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March 21, 2006

Planning, Funding, Executing, and Exiting a New Venture | Gerry Lemberg

Planning, Funding, Executing and Exiting a New Venture

by Gerry Lemberg

An entrepreneur is that rare gifted person who has foresight, is firm and resolute, able to motivate and lead others and understands that the value of an idea is directly proportional to the ability to execute it with limited resources.

Only about 1 out of 50 new business opportunities presented by entrepreneurs to investors for funding are ever successful. Our research has shown that entrepreneurs who fail to attract investment believe:

• Investors are too risk averse
• Investors can’t recognise a brilliant idea
• There is an equity funding gap for early stage investment
• Investors look only for short term results
• Investors are sharks that only want to steal their ideas
• Investors are too greedy
• Too much competition for available capital
• Investors ask the wrong questions
• Investors expect us to make a compelling case for our life’s work in ten minutes
• Investors have no appreciation for the sweat we put into the development of our idea and technology

The Reality 

In the investment community the reality is that there is more capital available than there are compelling business opportunities in which to invest. Any venture will be compelling and fundable if it offers relief to a well defined customer pain which will generate revenue when executed by a highly motivated team of entrepreneurs possessing a sustainable advantage.

The fundamental reason that only 2% of start-up business can attract professional investment is that the majority of entrepreneurs don’t understand how to properly structure a business or understand the investment process. Most of the new ventures that don’t get funded are due to:

• A belief that an Idea or a Technology + Capital = Success.
• An inability to understand the difference between an idea and what it takes to execute that idea into a revenue-generating business.
• The ignorance of not recognising that the funding process is structured to mitigate foolish risks and flesh out the criteria for success.
• The lack of communication and presentation skills.
• Unwillingness by the entrepreneurs to make an investment in developing the required skills to meet the critical success factors and adjusting their attitude to work in partnership with investors. 

There are some fundamental rules successful investors, be they angels or VC’s, have in their bible. Investors who don’t always follow these rules are family, friends and fools.

Rule No 1 

The idea is worth only 20% of the value of the venture.

Ideas are like opinions. Everybody has at least one. Universities and research foundations invest in ideas. Successful investors invest in the execution of ideas that will create revenue. The creation of revenue requires the recognition of following two rules. 

Rule No 2

 People – not ideas technology or money -  build companies, thus they are worth 50% of the value of the venture

A multi-million dollar fighter aircraft flown by an untrained pilot in combat would have a very short life expectancy. Investing millions in entrepreneurs with a potential billion dollar idea who have insufficient skills, passion and connectivity in their industries and markets is a sure route to an eventual crash and burn.  

Rule No 3  

A successful and fundable business requires a sound structure right at the start, thus the structure is worth 30% of the value of the venture.

A highly skilled pilot flying an unarmed aircraft in combat would have a life span measured in seconds. Investing millions in a brilliant idea executed by a skilled, passionate and connected entrepreneur without a structured and validated market, sales, operation, product development, financial plan and team to execute it will burn through any investment in a very short period without creating revenue.

Rule No 4

Only products and services that can relieve a significant identified group of customer’s pains can generate revenue. 

The biggest risk for investing in any idea or technology is the creation of an elegant solution for which there is no problem. The landscape is littered with the corpses of brilliant ideas, technologies, products and empty bank accounts created by passionate and creative inventors who mesmerized themselves and naive investors and could never find a customer that was willing to pay for it.

Rule No 5

Investors expect to exit with significant returns within six years.

Investors in early stage ventures expect returns commensurate with the risk they are taking. Their minimum expected return is at least a 30% IRR or five (5) times their investment. Aside from liquidation of a failed investment, there are three ways that an investor can exit from a successful investment:

1. A management buyout from a cash rich business.
2. A trade sale of the business
3. An IPO on a significant stock exchange

Investing in new ventures is a risky undertaking and the entrepreneur needs to address the primary priority of their investors of exiting with a significant return. That exit needs to be part of the grand strategy right from the beginning of the venture. Brand equity will be one of the single largest components of the exit value of the business. Thus an important part of the grand strategy will be planning and creating that brand equity. Creating brand equity requires the business to be customer centric rather than product centric. If you create a brand that is synonymous with customer pain relief and customer service, the value of the business will more easily meet the priority of the investors as well as the customers. 

Rule No 6

Strategies that are developed without total awareness of the forces and threats that can impact your business will inevitably fail.

Unlike the linear process of R&D and product development, most strategies dealing with marketing, sales, competition and HR deal with people issues and if dealt with using a linear approach will fail because of emotional responses, which force you to react rather than act. Unlike a linear problem, which allows you to go back to the “drawing board”, people oriented issues are non-linear problems. Any intervention in trying to resolve a non-linear problem changes the outcome in a manner that will not allow you to return to the original state, thus forcing you to react rather than act. If you react, you are then playing by your adversaries rules and you will lose. 

Grand Strategy

Robert Greene in his recently published book “The 33 Strategies of War” addresses Grand Strategy. The key to grand strategy is forethought. Grand strategists look at the world with a dispassionate eye, thinking in terms of the whole campaign to reach the objective by planning indirect and subtle steps along the way whose purpose gradually become visible to others.

Grand Strategy is the apex of rationality with four main principals.

1.  Focus on your greater goal.

Begin with a clear goal in mind that is rooted in reality. What has distinguished all history’s grand strategists, and can also distinguish you, are specific, detailed focused goals. Contemplate them day in and day out. By clearly visualising them in this manner they will become a self fulfilling prophecy. Your goals must be rooted in reality. If they are impossible for you to realise, you will grow discouraged. On the other hand if your goals lack a certain dimension and grandeur, it can be hard to stay motivated. Do not be afraid to be bold.

2.  Widen your perspective.

Grand strategy is a function of vision, of seeing further in time and space than the competition does. Force yourself to widen your view, to see things for what they are and how they might play out in the future, not for how you wish them to be. Always try to look at the world through the eyes of other people, including your competitors.

3.  Sever the roots.

In a society dominated by appearances, the real source of a problem is hard to grasp. Too many issues drag on because neither side know how to find the root of the problem. Uncover the roots of the trouble and you can then develop the strategy to sever them, ending the problem with finality.

4.  Take the indirect route to your goal.

The greatest danger you face in strategy is losing the initiative and finding yourself constantly reacting to competitive or other forces. The solution is constantly to be aware of your situation so that you can not only plan ahead, but also to plan subtly to take the indirect route. Preventing your competition and other potential adversaries from seeing the purpose of your actions gives you an enormous advantage. The key is to maintain control of your emotions and plot your moves in advance, thus acting rather than reacting.  

As an example, The Japanese bombing of Pearl Harbour was a devastating surprise, but a strategic disaster. The Japanese showed their hand too quickly ensuring that the Americans would prosecute the war to the bitter end. After the attack, Admiral Yamamoto stated prophetically that “All we have done is awaken a sleeping tiger”. The rest is history.

Winning is the object of a Grand Strategy 

A significant part of the Grand Strategy is a constant learning process. Cristina Andersson in her book “The Winning Helix” concludes, “Winning is a result of successful preparation, which is a learning process. The attitude of winning is a mental model, which should be cultivated along the process of preparing for peak performance.”

In order to plan, fund, execute and successfully exit from a venture and satisfy the priorities of all the stake holders in the process, you have to create the DNA of your organisation so you can act on the inevitable changes and forces that will create the obstacles that prevent you from achieving your objective. By creating the right DNA for your organisation you will be able to address the critical success factors to put you on a winning course. Those areas of constant learning to create the right DNA must be deployed to cover:

• Awareness & Communication
• The Business Concept
• The Management Team
• The Business Model
• The Operation Plan
• The Marketing Plan
• The Sales Plan
• The Financial Plan

With foresight, a grand strategy and constant learning winning will be inevitable. 

Dr Gerry Lemberg
Silver Fox Venture Partners
www.silverfoxvp.com
www.clearstartup.com

Gerry Lemberg is a venture capitalist who has been focusing on early stage ventures for nearly 40 years, as well as early stage turnarounds.  The above is an essay Gerry uses as a supplement to a seminar called “Planning, Funding, Executing, and Exiting a New Venture” which he gives regularly at a number of MBA schools in Europe.  

Gerry is very generous with his time and insights and is a regular contributer to numerous online forums on venture capital and entrepreneurship.  I am honored that he has given his permission to have his essay reprinted here — cgm

Posted by cmayaud at 02:14 PM | Permalink| Comments (2)
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Posted by: digitalroar at October 18, 2006 11:45 PM

Posted by: Eric Standlee at March 24, 2007 05:23 PM

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