusions that you have, and that they believe your start-up company offers a solution that provides a long term competitive advantage in the market.  So, properly outline your solution to your investors, as once you convince them that you offer “the solution” for the “problem” you are solving, all follow-on information provided during your presentation is now just back up support materials to justify the potential investment opportunity.

As an entrepreneur, typically you have an hour to present in front of sophisticated investors (e.g., venture capitalists).  This generally consists of a twenty minute entrepreneurial presentation and forty minutes of questions from these same potential investors. In reality, though, you only really have a few minutes to secure potential investors’ attention. To properly do so, you actually need to get their attention within the first three slides of your presentation by defining the opportunity, describing the problem, and outlining your solution.  If done properly and succinctly, you will secure their attention and the interest of your potential investors.  If not, your investors will “turn off” and move on to thinking about other investment opportunities.  So, as an entrepreneur, remember, you have need to secure the full attention of your investors quickly, or you risk the losing them and your ability to securing any funding from potential investors altogether.

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 3, 2010 Posted by | Competition, Customers, Execution, start-up, Venture Capital, Venture Funding | , , , , , , , , , | Leave a comment

Entrepreneurs, Stretching the Truth May Ruin Your Chances of Securing Funding from Potential Investors

Many times when entrepreneurs meet potential investors they do so for the first time.  With a blind introduction, a cold call, or recommendation from a colleague, entrepreneurs need to quickly gain credibility with their potential investors.  This is not an easy task, and is especially true when presenting to potential professional investors (e.g., venture capitalists) that “know their space” and are looking for the next exceptional business deal, with a credible and fundable team. In this situation, the worst thing that an entrepreneur can do to ruin the potential of securing funding from these same investors is to “stretch the truth” regarding any aspect of their business, the business opportunity, or their current state of development.  This approach to trying to “impress” your potential investors will only come back to haunt you, and in a worst case scenario it will ruin your reputation as well as your chances of receiving funding from any or all investors. Remember, the financial community is small and information regarding “bad” deals or non-credible entrepreneurs will get around fast, ruining any chances or receiving funding in the future.   

Increase Your Credibility by “Knowing” Your Business

The best way to prepare for investor meetings is to know your business.  As such, you need to do months of business planning and preparation just to get to the point where you are truly prepared for meeting potential investors for the first time.  Winging it will not go too far, as you will lose any potential interest from your investors if they know that you are not fully prepared, and trying to skate through the funding process. Remember, professional investors usually specialize in a given “space” (e.g., biotechnology, IT, wireless), and as such they are very well read in this area of focus and know all of the players and the current and future trends in the industry.  You need to be just as “knowledgeable” as they are, as you are trying to convince these same potential investors that you and your start-up company offer a unique technology, product or service offering that can create a long term sustainable competitive advantage in the market. This is no small task, but by “knowing” your business you will have required knowledge to create a credible story line for your technology, product or service offering.  Therefore, before you call one investor to set up a meeting, make sure you have taken the time to “know” your business, as this will substantially increase your credibility with your potential investors.

Don’t Stretch the Truth, Just Say “I Don’t Know”

When presenting in front of potential investors for the first time, many entrepreneurs want to always appear knowledgeable on all subject matter and all questions that are posed to them.  If you are well prepared, you will most likely be able answer 99% of the questions or subject matter posed to you during your first meeting with potential investors. That being said, there will always be one or more questions that you either don’t know the answer to, or did not prepare for.  This can be compared to preparing for a test, as you know you are ready, but it is that one thing you did not spend much time on that will catch up with you at test time.  To get through this many entrepreneurs try to “stretch the truth” or their “knowledge base” in a real time fashion in front of their investors. This can be a real untenable situation. In the worst case scenario, your investors know you are “stretching the truth” and you will instantly lose all credibility.  Alternatively, this approach will lead to more follow-on questions regarding the same subject matter and again you will be out on limb, just hoping to be able to get through the line of questioning without getting caught.  These scenarios can be easily avoided by just telling the potential investors, “I don’t know and I will get back to you.”  This is the best approach, as in this scenario you do not put your credibility in jeopardy and you still have to ability to impress your investors with your follow-up answer.  Remember, sometimes investors are just asking you questions to see how you will react.  So again, do not put yourself and your reputation out on a limb by “stretching the truth” in an effort to appear knowledgeable, as this approach will not work with potential investors.

Investor Due Diligence will Validate Both You and Your Start-up Company

Finally, as an entrepreneur, your “credibility” needs to stand up through the investor due diligence process. Therefore, any half-truths, or “stretching of the truth” during your investor meetings will be invalidated during the due diligence process. For professional investors, this due diligence process can take three to six months.  Therefore, during this process, you need to be careful to represent you and your start-up company in a truthful manner at all times. Accordingly, this due diligence process will require you to address all aspects of your start-up company, including:

  • The development status of your technology, product or service offering,
  • The members of your executive staff and their participation in your company,
  • Any and all invested capital, and company debt,
  • Strategic customer relationships,
  • Market size and growth potential,
  • Customer development status,
  • Corporate capitalization, and
  • Other

By truthfully and fairly representing your start-up company’s investment opportunity you will be fully validated through the potential investors’ due diligence process. This will also provide them with the assurance that they are dealing with a first class, reputable team, making your start-up company a much more favored investment opportunity for potential investors.                                                                                                            

Most entrepreneurs and potential investors do not know each other when the meet for the first time.  As such, the onus is on the entrepreneur to quickly gain credibility with these same potential investors. This is accomplished by knowing your business, never “stretching the truth” and presenting an investment opportunity that will stand up to thorough due diligence by your potential investors.  By doing so, you will increase your immediate credibility with you investors and the potential of receiving funding from these same investors.  So, take the high road and present you and your start-up company in a straight-forward, honest manner, it will serve you well with your potential 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.

April 26, 2010 Posted by | Venture Capital | , , , , , , | 1 Comment

Entrepreneurs, Legacy Costs Can Hurt Your Start-up Company’s Fund Raising Efforts

Start-up companies, by definition, need to be nimble and have the ability to change direction as the market changes.  Often with the development and maturation of a start-up company, things can change significantly from the original direction, mission and focus of the company.  This is especially true, if this same start-up company has been through multiple incarnations to develop a differentiated and long-term sustainable competitive position in the market.  These changes in direction do not come without costs to the start-up company itself.  And, often these costs can hurt your start-up company’s fund raising efforts.  Therefore, as you move forward and your start-up company changes direction, strategy, and its market entry tactics, you need to step back and understand what legacy costs need to be let go or changed to successfully move your start-up company forward in your fund raising efforts.  This can include replacing old executive team members, restructuring the company’s capitalization, and shedding old, irrelevant contracts, as all of these things if not appropriately addressed will hurt your start-up company’s fund raising efforts. 

A Change in Direction May Require a New Executive Team

Significant changes in direction for a start-up company may result in requiring new executive team members to move your start-up company forward.  Often these changes in direction come with a new CEO.  As such, the executive team members that were relevant for the old company and its original focus are not appropriate for the new company and therefore this often requires the new CEO to clean house and secure a completely new executive team.  This significant level of change within the executive management team of a start-up company can be very traumatic and should not be made over night. If there are some team members that have relevant capabilities and skills that add significant value to the new direction of your start-up company, then they should be given a chance to move forward with new direction of the company. On the other hand, if there are executive team members that lack the proper motivation and appropriate skill sets to add any value moving forward, then they will need to be let go and replaced with new executive team members that have the skill sets, motivation, and ability to move your start-up company forward.  Nothing is worse for a start-up company than to have legacy executive team members hanging around that add no value to your start-up company and its current direction. So, make the decision to bring on new executive team members and let go the legacy executive team members that do not any value regarding the new direction of your start-up company.  This will clean the slate and provide for a better path forward for securing funding.   

A Legacy Capitalization Structure Often Needs to be Changed

One thing that will immediately diminish the interest of potential investors is a legacy capitalization structure that does not support your required funding efforts. This legacy capitalization structure can take many forms and can include the following:

  • Too many small investors with tiny equity positions,
  •  Too much debt,
  • Too much equity for legacy team members,
  • Too much of a “hangover” in the stock option pool,
  • Not enough equity for multiple investor rounds,
  • Other.

These legacy capitalization structure issues need to be addressed before you talk with investors.  If you do not do this, you may risk losing potential investors.  So, take a look at your legacy capitalization structure before you engage with your investors.  If you do not know what makes an attractive capitalization structure which will facilitate the venture funding of your start-up company, find a financial consultant that has worked with venture capitalists. They will be able to provide you with the appropriate advice regarding recapitalization of your start-up company to make it more attractive to investors. 

Old Contracts May be Inappropriate or Irrelevant

Often with significant changes in direction, start-up companies should take the time to review old contracts and strategic relationships.  Contracts that were once important to your start-up company may be inappropriate or irrelevant to your start-up at its current point in time.  So, make sure that you clean up old contracts and relationships before you engage with your investors. This can include:

  • Discontinuing certain strategic relationships,
  • Cancelling old irrelevant contracts,
  • Reviewing and modifying existing contracts,
  • Other.

As an entrepreneur of a start-up company you must take the necessary steps to eliminate any risks moving forward. This includes reviewing all of your outstanding contracts and strategic relationships.  By doing so, you will facilitate third party angel or venture capital funding.

Often start-up companies go through multiple incarnations to develop a differentiated and long-term sustainable competitive position in the market.  These changes in direction do not come without costs to the start-up company itself and often require this same start-up company to shed some of its legacy costs to move forward in its fund raising efforts. To do this, an entrepreneur must often secure a new executive team, change its capitalization structure and cancel old, irrelevant contracts.  This is often necessary, as in doing so, you will be putting your start-up company in a much better position to secure venture funding from angel investors or venture capitalists.

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 29, 2010 Posted by | Venture Capital | , , , , , , , | 1 Comment

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

Entrepreneurs, Get Your House in Order Before You Present to Investors

Many start-up companies go through one or more incarnations before they are ready to engage with potential investors.  As such, more often than not, a tremendous amount of history exists that may have detrimental effects on your start-up company and its ability to secure funding from these same investors. Often, with changes in corporate vision and strategy, redirection in product focus and new executive teams along the way, there exist significant amounts of baggage that can have an adverse affect on how potential investors view your start-up company.  In order to make sure you put your best foot forward, you need to make sure that you have your house in order before you engage with investors. To accomplish this, you should review all of your start-up company’s outstanding contracts, update your capitalization structure, and secure a committed team.   If you do this, you can avoid any potential missteps with your investors and at the same time increase your chances of receiving funding.

Review Your Contracts

If your start-up has been through one or more incarnations, more often than not there exist old contracts that need to be reviewed and then determined if they are still applicable to your start-up company, its vision and product offerings.  Often, old contracts were based on completely different sets of assumptions and circumstances and must be voided or dissolved appropriately. If not disposed of properly, these outstanding contracts can have a detrimental effect on your company moving forward.  In some cases, these same contracts need to be renegotiated, since at the present time, your start-up company may have a completely new business model that significantly changes the role or importance of a contractor and their technology, product or service offerings.  Accordingly, many times, going back and renegotiating a contract can be a difficult and time consuming task.  So, before you open up a can of worms, you should spend the time to thoroughly review the contract to see if you can live with it as originally structured. If you can, keep the contract as is.  If you cannot, you need to go back and properly explain to the contracted party, that there have been significant changes in the direction of the company and you need to either renegotiate the contract.  If they are not willing to renegotiate, you need to find other sources for their technology, product or service offerings and immediately cancel the contract.  It should be noted that often when you try to renegotiate a contract, the contractor will have decided that the original contract was not fair to them and try to get a much better deal.  If this is the case, you need to understand if you can live with the updated demands.  If you cannot, then cancel the contract and move on.  Remember, you investors will want to review all of your contracts and old contracts that could have an adverse effect on your start-up company and have not been updated or voided will be an issue with your potential investors.

Update Your Capitalization Structure

Many times a start-up company that has been through several incarnations will need to be recapitalized to properly reflect the new debt and equity structure of the company and its present executive team.  Often old, executive team members and corporate structures will need to be modified, in order to move your start-up company forward. This is one of the most difficult tasks to accomplish, as old executive team members will want to retain their equity ownership and new executive team members will want their “fair” share of equity for their anticipated future contributions to the company.  So, you need to take a look at the whole picture, including previous contributions by old executive team members and their importance to your start-up company at the present point in time, and then come up with a new capitalization structure that works for all parties involved.  Many times, this includes changing the equity ownership of old team members.  In addition, you need to address any debt on the books and determine, if this debt is associated with any significant and present aspect(s) of your start-up company’s business moving forward.  If so, you will have to live with it, and if not you need to try to get this debt off the books through negotiations and/or voiding of any associated contracts. Remember, investors do not invest in your start-up company to pay off old debts.  So, if you can remove any old debt, do so, as it will help your start-up company moving forward.  Finally, in some instances, a start-up company with a long history, minor changes in the capitalization structure will not improve the situation.  In this case it is better to take your start-up company into bankruptcy and restart the company with a new capitalization structure.  Although not recommended, sometimes this is unavoidable. 

Secure a Committed Team

As often stated, investors invest in the “team” and not the “product”.  As such, for a start-up company with a history of several incarnations, often original team members, at the present time, do not add any significant value to your start-up company.  As such, these team members need to be removed and replace with new committed team members that will add significant value to the new direction of your start-up company. If you do not do this, you will end up with a bloated team and several non-contributing team members. This will de-motivate your contributing executive team members and bring the performance level of your start-up down.  Remember, it is better to clean up your start-up company’s executive team before you engage with investors. Many times these conversations are difficult, but necessary.  Accordingly, you need to have the best executive team you can possibly have and get their commitment to move your start-up company forward to success in the market before you talk to investors.  If you do not, you will not be successful in securing funding from potential investors.

A start-up company that goes through several incarnations often has a significant amount of history that can adversely affect the company moving forward.  To avoid this, and before you begin talking to potential investors, you much get your house in order. This includes reviewing your contracts, updating your capitalization structure and having a committed team.  If you do this before you engage with investors you will greatly improve your chances of securing funding from these same 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.

March 15, 2010 Posted by | Venture Capital | , , , , , , , , , , | Leave a comment

Investors Don’t Fund Your Start-up Only to Have You to Figure Out What to do Next

Most entrepreneurs come to investors with an “idea” or “concept”, looking to receive investor’s monies only to allow them to figure out what to do next.    This is a very misplaced approach and is guaranteed to turn investors off.  With this approach, more often than not, you will get an immediate rejection with no explanation. Why? Because, investors are very busy and only interested in only the most well developed and presented investment opportunities. Something that is not well thought through and or properly presented will not get their attention or their monies.  This should be understood by all entrepreneurs that approach angel investors or venture capitalists. As such, investors don’t fund start-up companies only to have you figure out what to do next.  They fund you to execute a well thought through plan.  To accomplish this, you need to do your planning, develop a business plan and be ready to execute.  If you do this, you will greatly improve your potential for not only getting potential investor’s attention, and you will also increase your chances of receiving funding from these same investors.

Do Your Planning

Doing planning is the most important and time consuming, arduous task an entrepreneur needs to take on.  This is something you need to do early, as waiting to do your appropriate planning will only send your start-up company in the wrong direction and require you start over, causing you to lose valuable time.  Planning is difficult for most entrepreneurs, as more often than not they want to start writing their business plan day one.  This is a huge mistake, because if you do not have the appropriate information, at your disposal, you will not come to the right conclusions regarding how, and in what direction to move your start-up company and its technology, product or service offering forward. Therefore, take up to two months to properly research and secure the appropriate information that will help you develop a well thought through business plan.  This includes:

  • Determining your proprietary technology, product or service offering,
  • Identifying the general trends and strategic opportunistic needs of the market,
  • Identifying a set of target markets and their growth projections,
  • Analyzing the competitors within your targeted markets,
  • Developing basic market entry strategy and tactics, and
  • Understanding the basic financial model of the targeted markets.

By spending the appropriate amount of time doing your planning up front, you will develop a vision, focus, and direction for your start-up company. On the other hand, if you expect potential investors to fund you to do this early planning work, you will be sadly disappointed.

Develop a Business Plan

After you have spent the time to appropriately plan the early stages of your start-up company, you need to put together a well thought through business plan that takes in all of this planning information. This plan will be much easier to write at this point because you have taken the time to secure the necessary information.  Now, you just need to take the necessary time to put it on paper.  This is also a very big task, and it again will take a significant amount of time and effort. But, if and until, you put your business plan on paper, your start-up company will remain “in the ether”.  As, it is only when you begin to put your business plan on paper do you have the ability to identify issues, holes and other items that need to be addressed to complete your business plan. So, take the necessary time to develop a will presented and thought through business plan, you will learn a lot in the process and many times provide yourself will essential insights on how and in which direction to move your start-up company forward.  Finally, ignore those individuals that tell you that today investors do not read business plans.  While, in some cases, this may be true, it should be remembered the writing and development of a well thought thorough business plan will again provide you with the necessary insights that will provide your start-up company with significant advantages when you finally go to market.  Remember, take the time to develop a well thought through business plan it will serve you well when you go to secure funding from potential investors.

Be Ready To Execute

By the time you begin to talk with investors, you should be ready to execute your business plan. To be ready for this, you need to have:

  • Identified and talked with your target customers,
  • Secured a well seasoned “A- level” executive team,
  • Secured relationships with any necessary strategic partners, and
  • Developed a well thought through and developed go to market strategy and associated tactics.

By doing this you will have identified many, if not most of the issues that could possibly cause your start-up company to stumble out of the gate.  You will also have put your start-up company in a strong competitive position which will allow you to execute and rapidly secure customers and revenue. This will impress your potential investors and get their attention.  Remember, investors do not fund you to figure things out, they fund you to execute.

Most entrepreneurs come to investors with an “idea” or “concept”, only looking to receive investor’s monies to allow them to figure out what to do next.    This is a very misplaced approach and is guaranteed to turn investors off.  By taking the time up front and putting the effort to do your planning, develop a business plan, and being ready to execute you will impress your investors and more than likely get their attention.  In addition, by doing so, you are not expecting investors to fund you to figure things out, but putting your start-up company in the best position to receive funding from potential investors.  So, get in there and do the necessary work up front, it will serve you well when you begin talking with potential 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.

March 8, 2010 Posted by | Venture Capital | , , , , , , , , | Leave a comment