Robert Ochtel’s Blog

An Experienced Approach to Venture Funding

Entrepreneurs, with Regard to Business Planning – Always Start from the Markets

Business planning is the first step in developing a proper business plan.  Often, entrepreneurs choose to skip this step in the business plan development process.  Why?  Because on day one most entrepreneurs want to begin by writing their business plans. This is a mistake, as this jump to the middle of the business plan development process will often require these same entrepreneurs to re-start their business plans by going back to the beginning of the process, business planning.  This being said, if done properly, where do entrepreneurs being their business planning process?  Do they look at their competitors? Do they define their go to market strategy? Do they determine their pricing?  No, one always begins their business planning process by looking at the markets.  In what follows is a short discussion on some of the things that need to be addressed when initiating your business planning process by starting from the markets.

Understanding the General Market Trends and Needs

The first thing you need to do to begin the business planning process is to step back and delineate the overall market trends and strategic market opportunistic needs.  That is, what are the long term general trends in the market?  Is there an aging population?  Are consumers moving toward mobility?  Will gas prices go up long term?  Properly identifying the near term and long term general market trends is very important, as it will define where the expected long-term growth is in the markets.  Understanding these general market trends will also allow you with the ability to identify the associated strategic opportunistic needs of the markets.  Will the elderly require at home care?  What are the data encryption requirements for mobile data, audio and video?  What technologies will be the required in a green economy?  By understanding the general market trends and the associated strategic opportunistic needs of the market you can better delineate where and how you want to participate in the market and how you can better position your start-up company to ride the wave of future these same future trends and needs. This is something investors will want know that you clearly understand and have a long term plan to address with your technology, product or service offerings.

Defining the Market Opportunities

Once you understand the general market trends and needs, you need to move on to defining the target market opportunities.  All markets are not equal. Some are large. Some are small. Some have strong growth. Some have slow growth. If the market is too small your investors will not have the ability to receive a proper return on their investment.  Or, accordingly, a small market will require your start-up company to secure an unrealistic percentage of market share, which will again not seem reasonable in the eyes of your investors.  In essence, here, by defining the market opportunities, you are determining not only the overall size of the target markets, but the expected growth of the markets themselves over the projected period of interest, usually three to five years.  Are the markets high growth markets or slow growth markets?  These are things you need to understand, as you investors generally want to invest in “large” markets that have significant growth potential.  Why, because a rising tide lifts all boats.  Here, if the market it not only large, but has substantial growth there is room for new competition. In addition, large, high-growth markets allow start-up companies to secure market share and create a position for themselves in the market.  So take the time to define the market opportunities that you will be addressing. As part of this planning process, it is also important to understand the unit volume growth numbers, not just the overall market size in total dollars.  These volume growth numbers are essential, as they will provide you with a basis to project your revenue from product sales, but also your market share growth over a generally accepted business planning period of three to five years. So make sure to clearly define the market opportunities, as this is an essential part of the business planning process.

Prioritizing Your Target Markets

As an entrepreneur of a start-up company, by definition you have limited resources.  Therefore, you cannot address all potential market opportunities that are available to you in the market.  Therefore you need to prioritize your target markets.  Some you will address immediately, and some you will address later.  This can be based on many things including:

  • Time-to-market, and near term revenue,
  • Ease of product development,
  • Long term growth potential, or
  • The competitive landscape.

All of these items will affect your decision on which markets to address up front.  The key here is to pick a single market or a limited market-segment space to address.  This will provide you with focus and at the same time allow you to put all of your resources toward a targeted and well defined market opportunity.  It may be that you are only addressing a small portion of a targeted market, say the high-end luxury car market.  Or it may be that you are developing a consumer product that has obvious future commercial market applications. The key here is to prioritize your identified market opportunities and only address those near term opportunities that provide near term market traction and also your start-up company with a unique, differentiated position in the market.  So, take the time to prioritize your target markets, it will provide you with focus and allow your clearly identify both near term and long term market opportunities for your start-up company.

Business planning almost always escapes first time entrepreneurs.  They more often than not they want to begin on day one writing their business plans.  This is a mistake, because if you do not understand the landscape of the potential market opportunities ahead of you, will not make informed business decisions that you can defend in front of your potential investors.  Therefore, as an entrepreneur you need to begin your business planning process by focusing on the markets. This includes understanding the general market trends and needs, defining the market opportunities, and prioritizing your target markets.  By doing this you will create a clear path forward and provide both near term and long term market success for 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.

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August 9, 2010 Posted by | Venture Capital | , , , , , , , , , | Leave a comment

Entrepreneurs, Business Plans Often Do Not Reflect Reality

The development of a business plan should be only viewed as a “plan” as it is really out of date the day you put your pencil down.  On the other hand, the business plan is a useful tool for the entrepreneur to create a map of the opportunities they will be addressing in the market.  As such, it provides a baseline of the path forward in the market, a time frame as to when your product will be available, and a blueprint of your financial model, and how you are planning to provide your investors a substantial return for their investment.  That being said, after you secure funding and start development, is when reality sets in.  Many of the scenarios outlined in your business plan from the cost assumptions, to operations, to the target markets may require a dose of reality when you begin development and execution of your original business plan.   In what follows is a short discussion on some of the things that need to be addressed forge through these realities. 

Ferret Out Your Unforeseen Product Costs

Many entrepreneurs do not have a good handle on their product costs and associated margins as presented in their business plan.  The numbers they present are often marred with faulty assumptions and inaccuracies that will hurt their bottom line when they finally bring their product to market.  This is not unusual as “reality” often has a way of creeping in and changing your actual costs.  These realities can often affect your product costs, operating margins, etc.  As an entrepreneur you need to get a handle on anything that significantly affects your original planned costs.  As an example, in operating an on-line eStore there are costs associated with allowing customers to use their credit cards on line to purchase products and services (e.g. merchant and gateway costs). Your business plan may have originally assumed your credit card merchants will only charge you a set service charge of 1.6% of each purchase price plus a fixed fee for each transaction.  But, when you finally get your bill you see that the average charge for each purchase is 2.6% plus the same fixed fee.  This is a big reality for a couple of reasons.  The 1.0% affects your gross margins and your bottom line. In addition, if you have a micropayment based business, this slight change can affect your business model, and also cost your company thousands of dollars every year in unanticipated costs. What happened here? The business plan assumed that the merchant charged a fixed percentage for each online purchase.  The truth is that depending on the consumers credit card, their credit rating, and any rewards programs they participate in, these same merchants have over 490 different costs levels associated with the percentage they charge and the number initial provided is usually a low ball number and does not reflect the realities of the real credit card customer base.  So in the end, the start-up company will be hit with additional costs that will affect their margins and bottom line.

Understand Your Real Operations

Many start-up companies do not really understand the total costs of doing business. They assume they can produce their end products based on a set of assumptions that do not always take into consideration the total cost of production, including marketing and overhead.  They just look at the product cost and not all of the infrastructure costs associated with producing their product and getting it to market. Recently, I was involved with a start-up company creating electronic content from published books. They claimed that their costs were only $1.00 to create a single piece of electronic content. What they did not tell me is that much of upfront costs associated with converting the original content into electronic form were not taken into consideration with this presented cost number.  These conversion costs included extracting the text, properly formatting the files, and sizing the associated images that were to be used in the final product.  The costs they claimed were only associated with the cost of taking the electronic content, once it had been created, and putting it into a spreadsheet that was ultimately extracted automatically into the online database. As it turns out if you take into consideration all of the preparation steps this probably added $3.00 to $4.00 to the cost of producing this same electronic content. So again, when the reality hits the road, the associated operating costs were significantly higher than outline within the business plan. As it turns out, I worked with them to develop a standard format as well as a couple of text/image extraction and verification programs and they were able to get the total costs of creating this same electronic content to about $0.25 single piece of electronic content.  So, again the operational costs of the business plan did not reflect the realities of the real world.

Be Open to New Market Opportunities

Entrepreneurs and their business plans tend to be fairly myopic.  That is, they generally focus on a limited target market or small defined set of target markets in which to sell their product offering.  This is generally considered a good thing, since it provides your start-up company with focus.  On the other hand, often many of the technologies, products or services being developed by this same start-up company could be used in other, non-related markets which may drive new, larger near term and long term revenue opportunities for your start-up company.  As a recent example, I was working with a start-up company that was developing a product for a consumer application.  After talking to an expert in the industry, it turned out that they believed that this same product offering, with minor modifications, could be used for commercial applications. Here, the start-up company was aware of this, but did not focus on this as a near term revenue opportunity for the company.  After a limited number of discussions, what was presented to this same start-up company was a strategic partnership that allowed for immediate nationwide penetration into the targeted commercial market with the strategic partner’s nationwide sales force.  This commercial opportunity, although not originally a near term focus of the start-up company made sense both strategically and helped with their near term marketing tactics.  So, again the business plan did not outline this opportunity for the start-up company, but the realities of the market, drove this start-up company to be open to new opportunities in the market.

A business plan should be considered a useful jumping off point for start-up companies to provide an initial path forward in addressing the market.  In reality, a business plan is out of date the day it is completed and often many of the underlying assumptions of the business plan are either incorrect or change substantially once the realities of the market hits.  Entrepreneurs need to be cognizant of this and appropriately adjust to these same market realities by ferreting out unforeseen product costs, understanding their real operations, and being open to new market opportunities.  By doing this you will be able to navigate through the realities of the market on your road to success.

This information was taken from Robert’s new book: “Business Planning, Business Plans and Venture Funding – A Definitive Reference Guide for Start-up Companies”.  Available at www.amazon.com.

August 2, 2010 Posted by | Venture Capital | , , , , , , | Leave a comment

Contract Negotiations Require Three Things to be Successful

Start-up companies often look to partner with third party companies to help them create become a successful company and at the same time create a presence in the market.  Whether it is a strategic technology partnership, a sales channel development relationship, or a key customer, all of these potential engagements will require contract negotiations to ultimately secure the relationship. As such, it is often at the contract discussion point of the relationship when one party tries to negotiate an advantage over the second party, and is where these same potential relationships often break down.  This jockeying for the upper hand does not work in any contract negotiations and often results in one or both parties walking away from the contract negotiations. In the end, both parties lose, since neither party will then have the ability to use their unique technologies, products, or services to bring value to the relationship and create a unique position that brings ultimate economic benefit to the parties involved.  This resultant breakdown in contract negotiations can often be avoided if both parties are honest, respectful and negotiate in “good faith” during their contract discussions.  The following addresses the importance of these three important tenants of successful contract negotiations.   

Honesty is the Best Policy

As in any personal or professional relationship, honesty is the best policy. If either party is not honest, then the other party cannot “trust” the first party and hence there is no solid basis for developing a strong relationship.  This is especially true for start-up companies.  Often entrepreneurs, in an effort to close an important strategic deal for their start-up company, present themselves, their company or their technology, product or service offering in a manner that does not always represent their true status of their underlying technology, development progress or competitive advantage in the market.  This intentional misrepresentation can cause problems down the road and may end up killing any contract negotiations.  In addition, if the other party finds out that your start-up company has not been honest regarding its representation, then all bets are off and often any contract negotiations will incur irreparable damage.  As such, one party will walk away, because their confidence in their potential partnership has been undermined.  So, as a start-up company it is best to be totally honest during contract negotiations, as the risk associated with the misrepresentation of you, your  company and its technology, products or service offering will often result in severed contract negotiations and a failed relationship.

All Successful Relationships Require Respect

All successful relationships require respect. This is especially true regarding the relationship between start-up companies and their potential partners. If this respect does not exist on the behalf of both parties, then there is no real reason to enter into a relationship. One party may respect the other company’s technology prowess and the other company may respect the other company’s marketing genius. In the end, both parties have to believe that they are engaging with a company that they respect and ultimately brings a technology, product, or service offering to the table that results in a strong competitive advantage in the market.  This mutual level of respect is required and is the true essence of a successful relationship. So, as a start-up company engaging in a number of potential relationships, you need to be sure that you engage with companies that earn your respect and bring significant value to your potential relationship.  

Always Negotiation in “Good Faith”

Negotiation is an art.  It also can ultimately be the downfall in contract discussions.  From the beginning of contract negotiations, both parties must enter in to all associated discussions in “good faith”.  This means that both parties must be negotiating to develop a mutually beneficial relationship, in which in the end both parties will ultimately benefit as a result of the relationship.  This necessity to negotiate in good faith will bring both parties to the table weighing not only the benefits of entering into such a relationship, but the downside of not securing a relationship. These “good faith” negotiations should not be clouded by jockeying for an advantage, misrepresenting the truth, or unfair legal contracts. No, negotiating in “good faith” is exactly what it means – negotiating with a potential partner such that both parties will ultimately benefit from the final relationship.  By negotiating in good faith, you will gain the respect of your partners and ultimately end up with a stronger contract and relationship.

Contact negotiations can be a long and arduous task.  All start-up companies that seek to enter in to a mutually beneficial relationship with a third party will need to enter in to contract negotiations with this same third party.  To help the process along, run smoothly, and in the end ultimately be successful, during negotiations, both parties need to be honest, respectful and negotiate in “good faith”.  By taking this approach to all of your contract negotiations you will ultimately end up with a much stronger relationship and a contract that is mutually beneficial to both parties.

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 24, 2010 Posted by | Venture Capital | , , , , , , | Leave a comment

Entrepreneurs, a “Concept” or “Idea” Must be Verified with a Sustainable Business Model

Too often entrepreneurs approach venture capitalists or other third party investors (e.g. individual angels or angel groups) with only a business “concept” or “idea”.  For this same business “concept” or “idea” to be of any real value to these same investors it must be verified with a sustainable business model.  Remember, once venture capitalists are interested in a business proposition, the first thing they do is to review the supporting financials to understand if this same business proposition supports a sustainable and scalable investment opportunity.  If so, they will venture further to better understand the product offering, investment opportunity, and management team. If not, they will move on to the next business “concept” or “idea.  So, as an entrepreneur, you need to verify early on that in fact, your business “concept” or “idea” supports a sustainable and scalable business model.  By doing so, you will substantially increase your chances in securing funding.  If you do not, you will most likely be bypassed the venture capitalists and other third party investors alike.  This article focuses on the top line related financial items that you need to focus on early during the business planning process that will help you determine if your business concept is worth pursuing further.    

Identify and Verify Your Revenue Sources

Whether your start-up company is focusing on developing a technology, product or service offering, you need to first identify all of your potential sources of revenue.  It should be remembered that venture capitalists are highly risk adverse.  So, if you have the ability to secure multiple revenue sources from a single technology, product or service offering, this is all the better in the eyes of your investors.  Multiple revenue sources minimize the overall investor risk, and at the same time allow your start-up company to scale its revenue growth much faster than it would be able to do with a single source of revenue.  It also increases the potential returns for your investors.  In addition, often if you dig deeper into potential revenue sources during your planning process you may indentify additional market opportunities in which to sell or apply the same or a slightly modified version your technology, product or service offerings. These revenue generating opportunities, in some cases, may be larger and easier to access than that of your original targeted markets. So, take the time to analyze and understand all of your potential revenue sources and their associated markets.  This will provide you with tremendous benefits you as approach potential investors.  

Determine Your Product Offering’s Gross Margins

During the business planning process, after you identify all of your revenue sources, you need to next focus on the gross margins of your start-up company’s technology, product or service offerings.  This is important, as if you cannot generate a healthy gross margin, from your start-up company’s technology, product or service offering, you will not be able to cover your variable costs (sales, marketing, general and administration and research and development) to support a sustainable and scalable business. In short, if your start-up company’s gross margins are not high enough or sustainable, you will never be able to cover your operational costs and generate an operational or net profit.  So take the time to analyze all the costs associated with generating and bringing your technology, product or service offering to the market.  These costs include materials, manufacturing labor, channel marketing, support, etc.  If you do not understand all of the “costs” associated with getting your technology, product or service offering to market, you will not be able to develop a predictable, long term sustainable business.  Therefore, focus on your start-up company’s gross margins, as developing a product offering with a healthy gross margin will allow you to develop a sustainable business operation for the long run.

Verify Your Top Line Financials Using Your Competitors’ Financial Statements

Once you have identified your revenue sources and determined their associated gross margins, you need to verify your findings. This is best done by looking at the income statements of your top competitors. By doing this, you can determine if your revenue sources and their associated gross margins (revenue – cost of goods sold) are representative of that of typical competitors within your industry.  If you have multiple revenue sources from various technology, product or service offerings, you need to look at the competitor financial statements for each of your product offerings. This will allow you to verify the top line financials for all of your revenue sources, and provide additional support when engaging with potential investors 

One of the easiest and best ways to verify your financial top line numbers is to go to Yahoo Finance (http://finance.yahoo.com) and look at the income statements of your competitors.  Generally, here it is best to look at multiple competitors for each product offering as well as the industry average.  By doing so, you will not only be able to verify your own top line financial numbers, but you will be able to determine where your top competitors fall on the financial performance spectrum and model your start-up company’s financial statement accordingly.  Remember if you do not verify your financial numbers, your potential investors will and it is better to do your own homework up front than to find out about it during an investor presentation.

Business “concepts” and “ideas” can be intriguing, but it is a sustainable and scalable business proposition that gets the attention of potential investors.  To move from a business “concept” or “idea” to a sustainable business proposition, you must identify all of your revenue sources, determine their associated gross margins, and then verify your top line financials with your competitors’ income statements.  This will allow you to determine if you can develop a sustainable operational business model.  This is not the end of the road in developing a complete financial model, only the beginning.  But, what this top line analysis does is to help entrepreneurs identify the appropriate technology, product or service offerings that will move them forward toward a verified sustainable and scalable business model that will secure potential investors’ interest.

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.

February 17, 2010 Posted by | Venture Capital | , , , , , , , | 2 Comments

Entrepreneurs, Take Your Time to Choose the Right Directors for Your Start-up Company

Choosing the individuals to serve as members of the board of directors for your start-up company is a very important task and one that should not be taken lightly.  Like, key members of your executive staff, the individuals that will serve on the board of directors of your start-up company must have the appropriate backgrounds, understand your start-up company’s technology, product or service offering, and have a strong reputation for helping to develop and steer successful companies.  Anything less is not acceptable. Therefore, be careful to choose the right individuals to serve on the board of directors for your start-up company, it will help you to attract capital and serve your start-up company well both short and long terms.

Don’t Choose Your Friends as Directors

Entrepreneurs, like any individual, tend to choose friends and other professional associates to serve as members of the board directors for their start-up companies. This is not really a good choice, as friends or even professional associates may not have the appropriate amount of experience or the skill set to help steer your start-up company through the trials and tribulations that will come your way. In addition, in some cases, personal friendships or professional relationship histories may get in the way of objective assessments and prudent business decisions. Therefore, in understanding the importance of board level positions, as well as the legal implications, it is more important to choose the “right” individuals to serve as members of the board of directors of your start-up company, as opposed to “known” friends of other individuals that may not be able to provide the necessary insight and direction that is critical to facilitating the success of your start-up company in the market.  So, take your time, as an entrepreneur, to choose the appropriate board members for your start-up company.  Remember, friends and other professional colleagues do not necessarily make the appropriate board members.  You need to choose individuals, for your board of directors, with the same prudence that you would when choosing the next member of your start-up company’s executive team.  Using this type of insight will serve your start-up company well.

Look for Individuals that Understand Your Space

Individuals that are to serve members of the board of directors for your start-up company need to necessarily understand the “space” or industry you are in.  This is necessary for them to offer any valuable insight to what is going on within the industry and the overall trends of the market. This is a key aspect to choosing members for your board of directors. If any of the individual members of your board of directors do not understand your start-up company’s technology, product or service offering and/or the space you are participating in, they will be much less likely to be able to provide you with the necessary insight and direction necessary to guide your start-up company to success in the market.  In addition, they will not really understand what is being discussed during board meetings, and most likely will end up being a distraction during these same meetings. Consequently, these same individuals will not be able to properly digest the important issues being discussed and triangulate this same information into conclusions that will add value to your start-up company’s direction.  Remember, successful start-up companies often need to change direction or pivot quickly in order to react to what is going on in the market or compensate for past decisions that took this same start-up company in the wrong direction.  Therefore, when choosing team members for your board of directors, choose members that have the appropriate amount of experience in your space, this will allow these same members to provide valuable insight to the necessary decisions that need to be made to steer your start-up company in the right direction.

Stellar Reputations will Attract Money

One of the things that you need to consider when choosing individuals to be members of your board of directors is to find individuals with “stellar” reputations.  This can be individuals that:

  • Have a strong history of choosing and working with successful start-up companies,
  • Have developed an extraordinary reputation as a technology and/or business specialist within the industry that your start-up company is focusing on, or,
  • Have invested in number of successful start-up companies and has a reputation for choosing winners. 

Remember all people want to be associated with individuals that are perceived as successful or winners within their industry.  In addition, choosing board members with “stellar” reputations will allow you to attract money.  As, good deals with great board members, get the attention of investors and as such these same start-up companies have a much easier time attracting investment monies.  So, take the time to identify and approach individuals with stellar reputations to serve as board members of your start-up company. This will necessarily make your start-up company attractive to potential investors.

As an entrepreneur, you need to take the necessary time to choose the right individuals to serve as members or your board of directors.  To do this properly you should stay away from friends, look for individuals have an understanding of your targeted space, and choose individuals that have stellar reputations.  Using these items as criteria when choosing potential directors for your start-up company will provide you with the necessary insight to select individuals that will have the necessary background, experience and insight to help successfully facilitate your start-up company through any trial and tribulations that come your way.

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.

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

Entrepreneurs, Rationalizing Your Financial Projections is an Important Step to Completing Your Business Plan

Most entrepreneurs focus on developing their financial projections at the same time they are trying to finalize their business plan.  This is done for many reasons, most likely of which is that they do not know much about financial statements and push off developing their financial projections until the last possible moment before they compete their business plan. Often in a rush to get in front of potential investors, these same entrepreneurs do not spend the necessary time to really understand and logically rationalize their financial projections.  Therefore, when they present to investors they may have a great technology, product or service offering that secures the initial attention of these same investors, but they have not spent the necessary time to properly rationalize their financial projections and as such will often immediately lose this same investor interest.  To keep your investors’ interest, you must rationalize your financial projections so that they are logically defendable in front of these same investors.  If you do not do so, this will eliminate any chance of receiving venture funding from seasoned angels or venture capitalists.

Rationalize Your Revenue Projections from the Bottom Up

Revenue projections need to reflect reality.  Often, entrepreneurs have very unrealistic revenue projections that cannot be rationalized by any logical means.  To develop revenue projections that are rational, it is important to start from the bottom up to build out these same revenue projections. This bottom up approach will allow you to logically estimate the necessary time it takes to engage customers and then secure revenue from these same customers. It will also allow you to build up reasonable product volume projections that are realistic and rational. In addition, as an entrepreneur you need to understand the basic fundamentals of your financial projections including, revenue sources, gross margins, operating costs, and net margins.  If you have not spent the time to understand the fundamentals of your start-up company’s business model and the rationalized your financial projections based on these fundamentals, your financial statements will not hold up to the scrutiny of seasoned investors.  Therefore, take the time to rationalize your revenue projections from the bottom up. By doing so, you have then developed a logical approach to building up your financial statements that will serve you well in front of your potential investors.

Rationalize Your Development Costs

Another step in developing defendable financial statements is to present development costs that also reflect reality.  Investors are always worried that it will take twice as long and cost twice as much money for an entrepreneur to develop and then introduce their technology, product or service offerings to the market.  As such, they are wary of overly optimistic development cost projections. Therefore, again, it is important to start from the bottom up and build out your development cost projections and staffing requirements.  Here, you need to take into consideration when your initial technology, product or service offering is to be introduced into the market and how many individuals will be required for this effort. You also need to take into consideration necessary ramp of staffing requirements. Too steep of a ramp, can delay development, and at the same time may leave many of these same individuals with nothing to do once their initial tasks are completed. Therefore, you need to add development staff at a rational and reasonable pace and level that not only reflects your near term development needs, but also reflects your long term staffing requirements as you introduce follow-on products into the market.   So, you need to be prudent and hire only the necessary development staff that fits your start-up company’s near term development needs and at the same time also reflects your long term product roadmap and its development staffing requirements.  Therefore, take the necessary time to rationalize you and development staff the costs associated with it.  Again, this will serve you well in front of your potential investors.

Identify and Delineate Significant Delivery Milestones

One of the biggest mistakes entrepreneurs make is to not identify their significant development and delivery milestones to potential investors.  That is, they do not delineate those significant milestones that will be delivered for the targeted amount of funding they are requesting.  Once you rationalize your revenue projections and development costs, as an entrepreneur, you need to identify and then delineate, in a rational manner, what the significant milestone deliverables are for this investment.  Accordingly, most start-up companies require multiple rounds of funding, so investors need to know what significant milestones will be delivered for each round of funding.  Do you have a beta product at the end of your first round of funding?  When can you begin to secure revenue from your customers?  In essence, you need to delineate to investors what you are delivering in terms of significant milestones to get your start-up company to the next level of funding or into the market.  Anything less is not acceptable.  Finally, by delineating your milestone deliverables, investors have something to measure you by to determine if you are performing according to your original pre-funding plan. So, as an entrepreneur take the time to properly identify and delineate the appropriate significant milestones as this will allow investors understand what they will be receiving for their investment. 

Before you get in front of any investors, you need to properly rationalize your financial projections.  To do this, you need to delineate your revenue projections, determine your development costs, and identify significant milestones.  By doing so, you will be developing a logical representation of your business model and its financial projections.  In addition, you will be determining the necessary staffing requirements that reflect your start-up company’s near term and long term development requirements. Finally, you will be delineating to your investors the necessary delivery milestones that will not only add value to your start-up company, but provide measureable tasks in which investors can determine your performance.  So, take the time to rationalize your financial projections as it will serve you well in front of 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.

January 18, 2010 Posted by | Venture Capital | , , , , , , , , | Leave a comment

Three Things Entrepreneurs Absolutely Need to Know Before They Talk To Their First Venture Capitalist Investor

Being an entrepreneur is not a guessing game.  Like any successful endeavors in life, starting a business as an entrepreneur, which depends upon third-party venture investors for its ultimate success, requires time and lots of hard work, as well as considerable planning and preparation.  Much of this planning and preparation process is often overlooked by first time entrepreneurs.  Why, because many of these same first time entrepreneurs believe the following: “Hey, I have a business idea and why shouldn’t I receive funding from a venture capitalists no questions asked.”  This thinking will not get you too far with potential venture capitalist investors.  They expect you to be prepared, and have thought through your proposed business idea from all angles.  In this vain, as a minimum, there are three items you need to answer before you step foot in front of any venture capitalist investor.  This article addresses these three items and outlines why by answering these three questions, you most likely will succeed in getting a follow-up meeting with these same venture capitalist investors.

What Problem am I Solving?

Investors first want to know that you are solving a problem in the market.  They do not want to invest in start-up companies with a technology, product or service offering that is looking for a problem to solve.  Why, because unless there is a “defined need” for you start-up company’s technology product or service offering no one will buy it.  Remember, you are in business to acquire paying customers and not to develop a “cool” technology, product or service offering.  Venture capitalists understand this, and from the beginning they are looking for the underlying reason customers will pay for your product offering.  Is your product offering cheaper?  Does your product get your customers to market faster?  Does your product offering save your customers money?  There many underlying reasons customers will buy your product offering. You need to determine this reason.

All venture capitalists want to know is that there is a reason for customers to buy your technology, product or service offering.  Therefore unless you are filling a “need” in the market you will be hard pressed to convince these same investors that you have a fundable start-up business.  This is very simple and at the same time is more often overlooked by entrepreneurs.  So, before you decided to present your business plan to potential venture investors, take a self assessment and determine what problem you are solving.  Be realistic and practical in your assessment, as you should know your investors will be.

What is My Business Model and Projected Financial Returns?

Most first time entrepreneurs do not really understand the venture funding game.  That is, they really don’t take the time to understand venture capitalist and their objectives and goals. So, let’s be clear, venture capitalists are in business to make money – a lot of money. Therefore, they need to invest in business opportunities that make business sense from the financial point of view.  Therefore, a new start-up company with a proven business model will make sense to venture investors.  On the other hand, a new business venture with an unproven business model will not get any real attention from these same investors.  Why, because venture capitalists are in business to mitigate their financial risk, and having a business model with a proven track record in the market will give these same potential investors the level of comfort that they need to consider the investment opportunity.

In addition, as an entrepreneur it is necessary that you know your projected financial returns of your start-up company for your venture investors. The standard rule of thumb here is 5 times the initial investment in 3 years or 10 times the initial investment in 5 years.  These numbers, do not reflect any reality or are even close to the average returns venture investors receive on their investments, but are merely the standard financial hurdles venture capitalists use to judge different start-up business opportunities.   So, as an entrepreneur you need to know your financial returns and make sure they conform to these industry standard projections.  Anything less will not get you a follow-up meeting with these same potential investors. 

Finally, as an entrepreneur you need to remember that venture capitalists only invest in a limited number of start-up companies over their lifetime of their venture fund, so they need to be careful when vetting start-up company investment opportunities.  Understanding the business model and the projected financial returns is their first step to considering a potential investment opportunity.

Is My Product Offering Unique and Compelling?

As an entrepreneur, you need to have a product offering that is both unique and compelling.  Anything less, will most likely not get venture investors attention.  Why, because these two attributes will differentiate your start-up company’s technology, product or service offering in the market.  If your product offering is unique, it more than likely is patentable or has intellectual property associated with it.  This will differentiate your product offering to your investors.  Why, because it provides the opportunity to create value – something that will potentially bring much higher financial returns when the investors go to sell the company.  Also, being compelling provides a reason for customers to buy your product.  This will provide the ability to create market “buzz” and associated market traction.  Remember, “time-to-money” increases the financial returns for your investors.  So creating a product with compelling value proposition for your customer base will get your investors attention from the beginning. Therefore, as an entrepreneur, if you wish to secure funding from third-party venture investors you need to create a product offering that is both unique in the market and compelling to your customer base.

Venture capitalists see lots of investment opportunities every year. Many review thousands of executive summaries and business plans.  Very few, if any of these same investment opportunities get the attention of the venture capitalists.  Why, because they do not address necessary items that will make their investment opportunity successful from an investor’s point of view.  This article has outlined three necessary things that entrepreneurs need to know before they get in front of venture capitalist. If these three things are not addressed in detail during your first meeting with investors, you will not get a follow-up meeting.  Therefore, be aware these three items as they most likely will provide you with the ability to secure immediate traction with potential third party 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.

September 14, 2009 Posted by | Business Planning, concept, Idea, Venture Capital, venture finance, Venture Funding | , , , , , , , | 2 Comments

Entrepreneurs: Your Executive Summary Sets the Tone For Your Potential Venture Investors

Your start-up company’s executive summary is typically the first document potential venture investors review when considering your start-up company as an investment opportunity. The quality of this document therefore sets the tone for these same venture investors (e.g. individual angels, angel groups and venture capitalists). A quality executive summary may be the difference between securing a meeting in front of potential venture investors or not receiving a call back.  Therefore, by considering the executive summary as their “door opener”, entrepreneurs need to focus on developing an “investor quality” document to put their best foot forward when introducing themselves and their start-up company to potential venture investors. This article outlines some of the things that entrepreneurs need to consider before they provide their start-up company’s executive summary to their potential venture investors.

Does Your Executive Summary Have the Appropriate Content?

The executive summary is a key element of the road show process. This document is used as the “entry” vehicle to secure the attention of venture investors. A well-written executive summary is necessary to securing a follow-up phone call and subsequent meetings with the venture investment community. The executive summary provides a two- to three-page overview of the company’s business plan. This document is to include an overview of the company, its technology, product, or service offering, as well as its management team and the financial requirements and expected return on investment. The executive summary must be a well-written, succinct document that describes all the essential points that are of interest to venture investors. Content to be included in an executive summary includes the following:

  • Company Overview
  • Background and Milestone
  • The Problem/Value Proposition
  • The Technology, Product, or Service Offering
  • Target Customers
  • Market Size
  • Market Strategy, Tactics and Execution
  • Competition Summary
  • Financial Projections
  • Management Overview
  • Funds Requirements and Use of Funds
  • Exit Strategy

 It should be noted that an “investor-quality” executive summary is very difficult to write and takes many hours of work by the whole management team of your start-up company.  But, given the importance of this document to securing your first meeting with potential investors, it is well worth the effort.

 Is Your Executive Summary Succinctly Written?

It needs to be emphasized that a considerable amount of time and effort should be spent by the management team of your start-up company to develop an “investor-quality” executive summary. This often requires that the management team to write, and then rewrite and rework the executive summary document many times, in different formats or layouts to get a succinctly written document having the proper flow, content, and message.

As previously mentioned, this document sets the tone by providing the proper introduction of your start-up company and its technology, product, or service offering that will determine whether you receive a call back and are able to arrange a first meeting with venture investors. So, the importance of this document can not be underestimated.  Your executive summary is the document that will make the difference between receiving and not receiving a call back.

To ease the process of developing an “investor-quality” executive summary, there are several items to adhere to during the development of your start-up company’s executive summary, including:

  • Length: 2-3 pages – The ideal length of an executive summary is two pages. Often, executive summaries are three to five pages in length. It should be noted that venture capitalists have a limited amount of time to review your executive summary and, as such, the shorter the better and the more likely it will be read. 
  • Font: 10 point or larger – Typical font size for an executive summary is 10 to 12 font. Anything smaller is not readable and will generally deter your target audience from reading your executive summary.
  • Sub-heading and bullets – The use sub-headings and bullet points to enhance the story is recommended in the development and presentation of your executive summary. This does two things: 1) It provides the reader with a format that is easy to read; and 2) It allows the venture investor to identify the “key” elements of interest in an executive summary at a simple glance.

Therefore, having a succinctly written, executive summary, based on the tenants outlined above, and at the same time providing the appropriate content and message is a big step toward receiving a call back from potential venture investors.

Does Your Executive Summary Contain Financial Pro Forma Statements?

Many times I receive executive summaries from start-up companies that do not contain any financial pro forma information. This is like buying a car without a steering wheel and an engine.  Without providing the appropriate financial pro forma statements in your start-up company’s executive summary, investors will not know where you are going or how fast you will get there.  Since your potential venture investors are financial managers, they are primarily reviewing your start-up company based on the potential return on investment it can provide them in a reasonable time frame.  They are not really concerned on how “cool” your technology is or by how “neat” of a product offering you are developing for your target customers. Potential investors, first and foremost, review your start-up company based upon its projected financial performance.  Therefore, you must spend a considerable amount of time putting together financial projections that are:

  • Defendable,
  • Have the appropriate back up details, and
  • Reflect industry standard financial statements.

 By not providing financial pro forma projections or by providing financial statements (e.g., income statements, balance sheet cash flow statements) that are inaccurate, un-defendable, or do not reflect typical industry financial standards, your executive summary is by definition an incomplete document.  Therefore, it is very important to include financial projections in your executive summary to ensure that you receive a call back from potential venture investors.

Have Your Executive Summary Reviewed By Third Parties.

All start-up companies should have their executive summaries reviewed by independent third parties that have experience securing funding from the venture funding community.  This review process will ensure you do not miss something and will provide the appropriate type of critique that will add value and quality to your executive summary.  You should have several colleagues review your executive summary. This will allow you to consider multiple input sources and at the same time provide you with many difference perspectives on this summary document.  Remember having originally generated your executive summary, you are too “close” to it and need an unemotional third party to review your document from an objective point of view.  This will enhance the quality of your start-up company’s executive summary and often, at the same time, improve the end product.

 Have You Done Your Due Diligence On Your Investors?

Many entrepreneurs do not spend the any time doing due diligence on their potential venture investors.  This is important, as you want to target only those investors that will have an interest in your start-up company and its technology, product or service offering. Therefore, doing the appropriate level of due diligence will ensure that you are targeting the appropriate investors for your start-up company and its technology product or service.  Several items to consider when doing your due diligence on your potential venture investors include the following:

  • Geographic focus,
  • Stage of development focus,
  •  Capital required,
  • Industry specialization, and
  • Deal leadership.

All of these items will affect whether a given venture investor will consider your start-up company as a potential investment opportunity. So, before you approach any venture investor, you should research their background, their past investments, as well as their strengths and weaknesses. This will more likely insure a positive experience with your target venture investors.

 Developing your executive summary is the important first step in securing a meeting with potential venture investors. The quality of your executive summary sets the tone with your potential venture investors and can be the difference between securing your first investor meeting or not receiving a call back.  It is important as an entrepreneur to understand the importance of your executive summary and create an “investor quality” document with the appropriate flow, content, and message to get your potential venture investor’s attention. By spending the appropriate amount of time an effort creating your start-up company’s executive summary you can ensure that you will get the attention of the venture funding community.

June 15, 2009 Posted by | angel investors, Executive Summary, Venture Capital, venture finance | , , , , , , | 4 Comments

When Seeking Venture Funding Don’t Forget to Focus on Your Business

The process of securing venture capital or any other type of private equity funding is very time consuming.  With all of the preparation, travel, presentations and required follow-up, entrepreneurs often forget to focus on their business.  This article reminds entrepreneurs that while focusing on their venture fund raising activities is important to move their start-up company forward, they need to remember to focus on their business and to move it forward, as this is just as important of an activity as is venture funding is for their start-up company.

Fund Raising is a Time Consuming Activity.

Ask any entrepreneur that has secured venture funding, and they will tell you that it is a very time consuming activity.  First, there is the materials preparation, including the development of your start-up company’s:

  • Executive Summary,
  • Business Plan, and
  • Road Show Materials.

Each of these documents, individually, can take substantial development time, working and then re-working to get them to the level of being investor-quality documentation.  As such, it usually takes several months of research, due diligence, creation, writing and then re-writing to develop the appropriate investor documentation.  Also, getting the attention venture funding investors (e.g., venture capitalists), just to schedule a meeting, can be very laborious and challenging for entrepreneurs.  This is especially true if you do not have a lawyer or some other person to provide your start-up company with the appropriate “soft” introduction to the investor community. Then, there is the required travel, presentations and follow-up with each of the individual venture investment groups, just to get to the next level of potential investor interest.  So, as can be described by seasoned entrepreneurs, venture fund raising is a very time consuming and difficult task that can take all of your available time, if you let it. This leaves little time to focus on your start-up company’s day-to-day business related activities.  This is not a recipe for a successful start-up business as there a multitude of issues that need to be addressed daily to ensure your start-up company in moving in the right direction and at the same time creating value for your company.

 Fund Raising Takes Time.

Many entrepreneurs assume that they can secure venture funding in two months or less.  This is not realistic.  Even in a good economy, it takes a typical start-up company 6 to 12 months to secure venture funding for the development of their technology, product or service offering.  This time table assumes that you have contacts in the funding community, and can set up your initial meetings with investors fairly early in the funding process.  If this is not the case, then you can add on a few months to just schedule your initial meetings with targeted investors.  Also, in today’s economy, this funding time table is even longer, given the fact that in slow economic times, investors tend to stick with their current investments, making it just that much more difficult for entrepreneurs to secure funding, from these same investors, than it would be in a strong economy.  Therefore, as an entrepreneur, you need to look at a realistic time table for securing venture funds, and often the resulting time table is much longer than originally anticipated.  This can make the funding process and the associated time frame can be even more detrimental to the overall development of your start-up company.

You are in Business to Create Value for Your Company.

As an entrepreneur, you are in business to create value for your company.  This means that in addition to securing venture funding, you must work diligently to move your company forward, with or without funding, such that you are creating value for your company every day.  This should be your personal expectation and it surely is the expectation of your investors.  They have to believe that even without funding that you and your executive team can continue to use creative ways to move your company forward and at the same time creating underlying value for your company in the market.  This can include:

  • Securing customers,
  • Aligning with strategic partners,
  • Developing your sales channels,
  • Continue to market your company to target customers,
  • Working with early “beta” test customers,
  • Moving product development forward to the next level, and
  • Other.

All of these activities and many others can create inherent value for your start-up company, both in the market and to your potential investors.  So remember, that securing venture funding is only one vehicle that can be used to move your company to the next significant value level. There are many other things you can do on your own through securing customers, the development of a strategic partnership, or bootstrapping that can also create near term value for your start-up company, and at the same time prove to your investors that you have the ability to move your start-up company’s business forward, even in non-ideal financial circumstances.

Continuing to Focus on Your Company’s Business is Often Beneficial.

During the venture funding process, focusing on your company’s business can take you away from the everyday hassles associated with venture funding.  This can be a good thing. By continuing to simultaneously focusing on your company’s day-to-day business activities, you can move your company forward to the next level and accomplish significant milestones that will be beneficial to your company.  This business focus can also create new opportunities that were not originally available to you and your company at the beginning of the venture funding process.  Remember, the venture funding road is a long one, and continuing to knock down significant development milestones, securing customers, or developing strategic partnerships, etc. can be just the ticket to get the attention of your investors.  Also, often, significant business opportunities often take time to develop and by continuing to focus on your business, while your are raising funding, can often provide the required time period for such opportunities to develop and take hold for your start-up company. 

Focusing on Your Business Can Facilitate Funding.

In the end, by focusing on your business while working to secure venture funding may be the vehicle that facilities the funding for your company.  No company can go for 6 to 12 months, without focusing on their business.  In addition, by developing new business opportunities during the funding process, you continue to create value for your company and its potential investors.  One or all of these business activities together, may be just the ticket that gives your potential investors the proof that your company is the one they are willing to risk their monies on to provide the types of returns they require.  Therefore, continue to focus on your company’s business and your investors will recognize the value you are creating during for your start-up company, even before you secure funding from third party investors.

Focusing on venture funding is just one phase of your start-up company’s development.  But, your company’s business is the real item that needs to be developed to create value for your company.  Therefore, while you are trying to secure funding for your start-up company do not forget to focus on your business.  By doing so, you can create significant value along the way and at the same time help facilitate the venture funding of your start-up company.

June 1, 2009 Posted by | Business Planning, Finance, Venture Capital, venture finance, Venture Funding | , , , | 1 Comment

Some “Truths” About Networking for First Time Entrepreneurs

The term networking itself and networking as an activity can be very intimidating to first time entrepreneurs.  Many of these same individuals have never have had to network or believed that they needed to network to enhance their career, and as such, are unfamiliar with networking and its benefits.  In fact, many first time entrepreneurs, not only need to learn what “networking is and is not”, but they need to learn “how to network” to benefit of both themselves and their start-up companies.   This article outlines some basic “truths” regarding networking and how it can benefit entrepreneurs and their start-up companies.

Networking is Really Focused “Socializing” 

Networking is really no different than any other socializing activity.  In fact, if it were referred to as “socializing”, instead of networking, I believe it would be less intimidating to first time entrepreneurs.  The word “networking” seems to have an underlying performance-based stigma associated with it. That is, to be a success at each networking event they attend, one needs to come away with something that they value for themselves or their start-up company.  This, “what can I walk away with mentality”, with virtually no effort on their part, is not really productive for the first time entrepreneur, as promotes undue pressure that requires this same entrepreneur to actively seek a “quality” connection each and every time they attend a networking event.  This is a non-realistic expectation and definitely not a “good” networking mentality.  A better approach is to attend each networking event with a positive attitude and hope to meet one to two individuals you can possibly create a personal connection with.  This is really what should be the expected “positive” result of a successful networking event.  Therefore, if you look at networking as focused “socializing” you will be more relaxed and ultimately more successful at each networking event you attend.

Not all Networking Organizations offer the Same Level of Benefit to the Entrepreneur

First time entrepreneurs need to be very particular regarding which networking events they decide to attend.  The reason for this is that all networking organizations have a particular focus. In addition, each networking organization also has unique presentations and participation formats. Therefore, out of the gate, first time entrepreneurs should first identify the various networking organizations in your area. After this, one should ask their friends if they have attended any of these networking events and get their overall opinion on the networking organization and its utility, effectiveness and friendliness.  Also, as a new participant, one should take time to attend at least one to two events, for each targeted group, before they decide to join any one networking organization. This will give you a true feeling for the networking organization and how it operates.  Finally, one should make an effort to meet the individuals that run each networking organization.  To do this, just introduce yourself and tell them that this is the first time that you are attending.  This is important, as each group has their own “personality” and that personality always comes from the individuals who run the network organization.  As you will learn through this process, one networking organization will most likely “fit” you and your personality better than the others.  This comfort level will allow you to be more effective and enjoy the events you attend. 

In Business, People Like to “Work” with People They “Know”

Have you ever noticed that entrepreneurs that start companies surround themselves with people they know?  In fact, many start-up company’s founders have worked together, in the past, at one or more companies.  This collegial bond and common experience base allows these same individuals to “know” each other, their personalities and most importantly their skill sets. 

To take this “known entity bond” a bit further, there have been whole industries that have developed based on personnel from a single company. In fact, the wireless industry in San Diego, Ca was founded, developed, and expanded by insiders that originally worked together at a single company, Linkabit. Since the early 1980’s there have been hundreds of wireless start-ups, in San Diego, that come from this lineage, most notably including: Qualcomm, Hughes Network Systems, ViaSat and many others.   This provides you with an understanding of the “basic” desire and “need” for people to “work” with individuals they “know”.  As such, this is what networking is all about — it provides a forum for you, as a first time entrepreneur, to present yourself and your start-up companies, so that others can get to “know” you and your start-up company.

Networking is Not a “One Time” Activity

Many first time entrepreneurs mistakenly believe that they can attend a “single” networking event and will walk out with funding and many “great” contacts. This is far from the case.  In fact, only by attending targeted networking events multiple times, do the individuals at these socializing functions get to “know” you and your company, its technologies, products or services, and your needs. Realistically, it usually takes three to six months or more, of continually attendance, for people begin to “know” you, and recognize you as a quality, reputable individual.  Only after this amount of time, individual effort, and interaction will other fellow networkers be willing to open up their networks and contacts with you.  This may seem like a long time for first time entrepreneurs, but look at it this way — you would not introduce someone you don’t know to your best friend unless you “know” them and can be assured it is a “quality” introduction.

 Getting Involved is the Best Way to Start

The best way to become quickly recognized and known among a networking organization you are interested participating in, is to become involved in their “executive committee”.  As most networking groups are volunteer networks, they are always looking for individuals to: organize events, recruit new members, run committees, etc.  This is done by the executive committee members.  This type of volunteer work generally only takes a few hours a month and you then have access to all of the “key” individuals within the organization and their networks, which are generally extensive. 

The Long Term “Benefits” from Networking are Many

The long term benefits of active networking are many for you and your start-up company.  Remember, no entrepreneur can successfully develop and expand their start-up company in a vacuum.  All start-up companies require “key” individuals with broad and deep skill sets, industry connections, and a continually expanding network to ultimately be successful in the market. As a minimum, some of the long term benefits of successful networking to entrepreneurs include:

  • Meeting new acquaintances,
  •  Acquiring new friends,
  •  Being exposed to new ideas,
  •  Expanding your industry contacts,
  •  Securing long-term business contacts,
  • Developing strategic business partners, and
  • Securing an extensive amount of resources at your immediate disposal.

So, as a first time entrepreneur, get out there and network, both you and your start-up company will benefit substantially from your efforts. 

March 30, 2009 Posted by | Business Development, Nwtworking, Venture Capital | , , , , , , , | 3 Comments