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The 3×3 Framework for Predictable Startup Investing

The 3×3 Framework for Predictable Startup Investing

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Fundraising, Investing

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    The Effects of COVID-19 on the Healthcare and Chronic Pain Markets

    4 min read What will be the COVID impact on Healthcare and Chronic Pain Markets? Effects on The Healthcare Sector The current focus on COVID-19 and things around it will eventually run its course. But the post COVID impact on healthcare-investment opportunities is going to be tremendous. Changes and advancements in healthcare technology are predicted to skyrocket, from non-touch transactions and telehealth advancements to AI-enabled procedures. Hopefully, there will be fair outcomes for the patients, providers, the healthcare system, insurers, and investors because when everything works in balance, it’s a win for everyone. In the beginning, there was also a lot of uncertainty related to investments in companies in therapeutics or MedTech because no one knew how COVID-19 would affect their clinical trials. Overall, however, the pandemic has had a positive impact on investment in the healthcare sector. For example, diagnostics is a field that does not get reimbursed very well and is therefore presents a risk for investors. Since diagnostics plays such an essential role in COVID-19 procedures, there have been a lot of financing of new diagnostic tools and an increase in reimbursement, especially in infectious diseases. The other sector that is seeing an increase in funding is digital health. Not all sectors have been so lucky, however. Their highest margin of loss is on optional procedures and non-critical procedures. Many of the hospitals’ cash flow has been severely hurt by COVID, causing them to rethink, and a lot of them are cutting back on things like adding new facilities. Bringing healthcare to the top of the mind on all fronts has highlighted and made transparent some of the inequities in the developing markets and the developed healthcare markets. This has worked to charge subsectors of the industry such as telemedicine, remote-patient monitoring, and point-of-care diagnostic. One of the most significant changes COVID has had on the industry is the way we view healthcare. A good analogy is the way our views on phones have adapted to the technology. In the past, when you would think of a phone, you would think of a physical location. When you had someone’s phone number, you were calling a place. Through cellular phones, they’ve changed the way we view this process. Your phone number is you now, no matter where you are. And that’s what we’re seeing happen in healthcare. One area that is changing in this way is triage. Triage is how you determine who should be seen and when. We can now add to that equation how. Positive things are happening in the healthcare industry. We’re getting better utilization of our resources and hopefully will provide the best healthcare solutions for people at a more reasonable price point. Changes in Business Operations Everyone is aware of how the all-hands-on-deck routine went when COVID first broke out. Many current business activities were shut down, and in turn, many new activities such as massive refocusing on vaccines and personal protective equipment. There was enormous redirection involved, moving assets and money from one effort to another, which always creates a disruption. The shutdown has disrupted our country’s economic health as well, meaning companies even unrelated to COVID-19 have been massively affected along with venture investment, venture capital, and investors. Stressors across all industries are leading to change, especially in the healthcare sector. The changing of regulations that have been overdue for revisiting, such as those restricting the Medicare programs from reimbursing anything related to telehealth, are being accelerated. Even the FDA has been pressured to accelerate the deployment of reviewing technology, policies, processes, and procedures. Hopefully, these items that the FDA was forced to expedite will stick after the pandemic is over. Some of the most prevalent changes we see as a result of COVID is companies going remote and digitizing their processes. The ability to change in these ways is an excellent indicator of how flexible and agile some of the larger companies in an industry are or are not. Any startup has to be nimble on its feet and ready for a surprise at any time. They rarely, if ever, have funding to throw money at problems. They need to be creative and reactive in their response to opportunities as well as negative surprises. COVID has made this all the more relevant. Companies need to be able to adapt quickly to customer changes, even if it’s a matter of them being able to access them differently and with separation. The reality of the situation is that some business practices are not available to us now, and companies have to be agile and react to them to survive. Changes in Production COVID had the impact of accelerating some parts of an industry and de-accelerating other parts. In the healthcare space, vaccine development, manufacturing, and clinical trials were vastly scaled-up along with an unusual amount of business opportunities for otherwise commodity products. There is significant opportunity in hand sanitizer, face masks, gloves, office cleaning, and sanitizing services. It’s remarkable how many commodity products and services that have not been historically tremendous growth opportunities are now a lucrative direction for some businesses. We see some companies pivoting to fill that gap, while other companies are doing it to overcome loss of traction on their core business. At some point, this is all going to come to an end. There will be warehouses and warehouses full of hand sanitizer from 50-500 companies that never existed before. It will be interesting to see how that is set aside, ignored, or disposed of when companies redirect back to business as usual. One thing we have already seen as an effect of these changes is the redirection to bring manufacturing and other operations back to the U.S. Even if a factory in Shanghai can ramp up production to provide double or triple the assets in a short time, that doesn’t mean we can physically get it here quickly. This has led to a trend in onshoring manufacturing capacity that will likely remain. The pandemic has also

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    Investing in Emerging Markets

    3 minute read Investing in emerging markets can be an incredibly tempting venture. The high risk/ high reward stakes are likely to draw in investors both big and small. So how do you choose? It is essential to analyze both the start-up and the industry they will be operating within. The Industry You can start by defining the niche space and reviewing the evolution thus far of the industry. It is also important to note current challenges in the market and potential future challenges and advancements. The Startup When analyzing the start-up, you should start by examining both the CEO and their team. What are their strengths, weaknesses, and past accomplishments? Next, you should define the problem they are solving and how. You want to be sure they are solving the whole issue, and not only part of it. Their idea must be protected so that other space players do not easily duplicate it. Finally, you want to understand the future aspirations of the company. Are they prepared for upcoming challenges and advancements within the industry to ensure that they are fully prepared and equipped to keep up with the competition? To better understand this process, we are going to look at a company in the MarTech space. We will briefly look at each component listed above to decide whether this is a company worth investing your money in. The Space MarTech, or “Marketing Technology”, refers to marketers’ tools and software to leverage, plan, execute, and track campaign efforts. This technology is used to streamline the marketing process, including customer communications and data entry and analysis. Industry Evolution As the industry evolves, more companies are beginning to position themselves as all-in-one marketing solutions. Traction around areas like conversational chatbots, AI, influencers, and augmented reality is increasing. However, overall growth in the segment will slow down. As companies consolidate, a lot of these point solutions will fall by the wayside. Challenges For early-stage companies, many of the challenges revolve around the way angels and VCs nurture the industry itself. There tends to be a push towards point solutions and the next shiny new thing. In many cases, the problem is a lot broader, and these point solutions are pieces of the whole. Investing The MarTech space is no different than any other niche in that there are some great opportunities, and there are some to avoid. As an investor, it is important to closely analyze the team and the problem that the business is trying to solve. The Company The Company sees itself as an integrated, socially collaborative, intelligent marketing platform. They are an all-in-one system that does social media marketing, content marketing, and email marketing. The CEO realized that marketing in the digital age was becoming increasingly complex due to the overwhelming number of marketing channels, mechanisms, and customer touchpoints. He also noticed that many of the old marketing standbys in advertising had become less and less effective. This inadequacy led him to create The Company. Conclusion Is The Company a smart investment move within the MarTech Space? They provide an all-encompassing solution, solving the whole problem and not just a part of it. The CEO has a successful track record at many reputable companies. It sounds like they have thought about keeping their platform up to date and flexible to compete within the space. It would seem this is a company that is worth investing in, so long as they can show how they will retain customer loyalty and protect their innovative platforms and ideas from duplication by other players in the space. If the company does not have a definite answer to these two potential problems, we would advise not to invest as this can quickly become a startup undoing. Read more in our most recent eGuide: http://staging.startupfundingespresso.com/investing-in-niche-markets/ 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 Last-Mile Delivery Space

    1 min read Players in the last-mile delivery space fulfill the ‘last mile’ of the transfer of goods from producer or retailer to the final consumer and growing consumer demands have caused this industry to boom. Industry Evolution The age of instant gratification has led to the growing consumer demand for increased home delivery, faster delivery turnaround times, and cheaper services. This is driving the need for change. Companies are now outsourcing the logistics to a third-party organization that is better equipped to fulfill the last leg of delivery at a lower cost to the consumer. This is called white-label logistics and is recognized as the next level for companies. Delivery used to be the most expensive part of the selling process. Now, evolutions in the last-mile space make it possible to obtain items locally and deliver them to the customer at a much lower cost. Should You Invest? What do you need to look for as an investor to be sure a company is worth your down payment? The major question to ask yourself is: How does this company compete with some of the major brands already out there? It is important to know if the company is going to be able to keep up with the major player technologies. Those that can keep up with the larger companies are the ones that are going to succeed therefore worth investing in. Read more in our most recent eGuide: http://staging.startupfundingespresso.com/investing-in-niche-markets/ 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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    SAFE Notes vs. Convertible Debt

    1 min read Many startups use SAFE Notes and Convertible Notes for their early-stage investments. So what’s the difference? A Convertible Note is a debt instrument that converts into equity later upon an event such as raising an equity round or reaching a maturity date. A SAFE Note is a Simple Agreement for Future Equity, a warrant to purchase stock in a future priced round. The SAFE can convert when you raise any equity investment amount and does not give the entrepreneur control of when. You can consider Convertible Notes to be legal debt while SAFEs are warrants. Neither a SAFE or a Convertible Note set the valuation but instead takes the equity round valuation. Convertible Notes include an interest rate while SAFE’s do not. Most Convertible Notes have a maturity date while SAFEs do not. Convertible Notes contain a discount rate that provides additional shares to the investor for investing early. SAFEs have no discount rate. SAFEs are often considered the more straightforward option than a Convertible Note, but as you can see, the Convertible Note provides more opportunities. Take our Convertible Notes vs. SAFE Notes Calculator here: http://staging.startupfundingespresso.com/note-calculator/ 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 Convertible Note: How Does it Work?

    1 min read A commonly used investment tool for funding startups is the Convertible Note. What is a Convertible Note? A short-term debt instrument that converts into equity later. If the issuer wants a debt instrument without conversion to equity, a promissory note would be a better option. With a convertible note, the investor receives accruing interest while holding the note. Why Use a Convertible Note? It works well for seed-stage startups as it removes the burden of a complex equity-based terms sheet which requires details on control and boards, and avoids issues of dilution and taxes. It’s easy to set up compared to most equity terms sheets which can be quite costly to develop since valuation must be negotiated and set at the time of signing. The convertible note also works well for investors who want to invest relatively small amounts. Investors seeking to make large investments typically want valuation set, board seats determined, and control provisions set which often requires an equity terms sheet. The convertible note is a useful tool for early-stage startups where there are still many unknowns about the deal. The Three Components: A Convertible Note has three components: the interest rate, discount rate, and cap rate. The interest rate determines the annual interest that will accrue. The interest is not meant to be paid out monthly or quarterly like a bank loan but will convert to equity later along with the principle. The discount rate is the amount of additional equity the investor will receive when the note converts to equity as compensation for investing early. The cap rate determines how much equity the investor will receive upon conversion. How Does it Work? The conversion from debt to equity is usually based on a future financing round. If there is no follow-on financing round, then the note often sets a time limit (say 5 years) at which point it will convert at the cap rate. The interest rate is typically a simple interest rate. If the price per share is $4 and the interest rate is 10%, then the investor receives $4*.10= $0.40/share in the form of interest. The discount rate gives a reduced price to the convertible note holder. If the price per share is $4 and the discount is 15%, then the note holder receives their share at a price of ($4 * (1-.15)) = $3.40. The cap rate sets a maximum limit at which the convertible note can convert to equity. For example, if the cap rate is $3M and the next round of financing comes in at $5M, and the share price is $4.  Then the price per share to the convertible note holder is $2.40. (3/5=.6; $4*.6=$2.4). Read more about Convertible Notes and take our Note Calculator here: http://staging.startupfundingespresso.com/note-calculator/ 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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    What is the Real Due Diligence Process?

    2 min read, I’m always surprised by how many investors say the team is the most important element of a startup, but how little the due diligence process focuses on the team. I can look back on successes and failures in my startup investing career, and almost all failures can be traced back to the “team wasn’t up to the task.” I recognize that I often underestimated the challenge at hand, but in all cases, failure was due to the team lacking skills or focused commitment. In running the due diligence process, it’s not about the product; it’s about the team. There are standard checklists, and the investor should verify the basics such as legal entities, tax filings, patent filings, etc., but the real due diligence comes when you go to the startup’s office and meet the team. I had a new angel investor ask me the other day how he should diligence a startup. I encouraged him to set up a meeting in the startups’ office and meet the team and interview each one. The first person you want to meet if you haven’t already is the CEO. You are assessing leadership, communication, strategy, and other key skills. If this interaction isn’t stellar, there’s no need to continue further with the potential investment. In reviewing the rest of the team, you want to check to see those on the team’s skill levels. If there are advisors or mentors, you want to meet with them to see how much time commitment they have for the project. In the end, time, skills, and focus will need to be applied, and you are looking to see if the team can do that. You can learn a great deal about a company when you go to their workplace. I had a friend who worked for IBM and considered investing in a startup by some of his former coworkers and set up a meeting at their office. When he followed the address, it led him to a skyscraper in the downtown area. There he found the team had rented out the entire 12th floor of the building. Needless to say, the startup ran out of cash in just 6 months. Walking through their office, you’ll get a much deeper sense of who they are and what they are doing. Products come and go, markets shift, and change, but the team is a constant. Read more: 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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    How to Move Your Angel Investor Network Online

    1 min read As businesses are becoming increasingly more virtual, you should consider moving your angel investor network online as well. In this COVID-19 world, making it challenging to meet in person, meeting online is now the standard. Moving your angel investor network online provides added benefits: More engagement from those who are busy or live/work too far from the meeting place Better fit for today’s angel investor whose primary work centers around a computer rather than in-person meetings Efficiency to the process as online meetings are typically half the time of physical ones Improved research as the investor can look up stats on Crunchbase, search online for competitors, and generally make use of online tools Expanded network range to include investors outside your geographic area Increased member participation through presentation availability anytime and from anywhere More contact with members through various online meetings, screenings, education, and diligence sessions Improved decision making as the investor can access online resources such as deal documents while seeing the pitches TEN Capital Can Help. Online meetings will augment your group rather than replace the physical sessions entirely. Social and networking events can continue for members to meet each other. Read more: http://staging.startupfundingespresso.com/ten-capital-network-for-angel-groups/ 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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    Yes, You Can Define an Early Exit

    2 min read At TEN Capital, we see several startups that are strong candidates for early exits. In looking at the history of angel groups and startup investing, a typical portfolio yields the following: the top 10% are big winners, 15% are medium winners, the bottom 10% go out of business, and the remaining 65% turn into lifestyle businesses that may be providing a nice income for the founders but will never provide a return for the investors. As an investor, I found it irksome to fund someone else’s lifestyle business. The startup often envisioned a high growth company but couldn’t find the growth rates or additional funding to achieve it. It was then that I decided to introduce the redemption right into the negotiations. It’s a convertible note structure that provides a 3X in 3 years (terms vary for some deals) redemption right at ‘investor sole discretion’, which means the investor has the right to ask for 3X the investment at the 3-year mark. So $100K investment would return $300K. These terms work well for startups with revenue and strong growth rates, but doesn’t make sense for pre-revenue startups or companies still looking for traction. If the startup is growing well at year 3, the investor can forego the redemption and stay for the equity exit. If the startup has turned into the “lifestyle” business discussed earlier, then the investor has an exit path. When I talk with startups about their exit plan (IPO, M&A, etc.), it’s frequently a vague and fuzzy conversation. When I put a 3X in 3 years on the table, it turns into a real and focused discussion. Those on the growth path can pursue it; those that aren’t typically won’t. Read more: http://staging.startupfundingespresso.com/3xin3/ 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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    Launching Your Own Podcast Program

    Podcasting is a continually growing medium through which to tell your story and build your brand in your own words. We at TEN Capital have been producing our successful podcast for over six years called Investor Connect, and are now opening up our expertise to other firms looking to begin their own series. But why produce your own podcast? Podcasting builds your brand. There are more than 850,000 podcasts active today. Podcasting continues to grow exponentially as it’s a great medium to tell your story and build your brand. People like it because they can hear the real you rather than just read about your company on a website or email. You can use podcasts to connect with your audience. Podcasts give you a channel through which to tell your story. Your podcast can reflect your personality and brand through the various show formats and styles. TEN can show you how to set up your podcast and position you for success. Podcasting tells your story. Everyone has a unique story. You can write it out on the website, but there’s nothing like hearing the story told in person. The podcast lets you tell your story in your own words. It communicates who you are and what is important to you. It takes the words on a website and gives them life. Consider using podcasts to get your message out to a greater audience. Podcasting attracts more startups to your fund. Podcasting takes your fund to the broader market and brings more deal-flow. Startups looking for funding also seek testimonials and references from other startups. In the podcast, you can showcase the deals you have done and the startups you have helped. You can bring startups you’ve helped onto the podcast to tell their story about working with you and your fund. Startups discussing their experience with your fund provides the best testimonials. You can repurpose the podcast into blog posts, youtube videos, and more to distribute through various channels, including social media. TEN Capital can help you set up your podcast program or even record a series of episodes you can use in a marketing campaign. Podcasting positions you as a thought leader to the Limited Partners Podcasting raises awareness for your fund with Limited Partners. LPs look for validation of your network and activities. Podcasting is an excellent way to capture your interaction with startups and other investors. You can showcase the deals you have done in the podcast and the startups you have helped. You can discuss your investment thesis and how it plays out as you predicted and discuss what changes came up. Discussing your experience with the fund provides the best testimonials. You can repurpose the podcast into blog posts, youtube videos, and more to send prospective LPs. TEN Capital can help you set up your podcast program or even record a series of episodes you can use in a marketing campaign. Read more: https://investorconnect.org/ 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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