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How to Diligence a Marketplace Startup

How to Diligence a Marketplace Startup

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Fundraising, Investing

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    Educate the Investor About Your Deal

    2 min read They say it takes seven touches to close a sale – so it takes seven touches to close an investor. Some startups pitch to a group of investors and if they don’t see checkbooks coming out at the end, then in their mind it’s a failed meeting. I tell the startup, the investor doesn’t yet know if they are interested or not – they’re still trying to figure out what the deal is about. It takes four updates before the investor gets a sense of the deal and can start to form a decision. In the end, the investor makes a decision based on team and traction. The Introduction In the introduction, you can talk about the market size, growth rates of the industry, and the promise of a great outcome.  After that first mailer, the investor doesn’t care to hear any more about the market or growth rates. They only care about one thing – what are you doing to achieve the promise? Revenue Numbers I’m amazed at how many startups don’t know their revenue numbers. Come prepared to share those details with the investors in mailers and follow-up conference calls. One tactic I’ve seen used to good effect is to go to your investor prospects six months before launching the campaign. Tell them you will start your raise in six months and then ask if you can keep them informed of your progress. This gives you six months to educate the investor about your deal and demonstrate progress so when you are ready to launch your fundraise; you have a group of educated investors prepared to go. Read more in the TEN Capital eGuide: http://staging.startupfundingespresso.com/how-to-raise-funding-eguide/ Hall T. Martin is the founder and CEO of the TEN Capital Network. TEN Capital has been connecting startups with investors for over ten years. You can connect with Hall about fundraising, business growth, and emerging technologies via LinkedIn or email: hallmartin@tencapital.group

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    The New Normal for Fundraising (It’s All Online)

    2 min read Fundraising like everything else has moved online, almost all of it. Traditionally, those who wanted to raise funding would meet everyone in their local area. You would pitch to the local angel network or investment group, meet with the local venture capitalist, and of course canvas all your family and friends. It was something the CEO had to do because investors wanted to meet with the CEO of the company. It was time-consuming. You had to get introductions to investors you didn’t know and you had to keep the investors up to date with your progress. It was not uncommon to hear about 50+ pitch sessions before receiving the first investment. The investor side was equally difficult. I ran an angel network in the 2000s, and I had many startups pitch to my investors in a dinner club setting. Ninety percent of the startups would go away, and we would never hear from them again. We had no idea what happened to them. Only about ten percent would come back and give us updates, reminders, and show some semblance of progress. Those are the startups we funded. Those CEOs built a relationship with the investor and provided enough information to the investor that one could see momentum and traction in play. The Present Today, there is a better way. You can use online tools to help raise funding for your business. The key to fundraising is to build an investor prospect list and update them on your progress.  It takes seven touches to close a sale – so it takes seven touches to close an investor. Tools to Raise Funding To raise funding, you need to: Access a large number of investors. You need to think worldwide-not just citywide. Use analytics to find the right investor. Understand the different investor types – angels, VCs, family offices, etc. Engage and maintain contact with investors.  You have to demonstrate progress not just state forecasts and make promises. Prepare investor documents— you need to come prepared with your pitch deck, due diligence box, and other key documents for investors. Prepare the campaign– know what are you are going to tell the investor about your deal. The rule of pitching is: if you don’t articulate it – it doesn’t exist.  If you have revenue but don’t mention it, you get no credit for it with the investors.   Read more on the TEN Capital Network education: http://staging.startupfundingespresso.com/education/ Hall T. Martin is the founder and CEO of the TEN Capital Network. TEN Capital has been connecting startups with investors for over ten years. You can connect with Hall about fundraising, business growth, and emerging technologies via LinkedIn or email: hallmartin@tencapital.group

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    Understanding How Much Funding to Pursue

    2 min read  When I ask entrepreneurs how much they are raising the automatic answer is $1M. It just seems like the thing to do. Moreover, when I ask what they are going to do with it, many seem unsure. Alternatively, they provide generalizations like:  “We need it for marketing, or hiring key personnel, or developing products.” The response from investors (myself included) is usually along the lines of, “No S!#t?” How Much Do You Need? Before pursuing investment, one needs to consider how much to raise and how it’s going to be used.  When you go to pitch to investors make sure you are prepared. It should be clear as to exactly how you’ve come up with these funding requirements. Be comfortable explaining these funding requirements and exactly how you plan to put that money to work. Of course, it’s still an educated guess. However, having these items researched and detailed in your business plan (and pitch presentation) will build a lot more credibility with the potential investor. Figuring out how much you need to raise starts with: How much do you need for equipment, inventory, contract services (such as legal costs, marketing, sales, and more.)? This financial model is a MUST before setting the fundraising amount. Start Small I often recommend raising as little money as possible before you have customer sales because the valuation (how much the investor considers your company worth) is going to be quite low. Any money you raise in the beginning will cost a more significant portion of the equity in your company than follow-on investments down the road. In other words, the higher the risk, the greater the equity the investor is going to require.  It’s also better to raise a lower amount (say $250K) to get the product up and running and sold to a few customers. You always raise a larger round of funding later, but at that point, it should be a much better valuation for the entrepreneur–with the product and customer risks mitigated you don’t have to give away as much equity. Also, for every $1M you are trying to raise you’ll spend one year raising it and NOT doing much of anything else on your business. Raising only $250K will reduce the amount of time spent fundraising allowing you to work on your product, marketing, sales, and team building. Read more on the TEN Capital Network education: Click Here Hall T. Martin is the founder and CEO of the TEN Capital Network. TEN Capital has been connecting startups with investors for over ten years. You can connect with Hall about fundraising, business growth, and emerging technologies via LinkedIn or email: hallmartin@tencapital.group

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    Best Practices for Entrepreneurs Seeking Funding

    Next2 min read Have ready the executive summary, slide deck, and business plan with financials.  It helps to have the core three documents – executive summary (one-page only), slide deck, and business plan already developed and ready to go. As the entrepreneur meets prospective investors, he can use the relevant docs for each meeting.  Publish a periodical email newsletter for interested investors  In the fundraising process, I see some entrepreneurs sending out email updates to highlight the progress of the company. Some come as often as weekly to show growth in sales, product plans, and other milestones. This shows the company’s ability to execute.  Finding a Lead Angel Find a lead angel to develop a terms sheet and start the funding round By finding a lead angel and creating a terms sheet, the entrepreneur removes the most significant barrier to fundraising – the negotiation process. Numerous angel investors find the initial negotiation and due diligence process too time-consuming. By eliminating this hurdle, the entrepreneur opens up the deal to a more significant number of investors.  “Investor-friendly “ Make the deal terms “investor-friendly.” First, every deal must be negotiated. The harder the terms for the investor to accept the longer the time it will take to negotiate. By making the terms “investor-friendly” through reasonable pre-money valuations, preferences, and other terms, the faster the process goes.  Due Diligence Next, push all due diligence docs to password-protected therefore, interested angels can perform due diligence more easily. The due diligence phase can be sped up by having all the essential docs already available. I’ve seen some entrepreneurs put everything on a protected website and then give out the password to interested investors. This knocks down the hurdle of trying to send 600 MB worth of documents through the email system.  Continue the quarterly email newsletter after funding, so investors stay with you. It’s important to keep investors up to date even after the funds are raised since investors can help in other ways. Some investors bring a Rolodex of contacts while others bring experience and coaching. By keeping them informed of your progress and challenges, they may be able to help. This practice is also useful for when it comes time for follow-on fundraising.   Read more on the TEN Capital Network education: Click Here Hall T. Martin is the founder and CEO of the TEN Capital Network. TEN Capital has been connecting startups with investors for over ten years. You can connect with Hall about fundraising, business growth, and emerging technologies via LinkedIn or email: hallmartin@tencapital.group

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    How to Use Mailers to Assess Engagement

    2 min read You have a good list. Next, you need to introduce your deal to the investors and demonstrate why it’s a good deal. The operative word here is “DEMONSTRATE.”  Most startups tell the investor why it’s going to be a good deal – great product, great team, great market, great future, etc. The key is you have to SHOW them it’s a great deal by highlighting the traction with customers, the experience and ongoing work of the team, and the improvements on the product. Investors see dozens of deals every day.  You can stand out by remembering one thing: Everyone promises – only a few deliver. What is an Investor? Every startup has a great future. Every startup promises the moon.  So what does the investor do? The investor looks for evidence of meeting milestones, a sense of momentum behind the deal. Your outreach to the investor is a campaign – not a one-time contact. You must demonstrate that you have traction. The team must be doing great things. The product must be progressing. If you can’t do anything unless you have a $500K, then this is going to get tough. You have to show you can do things with little or no funding. Your campaign mailers need to tell your story. Over the next four mailers, you need to showcase your story and how it works. Investors are busy, and they don’t have time to read 5000-word emails. They’ll read a half-page, maybe a little more and that is it. It would be best if you told your story over a series of emails as we work our way into the busy lives of the investor. Break the story down into smaller pieces and schedule them out so the investor can see progress being made weekly.   Read more on the TEN Capital Network education: Click Here Hall T. Martin is the founder and CEO of the TEN Capital Network. TEN Capital has been connecting startups with investors for over ten years. You can connect with Hall about fundraising, business growth, and emerging technologies via LinkedIn or email: hallmartin@tencapital.group

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    Recurring Funding for Recurring Revenue Businesses

    2 min read The rise of the recurring revenue business as a standard business model has implications for financiers. Just as it changed how customers made payments, so it changes the way funding providers are changing the way they fund startups. Recurring Revenue Recurring revenue businesses don’t necessarily need sizeable discrete funding rounds. Today we see funding ongoing throughout the life of the business. As specific business growth needs to arise funding steps in to provide the resources. The funding comes in small amounts and when needed.  In this model the fundraise round is never closed – it’s always open. Investors should continuously be monitoring businesses to see who is reaching an inflection point and for opportune moments to invest in the businesses. I started my company under the name Texas Entrepreneur Networks about ten years ago after launching three angel networks in Austin. I built a network of entrepreneurs and investors now throughout the country using a recurring revenue model instead of a broker model. Building out the business doesn’t require large fundraise all at one time.  It takes some funding to bring on new developers here and provide for a marketing push there. Funding Methods I see a new method of funding for recurring revenue companies in which the companies continually raise small amounts of funding from investors rather than large rounds periodically. This new model works for our entrepreneurs who find it a great way to increase funding. Rather than spend a tremendous amount of time raising funding for six to twelve months, we’ve turned it into an ongoing program in which the raise is always open but doesn’t take too much of the CEO’s time. There are some key things you need to do to enable this model: At heart, it’s an investor relations program. We use email, website, and social media to introduce the deal to the investor and then keep the investor informed of the progress. A campaign is how you tell your story and convince investors you are worthy of investment. Investors are looking for a strong team and consistent traction. Your campaign should demonstrate both. It would be best if you were consistent and persistent about it. The motto is the “Fundraise is always open.”   Read more on the TEN Capital Network education: Click Here Hall T. Martin is the founder and CEO of the TEN Capital Network. TEN Capital has been connecting startups with investors for over ten years. You can connect with Hall about fundraising, business growth, and emerging technologies via LinkedIn or email: hallmartin@tencapital.group

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    How to Raise Funding at Every Stage of the Business

    1 min read Crowdfunding can be used to raise funding throughout the life of a business.  When the idea of a new business strikes you, and there’s nothing built yet, then you should run a donations campaign–ask family and friends to donate $10K collectively.  Make sure they understand that no one is getting paid back.  The value of this step is that it establishes a network to support your business.  The money can be used for some initial costs such as filing patents, building websites, and starting work on a prototype. Rewards The next step is to use a Rewards/Prepay campaign to pre-sell 50 units of your product.  It can be anything.  The key here is that you start to build your customer network.  If you can’t presell 50 units, then you have a product problem that needs to be solved first before you go any further.  The funding you raise should be enough to build the first version of your product. Crowdfunding Campaign With a successful rewards campaign behind you,  you now move towards turning those customers into investors using the Texas Intrastate crowdfunding campaign.  The Texas Intrastate law gives anyone the ability to invest in your business.  Again, the funding helps, but building your network is the crucial point.  If all fifty of your Prepay customers invested in your business you now have fifty brand ambassadors supporting your business–not trivial support by any means. With support from your customers, and now investors in your business, you approach angel investors and start to raise funding to grow the business.  Angels invest $250 to $2M to grow a working operation.  When you arrive at the angel investors’ door, they are expecting you to have a product at some stage of usage and some revenue.  The previous steps give you the ability to do that. If you need more funding, then you can go back and raise revenue-based funding.  The investors at this stage take a piece of the revenue as payment rather than an equity stake.  If you find yourself having trouble raising funding, it may mean that you skipped some key steps. You should go back and fill in the gaps of building your support network and your customer base before proceeding. Read more in the TEN Capital eGuide: http://staging.startupfundingespresso.com/how-to-raise-funding-eguide/ Hall T. Martin is the founder and CEO of the TEN Capital Network. TEN Capital has been connecting startups with investors for over ten years. You can connect with Hall about fundraising, business growth, and emerging technologies via LinkedIn or email: hallmartin@tencapital.group

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    How to Raise Funding – A Little at a Time

    1 min read Traditionally fundraising takes a tremendous amount of time on the part of the startup CEO. Some CEOs drop everything to run the fundraise.  I advise against spending too much time fundraising but instead set up a system to help with the fundraise. With the right use of online tools (analytics, CRM, Drip campaigns, etc) the CEO doesn’t have to let fundraising become a huge distraction. Building a list of investor prospects and keeping them informed of your progress, the CEO can reach out to ask for an investment at the right time. Instead of raising two years’ worth of funding, the CEO can raise a few months which is a great deal easier. This type of funding works best for early stage, and those with recurring revenue business models. These techniques were popularized by crowdfunding but can be applied to accredited investor raises as well. As investors see more and more deal flow, they need help in finding, qualifying, and following up the deals. At TEN Capital we let the investor select the deals they want to see and then send updates only on those deals. We work with the startups to build upgrades to share with interested investors, All of this happens online. At some point, interested investors set up a call to talk with the CEO and later they decide to invest or pass. Most of the process if not all takes place online. Read more the TEN Capital eGuide: http://staging.startupfundingespresso.com/how-to-raise-funding-eguide/ Hall T. Martin is the founder and CEO of the TEN Capital Network. TEN Capital has been connecting startups with investors for over ten years. You can connect with Hall about fundraising, business growth, and emerging technologies via LinkedIn or email: hallmartin@tencapital.group

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    Thinking Out of the Box: Creative Sources of Funding for Startups

    2 min read Finding funding is an indefinite ongoing process for startup organizations. Equity funding is a typical go-to for many startups, however, it is not always the most ideal form of funding. Below are a few creative sources you can look to for your next raise. Loans Loans are debt instruments that must be repaid. Startups can find it difficult to get a traditional loan from a bank. The Small Business Administration offers several loan types for early-stage companies. These loans come with personal guarantees and cannot be closed out with the dissolution of the business. There’s also debt through the use of credit cards and microloans. It’s difficult to use debt to pay for your core product development. Debt makes sense when you have some revenue coming in to pay for the loan.  There are other types of debt including accounts receivable factoring in which you raise money on what customers owe you. There’s also equipment financing in which the equipment collateralizes the debt. Factoring works when you have to pay customers and want to shrink the cash float from the time you build the product until the time you receive payment. Equipment financing works well if you need machinery to build your product or run your business. Credit Lines A line of credit is a short-term loan from the bank to help smooth out cash-flow cycles. Unlike a bank loan in which you receive an injection of funds, a line of credit lets you draw upon it when you need and pay it back when you can. The interest rate on a line of credit is substantially lower than credit cards and offers a higher borrowing limit than most credit cards. However, the interest rates are often variable and not fixed. A secured line of credit is backed by an asset, while an unsecured line of credit is not. An unsecured line of credit will come with a higher interest rate. There are both personal and business lines of credit. Personal lines of credit are often secured by personal property. For a business line of credit, the bank determines your credit limit based on the business assets and cash flow. The bank determines the interest rate by adding the interest to a margin that is affected by your credit history, profitability, and business risk. The line of credit is a useful tool for early-stage businesses to help with cash-flow issues. Licensing You may be able to reduce the amount of funding needed to grow your business by licensing your technology to others. Instead of building and selling a product, you can license to others who will build and sell the product. In licensing, you must have a patent to protect your technology and oftentimes a series of supporting tools to help those who license your technology for using it.  Licensing brings the following benefits: It reduces the amount of capital you need to raise. It can generate a substantial return given the costs are low. The risk of product failure is shifted to the licensee. The disadvantages are: You don’t control how it is used. Your licensee may later compete with you. You don’t receive the full revenue as if you had built and sold the product yourself. Licensees can also bring you new ideas for improvements on the technology. For applications requiring high-capital expenditures for building and selling the product, licensing is a good fit. Grants Grants are typically provided by government organizations to spur research and make a small contribution to the business. Commonly used grants include SBIR, Small Business Innovation Research, which provides phase 1, 2, and 3 grants that add up to $1M. You can search for grants at www.grants.gov. Grant funding is mostly one-time offerings and need not be paid back. They are non-dilutive which means they don’t take any space on the cap table. Use grants to cover costs that customers will not. For example, customers will not pay for basic research but only for finished products. Grants often come with rules on how they can be spent. Be careful in spending too much time with grants. I once worked with a company that had raised over $4M from grants over a five-year period. The team became experts at writing grant proposals but no one could sell, market, or do much of anything for a customer because for five years they focused on writing and winning government grants. Read more TEN Capital eduction:  http://staging.startupfundingespresso.com/education/ Hall T. Martin is the founder and CEO of the TEN Capital Network. TEN Capital has been connecting startups with investors for over ten years. You can connect with Hall about fundraising, business growth, and emerging technologies via LinkedIn or email: hallmartin@tencapital.group

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