Quality Coaching for High Tech Startups by Dr. Octavian Schatz
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From an Investor’s Perspective

Sitting On The Other Side Of The Table

Your USP
Why should an investor spend his/her valuable time to grapple with your project? It usually pays to waste a little time thinking about how to stand out from the rest. To get your message across, your story must be written so that the reader immediately understands the benefit of your solution. It is therefore often a good idea to start with the needs of your prospective customers – without a clear market need, the most ingenious products or services seem much less compelling. And hammer in your USPs (one of the few elements of a business plan that can (or even should) be reiterated at least once, for example highlighted in a box, in the take home message of your market research and in the Executive Summary. If it is not clear to an investor which advantages your product or service has compared to the competition, he/she will likely refrain from making an investment.

What’s The Catch?
An experienced investor will try hard to detect loopholes in your arguments. Even if your story as such sounds reasonable, he/she will look for other things that could go wrong. As the most important source of failure is the team itself, an investor will not only ask whether the team has the necessary skills but also whether the tasks are adequately distributed, whether the team communicates well, which incentives exist that keep the team members committed to reaching their common goal and whether the team has the right mixture of visionaries and realists. Some investors try to check your working attitude by placing calls to your office after 6 p.m. or ask for the progress you have made every fortnight. Others aks team members individually about their long term plans to find out whether their answers match (for example, regarding the timing and conditions of the planned exit). Such informations may tip the scales for or against a planned investment.

There are many other things that can go wrong with an investment and it is obvious that the chances for failure increase the longer the time to market is. Even worse, a long time to market not only increases the risks but also curtails the possible return of an investment. High risk projects must therefore yield very high returns. That means that you either have to accept a low starting valuation or realize an extremely fast growth. It is all too natural that investors and founders sometimes have widely different views about the fair valuation, the appropriate distribution of risks – at the end of the day both parties must consider the conditions acceptable.

Due Diligence
In the due diligence phase before an investment is made, factors like freedom-to-operate, strength of the IP (Intellectual Property) portfolio, sustainability of the business model will be analyzed in detail. While these data are reviewed, be prepared to be asked a lot of questions and make sure all your data are consistent and stored in an appropriate form.
The upside potential of your project often also depends on possible synergisms with existing portfolio companies of the investor. It is therefore a good idea to have at least a rough idea of the technologies of companies an investor already has in his/her portfolio. A good investor will probably encourage you to talk with the management of portfolio companies (if not, this is a reason to contact them all the more).

Ask Back
One final advice for dealing with investors: do not hesitate to ask tough questions yourself. You have the right to know whether the investment vehicle that provides the funding of your project is nearing its end of life, whether your investors have adequate cash reserves to be able to put in additional money if necessary (if you are funded by a consortium of investors, this applies for each individual investor, since practically all investment agreements contain clauses that subject the transfer of money, even contractual milestone payments (!), to the participation of each investor, otherwise all other investors have the right to withhold their payment, too). It is not impossible that a project fails not because of technical or market problems but because the investors cannot come to terms concerning the conditions of a financing round.

Happy starting up. Yours sincerely,

Octavian Schatz

Bild: ©iStockphoto.com / Brian Jackson

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