By Laurence K. Hayward
This is part seventeen of a twenty part series on this topic.
17. What is the anticipated lifecycle of your product or service offering? What are current and future plans for R&D investments?
All great things come to an end. Products mature, competitors offer substitutes and customers’ demand change. Have you anticipated when the earnings power of your product will run its course -- for first-time buyers as well as for follow-on sales to existing customers (e.g. upgrades)?
For early-stage companies, the most critical question is how you will get customers to repurchase or renew after the first usage. Once you’ve thought through that issue, then focus on related matters, such as your plans for R&D investments. How will you continue to generate revenues when existing products run their course? Many companies fail to include the costs associated with continued R&D in their financial projections.
Laurence K. Hayward is the Founder and CEO of TheVentureLab. To learn more about him follow the link here
An online meeting place for entrepreneurs and investors to interact and engage in discussions on early stage investing and entrepreneurship. Learn more about our activities and our team by also visiting www.theventurelab.com
Tuesday, September 18, 2012
Tuesday, September 4, 2012
Part 16/20 - Twenty Questions You Will Be Asked By Venture Capitalists (If You Get That Far)
By Laurence K. Hayward
This is part sixteen of a twenty part series on this topic.
16. What alliances or partnerships have you entered (e.g. joint ventures, marketing alliances, licensing arrangements, selling/distribution agreements, channel partnerships, software agreements, etc.)?
It is important to remember that alliances can be assets as well as liabilities. VCs will want to know if any of your alliance agreements have compromised your intellectual property claims and if the company has any outstanding obligations to third parties. Some alliances can even have an effect on how revenues are recognized. When in doubt, speak to your lawyer and accountant about these issues.
In the marketing section of your business plan, demonstrate how alliances may have helped your company lock-up certain distribution or sales channels for your products and services. Do any of your alliances provide a competitive advantage? Do they create barriers to entry? Do they help you reach customers more efficiently? See question 15 covered in our last post for additional information on the value of alliances.
Laurence K. Hayward is the Founder and CEO of TheVentureLab. To learn more about him follow the link here
This is part sixteen of a twenty part series on this topic.
16. What alliances or partnerships have you entered (e.g. joint ventures, marketing alliances, licensing arrangements, selling/distribution agreements, channel partnerships, software agreements, etc.)?
It is important to remember that alliances can be assets as well as liabilities. VCs will want to know if any of your alliance agreements have compromised your intellectual property claims and if the company has any outstanding obligations to third parties. Some alliances can even have an effect on how revenues are recognized. When in doubt, speak to your lawyer and accountant about these issues.
In the marketing section of your business plan, demonstrate how alliances may have helped your company lock-up certain distribution or sales channels for your products and services. Do any of your alliances provide a competitive advantage? Do they create barriers to entry? Do they help you reach customers more efficiently? See question 15 covered in our last post for additional information on the value of alliances.
Laurence K. Hayward is the Founder and CEO of TheVentureLab. To learn more about him follow the link here
Tuesday, August 14, 2012
Part 15/20 - Twenty Questions You Will Be Asked By Venture Capitalists (If You Get That Far)
By Laurence K. Hayward
This is part fifteen of a twenty part series on this topic.
15. Who is the end user of the product or service offering?
Is this a consumer-based business, or will you sell your product or service to other businesses? What do you know about the demand for your product or service in that target market? What do you know about the buying habits of your target market? VCs want to know that you understand the unique buying habits of your target markets.
Do you anticipate any roadblocks? For example, will you have to educate the buyer? Many entrepreneurs have an incredibly clear understanding of the benefits of their product or service. They may have even worked for a company that would be a potential buyer for the particular offering, which may be how they originally came up with the idea. Yet, when they begin marketing the product, they find out (often with surprise) that others don’t share their enthusiasm.
It often takes longer than expected to get past the inertia associated with understanding a new product or service offering. As a result, questions such as these are critical to understanding the sales cycle and marketing costs. Ironically, in this instance, competition can be helpful because it helps to demonstrate that a market already exists for the product or service offering. You may be able to use your competition to your advantage if you can demonstrate that they’ve proven the market demand, but you are better positioned to deliver a solution that meets customers’ needs (and perhaps doing so more efficiently as well).
Think about how you can leverage partners or resellers to reach your target markets. In many businesses, establishing effective sales channels enhances the scalability of the enterprise. It is often difficult to achieve the rapid sales growth VCs desire through organizational growth alone. Building out the sales and marketing function requires time and money, and significant effort in recruiting and training. However, key partnerships may help in spreading the message or expanding the sales channel to support rapid growth. If this approach is appropriate for your business, it should be outlined in the marketing section of your business plan.
Laurence K. Hayward is the Founder and CEO of TheVentureLab. To learn more about him follow the link here
This is part fifteen of a twenty part series on this topic.
15. Who is the end user of the product or service offering?
Is this a consumer-based business, or will you sell your product or service to other businesses? What do you know about the demand for your product or service in that target market? What do you know about the buying habits of your target market? VCs want to know that you understand the unique buying habits of your target markets.
Do you anticipate any roadblocks? For example, will you have to educate the buyer? Many entrepreneurs have an incredibly clear understanding of the benefits of their product or service. They may have even worked for a company that would be a potential buyer for the particular offering, which may be how they originally came up with the idea. Yet, when they begin marketing the product, they find out (often with surprise) that others don’t share their enthusiasm.
It often takes longer than expected to get past the inertia associated with understanding a new product or service offering. As a result, questions such as these are critical to understanding the sales cycle and marketing costs. Ironically, in this instance, competition can be helpful because it helps to demonstrate that a market already exists for the product or service offering. You may be able to use your competition to your advantage if you can demonstrate that they’ve proven the market demand, but you are better positioned to deliver a solution that meets customers’ needs (and perhaps doing so more efficiently as well).
Think about how you can leverage partners or resellers to reach your target markets. In many businesses, establishing effective sales channels enhances the scalability of the enterprise. It is often difficult to achieve the rapid sales growth VCs desire through organizational growth alone. Building out the sales and marketing function requires time and money, and significant effort in recruiting and training. However, key partnerships may help in spreading the message or expanding the sales channel to support rapid growth. If this approach is appropriate for your business, it should be outlined in the marketing section of your business plan.
Laurence K. Hayward is the Founder and CEO of TheVentureLab. To learn more about him follow the link here
Thursday, July 26, 2012
Part 14/20 - Twenty Questions You Will Be Asked By Venture Capitalists (If You Get That Far)
By Laurence K. Hayward
This is part fourteen of a twenty part series on this topic.
14. What drives customer satisfaction for this industry and for the product? And, how do you know?
Have you conducted research in order to assess what is truly important to your customers? Do you know what product features are critical vs. those that are ancillary? A classic mistake in product development is to perfect unwanted features, sometimes at the expense of critical ones. For example, a company focuses on adding certain bells and whistles to its product at the expense of timely delivery, which as it turns out was the customers’ top decision factor. In your business plan, an understanding of critical product features or determinant attributes (what most determines or affects a customer’s purchase) can be used to distinguish your offering from that of your competitors.
Once you've acquired customers, ensuring ongoing satisfaction and tracking changing needs become critical. How will you support the product or service once it is launched? What will be the expenses associated with support? It is common to underestimate the time and expense associated with product or service support. Will existing customers purchase your product or service again? Will they recommend it to others? Regular and consistent customer feedback is essential in order to obtain answers to these types of questions.
If a VC has interest in your business, you can expect at some point that they will engage in ‘customer due diligence.’ If you don’t yet have customers, they may interview potential customers or industry experts to ascertain their demand for your product or service at the proposed price points. If you have customers, they will want to contact them to ascertain level of satisfaction and likelihood of repurchase. You will want to identify potential candidates and inform them in advance if a VC is planning to conduct customer interviews. If you are approaching a syndicate of investors (multiple VCs), coordinate the process (usually with the lead investor), so that the same customers aren’t approached repeatedly with the same questions again and again.
Laurence K. Hayward is the Founder and CEO of TheVentureLab. To learn more about him follow the link here
This is part fourteen of a twenty part series on this topic.
14. What drives customer satisfaction for this industry and for the product? And, how do you know?
Have you conducted research in order to assess what is truly important to your customers? Do you know what product features are critical vs. those that are ancillary? A classic mistake in product development is to perfect unwanted features, sometimes at the expense of critical ones. For example, a company focuses on adding certain bells and whistles to its product at the expense of timely delivery, which as it turns out was the customers’ top decision factor. In your business plan, an understanding of critical product features or determinant attributes (what most determines or affects a customer’s purchase) can be used to distinguish your offering from that of your competitors.
Once you've acquired customers, ensuring ongoing satisfaction and tracking changing needs become critical. How will you support the product or service once it is launched? What will be the expenses associated with support? It is common to underestimate the time and expense associated with product or service support. Will existing customers purchase your product or service again? Will they recommend it to others? Regular and consistent customer feedback is essential in order to obtain answers to these types of questions.
If a VC has interest in your business, you can expect at some point that they will engage in ‘customer due diligence.’ If you don’t yet have customers, they may interview potential customers or industry experts to ascertain their demand for your product or service at the proposed price points. If you have customers, they will want to contact them to ascertain level of satisfaction and likelihood of repurchase. You will want to identify potential candidates and inform them in advance if a VC is planning to conduct customer interviews. If you are approaching a syndicate of investors (multiple VCs), coordinate the process (usually with the lead investor), so that the same customers aren’t approached repeatedly with the same questions again and again.
Laurence K. Hayward is the Founder and CEO of TheVentureLab. To learn more about him follow the link here
Tuesday, July 10, 2012
Part 13/20 - Twenty Questions You Will Be Asked By Venture Capitalists (If You Get That Far)
By Laurence K. Hayward
This is part thirteen of a twenty part series on this topic.
13. How do you plan to acquire and keep customers?
It surprises many people to learn that ‘marketing’ is commonly one of the weakest elements in most business plans (along w/ the financial projections). It’s almost as if the entrepreneur assumes that with the right business model, the products and services will sell themselves. There are many innovative and brilliant business concepts that never become real businesses, just as there are many so-so concepts that become the basis of major successes. I’m reminded of a successful entrepreneur who put a plaque on his wall that read, “nothing happens until somebody sells something.”
A well-developed business plan includes marketing strategies that demonstrate an understanding of market realities and customer behavior. For example, your revenue projections call for 100 units of X product to be sold next year. How will they be sold? Who will be selling them? Why is this projection realistic, do you have relevant industry, product or customer experience that guides this assumption? This is one reason VCs look for industry experience in their management teams. The appropriate experience should provide insight into the dynamics of the sales process and customer behavior, knowing for example the key decision factors (the sometimes harsh realities) of the customer group. Having a well constructed sales pipeline and a disciplined selling process will also help.
In the marketing section of your business plan and presentation, VCs will look for more than a list of your marketing initiatives. You can anticipate questions like: what are your company's customer acquisition costs? Have you calculated average and target revenue per customer? Do you know how many customers are required to break even? Do you know the product sales cycle? Think quantitatively as well as qualitatively.
In addition, the most successful companies know how they will retain customers -- even before they acquire them. It is said that it costs five times as much to generate business from new customers as it does from existing customers.
Customer retention is critical to the long-term success of most enterprises. How will you get customers to return?
Laurence K. Hayward is the Founder and CEO of TheVentureLab. To learn more about him follow the link here
This is part thirteen of a twenty part series on this topic.
13. How do you plan to acquire and keep customers?
It surprises many people to learn that ‘marketing’ is commonly one of the weakest elements in most business plans (along w/ the financial projections). It’s almost as if the entrepreneur assumes that with the right business model, the products and services will sell themselves. There are many innovative and brilliant business concepts that never become real businesses, just as there are many so-so concepts that become the basis of major successes. I’m reminded of a successful entrepreneur who put a plaque on his wall that read, “nothing happens until somebody sells something.”
A well-developed business plan includes marketing strategies that demonstrate an understanding of market realities and customer behavior. For example, your revenue projections call for 100 units of X product to be sold next year. How will they be sold? Who will be selling them? Why is this projection realistic, do you have relevant industry, product or customer experience that guides this assumption? This is one reason VCs look for industry experience in their management teams. The appropriate experience should provide insight into the dynamics of the sales process and customer behavior, knowing for example the key decision factors (the sometimes harsh realities) of the customer group. Having a well constructed sales pipeline and a disciplined selling process will also help.
In the marketing section of your business plan and presentation, VCs will look for more than a list of your marketing initiatives. You can anticipate questions like: what are your company's customer acquisition costs? Have you calculated average and target revenue per customer? Do you know how many customers are required to break even? Do you know the product sales cycle? Think quantitatively as well as qualitatively.
In addition, the most successful companies know how they will retain customers -- even before they acquire them. It is said that it costs five times as much to generate business from new customers as it does from existing customers.
Customer retention is critical to the long-term success of most enterprises. How will you get customers to return?
Laurence K. Hayward is the Founder and CEO of TheVentureLab. To learn more about him follow the link here
Wednesday, June 20, 2012
Part 12/20 - Twenty Questions You Will Be Asked By Venture Capitalists (If You Get That Far)
By Laurence K. Hayward
This is part twelve of a twenty part series on this topic.
12. What is your valuation?
This could be one of the most difficult questions of all. Answer too high and many investors will simply reject the opportunity outright. Why would they do that even if they like the opportunity? They may take it as a sign of inexperience and excessiveness, or they may simply view it as unproductive – that is, it will be too risky and time-intensive to find acceptable terms. Answer too low and you’re giving up more of your business. The common saying in venture capital is that it is better to have a piece of something, than all of nothing. But, that doesn’t provide much help after all, unless you’re down to your final option.
One way to think about valuation objectively is to step outside ‘negotiated thinking’ for a moment and imagine you were trying to set the price of a new product you were preparing to release. How would you determine the price? Most likely you’d study the market demand for the product first and seek information regarding the elasticity of potential buyers. You’d try to get objective and independent feedback of various price points. You’d try to understand the perceived value of the product because ultimately that will likely yield a higher price than some ratio to cost. You’d compare it to other similar product offerings already on the market.
Try to find a trusted source or two to help you with an analysis like this for your business. Also find someone who can help you understand the most appropriate valuation methods based on the characteristics of your business situation. Sound like a lot of work? It is. This is why many believe that raising capital is a full-time job, and find outside advisors to assist with the process.
Don’t forget Economics 101, which tells us that price is ultimately determined by supply and demand. How does this apply? First, don’t “shop” (promote indiscriminately) your deal else you’ll unintentionally make it appear oversupplied and less valuable. Second, don’t stop at the first investor who seems interested. Try to find other (carefully targeted) investors who are interested. While it is rare to encounter a bidding war, having credible investors interested in your company can raise its perceived value. Third, understand the nature of syndicates (multiple VCs investing together in a round), which is how many early-stage deals are done today. The lead investor typically sets the valuation and the other investors in the round follow. Know with whom you need to focus your negotiations.
Information regarding valuation does not belong in the business plan. Rather it is included in a private placement memorandum (PPM) and subscription booklet. If you are seeking funds primarily from VCs, valuation will likely be handled in the form of a term sheet developed by the VC to be negotiated between parties. If you are seeking funds from accredited investors or angels, the valuation will usually be covered in the PPM or subscription agreement.
This is part twelve of a twenty part series on this topic.
12. What is your valuation?
This could be one of the most difficult questions of all. Answer too high and many investors will simply reject the opportunity outright. Why would they do that even if they like the opportunity? They may take it as a sign of inexperience and excessiveness, or they may simply view it as unproductive – that is, it will be too risky and time-intensive to find acceptable terms. Answer too low and you’re giving up more of your business. The common saying in venture capital is that it is better to have a piece of something, than all of nothing. But, that doesn’t provide much help after all, unless you’re down to your final option.
One way to think about valuation objectively is to step outside ‘negotiated thinking’ for a moment and imagine you were trying to set the price of a new product you were preparing to release. How would you determine the price? Most likely you’d study the market demand for the product first and seek information regarding the elasticity of potential buyers. You’d try to get objective and independent feedback of various price points. You’d try to understand the perceived value of the product because ultimately that will likely yield a higher price than some ratio to cost. You’d compare it to other similar product offerings already on the market.
Try to find a trusted source or two to help you with an analysis like this for your business. Also find someone who can help you understand the most appropriate valuation methods based on the characteristics of your business situation. Sound like a lot of work? It is. This is why many believe that raising capital is a full-time job, and find outside advisors to assist with the process.
Don’t forget Economics 101, which tells us that price is ultimately determined by supply and demand. How does this apply? First, don’t “shop” (promote indiscriminately) your deal else you’ll unintentionally make it appear oversupplied and less valuable. Second, don’t stop at the first investor who seems interested. Try to find other (carefully targeted) investors who are interested. While it is rare to encounter a bidding war, having credible investors interested in your company can raise its perceived value. Third, understand the nature of syndicates (multiple VCs investing together in a round), which is how many early-stage deals are done today. The lead investor typically sets the valuation and the other investors in the round follow. Know with whom you need to focus your negotiations.
Information regarding valuation does not belong in the business plan. Rather it is included in a private placement memorandum (PPM) and subscription booklet. If you are seeking funds primarily from VCs, valuation will likely be handled in the form of a term sheet developed by the VC to be negotiated between parties. If you are seeking funds from accredited investors or angels, the valuation will usually be covered in the PPM or subscription agreement.
Tuesday, June 5, 2012
Part 11/20 - Twenty Questions You Will Be Asked By Venture Capitalists (If You Get That Far)
By Laurence K. Hayward
This is part eleven of a twenty part series on this topic.
11. When will your company break even in terms of profitability and cash flow?
I remember when I first became financially independent of my parents. The thrill of freedom was quickly followed by the burden of responsibility. Still, my income exceeded expenses, and I no longer required financial support. In accounting terms, I was solvent. Likewise, my parents had one less thing to worry as much about, financially speaking anyway. The concept is not unlike that of a venture capital investment. Once your business is financially independent and solvent, you become less of a liability to a VC. Certainly there may be opportunities to continue investing, but that might be focused on expansion rather than “staying alive.” VCs would like to get their portfolio companies to this point as quickly as possible. Many only invest in companies that have already passed this mark. Profitable businesses are more attractive to potential buyers and the public markets.
In order to estimate when your company will break even, it is important to have the appropriate financial projections. Many entrepreneurs develop income projections, but fail to fully appreciate the application of the balance sheet and cash flow statement. For example, capital expenditures can drain significant cash upfront even though the effect on the income statement as depreciation expense can be minor in a given year (because the expense is spread over a number of years – the depreciable life of the asset). Likewise, accounts receivable cycles and inventory can have a significant impact on cash flow, which fundamentally is the most critical element to survival. If you do not have the appropriate financial experience, seek out a well-trained advisor who can assist you with your financial projections.
A well-developed business plan will include projected income statements, balance sheets and statements of cash flow five years forward. Many entrepreneurs also provide information regarding the assumptions used to generate the financials.
For example, they may provide pricing and volume data in order to demonstrate how and when revenues are recognized. Whether you present this information in the plan, or reserve it for more detailed discussions with investors is up to you.
However, it is critical that you can support the assumptions logically (with hard data), that your calculations (within the given set of assumptions) are accurate, and that the approach used to arrive at the final set of projections is methodical.
Laurence K. Hayward is the Founder and CEO of TheVentureLab. To learn more about him follow the link here
This is part eleven of a twenty part series on this topic.
11. When will your company break even in terms of profitability and cash flow?
I remember when I first became financially independent of my parents. The thrill of freedom was quickly followed by the burden of responsibility. Still, my income exceeded expenses, and I no longer required financial support. In accounting terms, I was solvent. Likewise, my parents had one less thing to worry as much about, financially speaking anyway. The concept is not unlike that of a venture capital investment. Once your business is financially independent and solvent, you become less of a liability to a VC. Certainly there may be opportunities to continue investing, but that might be focused on expansion rather than “staying alive.” VCs would like to get their portfolio companies to this point as quickly as possible. Many only invest in companies that have already passed this mark. Profitable businesses are more attractive to potential buyers and the public markets.
In order to estimate when your company will break even, it is important to have the appropriate financial projections. Many entrepreneurs develop income projections, but fail to fully appreciate the application of the balance sheet and cash flow statement. For example, capital expenditures can drain significant cash upfront even though the effect on the income statement as depreciation expense can be minor in a given year (because the expense is spread over a number of years – the depreciable life of the asset). Likewise, accounts receivable cycles and inventory can have a significant impact on cash flow, which fundamentally is the most critical element to survival. If you do not have the appropriate financial experience, seek out a well-trained advisor who can assist you with your financial projections.
A well-developed business plan will include projected income statements, balance sheets and statements of cash flow five years forward. Many entrepreneurs also provide information regarding the assumptions used to generate the financials.
For example, they may provide pricing and volume data in order to demonstrate how and when revenues are recognized. Whether you present this information in the plan, or reserve it for more detailed discussions with investors is up to you.
However, it is critical that you can support the assumptions logically (with hard data), that your calculations (within the given set of assumptions) are accurate, and that the approach used to arrive at the final set of projections is methodical.
Laurence K. Hayward is the Founder and CEO of TheVentureLab. To learn more about him follow the link here
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