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How to Diligence a CPG Firm

How to Diligence a CPG Firm

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    Understanding Financial Fraud

    5 min read Understanding Financial Fraud Financial fraud is a significant risk for startups in the investment industry. Understanding the various types of fraud, their sources, and the red flags that indicate potential fraud can help protect your business. What Is Fraud? Fraud is “The use of one’s occupation for personal enrichment through the deliberate misuse or misapplication of the employing organization’s resources or assets.” Fraud typically involves the following elements: Material Fact: A false representation of a material fact. Intentional Act: The false representation is made intentionally. Belief by the Victim: The victim believes the false representation. Action by the Victim: The victim acts on the false representation. Harm to the Victim: The victim suffers harm as a result. Four conditions usually present for someone to commit fraud: Opportunity: The chance to commit the fraud. Low Risk of Getting Caught: Belief that they won’t be discovered. Rationalization: Justifying the fraudulent act in their mind. Justifications: Rationalizations that make the act seem acceptable. Startups are particularly susceptible to fraud due to their often limited information and controls. Investors should be aware of these vulnerabilities and take appropriate measures to safeguard against fraud.   Types of Financial Fraud in Startups   Misrepresentations Fraudsters may lie about financial investments’ value, risks, and costs. This can include misrepresenting a company’s financial condition and omitting key facts that could influence investment decisions. Regulatory Violations This includes violating securities laws such as insider trading or selling securities without a license. Failing to register securities as required by law also falls under this category. IPO Fraud During an Initial Public Offering (IPO) or Special Purpose Acquisition Company (SPAC) offering, fraud can occur through misstatements in accounting information or the omission of crucial information. Misappropriation of Funds This includes Ponzi schemes, where returns are paid to earlier investors with funds from more recent investors, and the personal skimming of money by those in control. Trading Violations Trading violations involve market manipulation tactics such as pump-and-dump schemes, front-running, and insider trading. Cybersecurity Fraud This type of fraud includes data breaches and the failure to protect investor data, which can lead to significant financial and reputational damage. Money Laundering Money laundering involves falsifying statements in accounting books and records to disguise the illegal origins of money. Startups operating in the financial industry should be particularly vigilant about these types of fraud to protect their businesses and investors. External Sources of Fraud Fraud can also originate from external sources, often involving individuals or entities pretending to be someone trustworthy to deceive the business. Here are common external fraud tactics: Fake Invoices Fraudsters create invoices for services never rendered, hoping the company will pay without verifying the charges. Advertising Scams These scams involve paying for advertising services in directories or books that either don’t exist or are never published. Imposter Scams Scammers pose as creditors or service providers, claiming that the company owes money or services will be cut off if payment isn’t made immediately. Tech Security Scams A warning screen pops up on a computer, claiming a virus has disabled the system and demanding payment to remove it. Phishing Attacks Fraudulent emails or calls request personal information, such as Social Security numbers, to verify employee identity. Ransomware Cybercriminals encrypt company data and demand payment to unlock the files. Business Coaching Scams Scammers promise business training and services that are never delivered, taking payment without providing the promised value. Training employees to recognize these types of fraud is crucial for preventing external scams. Internal Sources of Fraud Fraud can also come from within the business. Here are some internal fraud sources to be aware of: Identity Theft Fraudsters capture and sell personal information for illegal uses, often by accessing employee bank accounts or tax returns. Asset Misappropriation This is essentially theft, often carried out through forged checks or unauthorized transactions. Embezzlement The illegal use of company funds for personal expenses, typically by charging personal expenses to the business account. Payroll Fraud Manipulating payroll records, such as claiming hours not actually worked. Employment Fraud Providing false work history or omitting critical information, such as criminal history, during the hiring process. Implementing strong internal controls is essential to prevent internal fraud. Red Flags Indicating Fraud Fraud in businesses often involves employees and management. Here are some red flags to watch for: Employee Red Flags Lifestyle Changes: Sudden acquisition of expensive items like new cars or homes. Substantial Personal Debt: Financial stress can lead to fraudulent behavior. Addictions: Gambling or alcohol addictions can result in changes in behavior. Avoiding Leave: Employees who never take vacation or sick leave. High Turnover: Frequent staff changes in certain areas. Management Team Red Flags Failure to Submit Information: Lack of transparency with auditors. Weak Internal Controls: Poorly managed business units. Frequent Bank Changes: Regularly changing bank accounts. Changing Auditors: Frequent switches in auditing firms. Inexperienced Accounting Team: Lack of skilled personnel in finance. Excessive Loans: Heavy reliance on borrowing. High Compensation: Unusually high pay packages for executives. Monitoring these red flags can help detect and prevent fraud. Financial fraud poses a significant threat to startups, especially in the investment industry. Understanding the various types of fraud, recognizing the external and internal sources, and being vigilant about the red flags can help safeguard your business from potential financial pitfalls.   Read More from TEN Capital Education 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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    Data Monetization: A Guide for Startups

    3 min read Data Monetization: A Guide for Startups Monetizing data is a critical aspect that startups must consider in today’s digital landscape. They need to understand some essential components and models to generate revenue from their data. Data Monetization Requirements Acquiring Data It is crucial to acquire your own data rather than relying on external sources to increase the value of your data. Storing Data Utilize a data platform to store and manage the acquired data for analysis effectively. Modeling and Testing Model and analyze the captured data using databases and algorithms to achieve the desired results. Customer Requirements Understanding the needs and preferences of your customers is vital to building valuable data sets for them. Compliance and Regulatory Stay informed about data laws and regulatory requirements to ensure compliance in data usage. Skilled Team Employ individuals proficient in analyzing, interpreting, and presenting data appropriately. Consider integrating these elements to establish a robust data analytics program for your startup. Data Monetization Model Data as a Service Offer data your startup generates to other companies, such as weather data, through a machine-readable format. Direct Data Transfer Sell data directly from your startup to other businesses, like customer lists or email addresses. Data Augmentation Enhance your data sets by combining them with external sources, creating a more comprehensive product for sale. Explore these data monetization models to determine the best strategy for your startup. How To Monetize Your Data Mining Your Own Data Leverage your startup’s data to develop new services or products that cater to existing and potential customers. Providing Data Sets Offer valuable data sets, like stock market prices or foot traffic information, to other businesses for their use. Higher-Level Information Deliver analyzed data to address other businesses’ specific queries, enabling them to make informed decisions. By implementing these business models, you can efficiently monetize your data and drive revenue growth for your startup. In conclusion, the thorough understanding and strategic implementation of data monetization requirements and models are crucial for startups aiming to maximize the value of their data assets. Explore these approaches and tailor them to suit your startup’s unique needs to unlock the full potential of data monetization. Read More from TEN Capital Education 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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    The Ins and Outs of Whistleblowing: What You Need to Know

    3 min read  The Ins and Outs of Whistleblowing: What You Need to Know Whistleblowing is a crucial tool in the fight against fraud, but it comes with its own challenges and considerations. Here’s a comprehensive guide to help you navigate whistleblowing effectively.   Understanding Whistleblowing Laws Whistleblowers play a vital role in exposing fraudulent activities, but it’s essential to be well-versed in the relevant laws before taking any action. Different jurisdictions have varying laws surrounding whistleblowing, so it’s crucial to understand the legal framework in your specific situation. Dispelling Myths About Whistleblowers Contrary to popular belief, whistleblowers are not always portrayed accurately in the media. In reality, they are individuals who courageously come forward to report wrongdoing. However, success is not guaranteed, even if fraud is proven. To protect your identity and ensure a strong case, it’s advisable to seek legal counsel when filing a claim.   Best Practices for Whistleblowers If you’re considering blowing the whistle, following best practices to safeguard yourself and your case is essential. Key steps include finding a reputable attorney, maintaining anonymity, and gathering substantial evidence. Additionally, acting swiftly is crucial, as evidence can deteriorate over time. Navigating the Aftermath of Whistleblowing Keeping your job after blowing the whistle can be challenging, but there are steps you can take to protect yourself. Retaining legal counsel, documenting retaliatory actions, and preserving evidence are vital to upholding your rights. It’s also important to be aware of any time limits on retaliation claims and seek support from potential witnesses   Whistleblowing is a complex and often daunting process, but with the right knowledge and preparation, you can make a difference in combating fraud. By understanding the laws, following best practices, and safeguarding your job, you can navigate the world of whistleblowing with confidence and integrity.   Read More from TEN Capital Education 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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    Mastering Product Management

    5 min read Mastering Product Management In today’s competitive market, product differentiation has become crucial for businesses looking to stand out and attract customers. Before diving into the development process, it is essential to understand the best practices in product management and product experiences. By addressing challenges head-on and implementing effective strategies for differentiation, companies can create products that meet customer needs and exceed expectations. In this blog, we will explore the importance of product differentiation, the key considerations before product development, best practices for product experiences, and effective product management strategies for successfully navigating challenges. Before Product Development To ensure you are developing the right product for your target customer, you must ask yourself key questions. Firstly, consider what features may be causing you to lose customers to competitors. If there is a specific feature that customers are choosing over your product, it may be worth incorporating it into your own offering. Additionally, analyze what your competitors do that keeps you up at night. If they are working on features that you lack, these could be potential candidates for inclusion in your next product upgrade. Pay attention to customer feedback—have they consistently requested a certain feature? Prioritize these requests as they indicate a genuine need. If customers find ways to add a feature to your product themselves, it’s a clear sign that it should be officially integrated. Lastly, focus on selling the proposed feature to customers before investing in its development. It should be a top priority if customers are willing to purchase your product solely for that feature. Remember, the rule is to sell it first and build it second. By considering these questions, you can effectively prioritize the features to build into your product and meet the needs of your target audience. Product Challenges Developing, launching, and maintaining a product presents many challenges for businesses seeking to succeed. Choosing the right product to build is one of the first hurdles to overcome. Identifying customers with unmet needs and tailoring your product to address those specific pain points is essential. Equally important is selecting your ideal customer whose needs align with the product you are offering. Understanding customer requirements is another critical step in the product development process. You should engage with at least fifty customers to comprehensively understand their needs and preferences. Building a minimum viable product (MVP) is key to testing your concept and validating its market potential. The MVP should be developed within six months and ready for sale within the same timeframe. If the product cannot be built within this timeline, it may be too ambitious in scope. Achieving product/market fit is a crucial milestone that involves analyzing how your product can further support customers in their work. Building a follow-on product based on insights from the initial product’s support issues can help drive continuous innovation and customer satisfaction. While product development poses numerous challenges, focusing on these key areas can help businesses navigate the complexities of bringing a successful product to market. Product Differentiation Features In product development, features can be categorized into three main types: basic requirements, nice-to-haves, and differentiators. Basic requirements are essential features considered table stakes in the industry, as customers expect them to be present in all products within the market. These features are non-negotiable and are deemed must-haves for any product to be competitive. On the other hand, nice-to-have features are additional functionalities that may not be critical for product usage but add value and enhance the overall user experience. While they may have been inspired by team members or a few customer requests, they are not essential for product functionality. Finally, differentiators are features that set your product apart from competitors and add significant value. These features are not typically requested by customers but are crucial for standing out in a crowded market. As a product manager, it is important to prioritize differentiators on the product roadmap, even in the face of objections from team members who may prefer to focus on basic requirements. These unique features can attract new customers and distinguish your product from the competition. Regularly reviewing your product roadmap to ensure a healthy balance of differentiators is essential for continued market success. Ideally, the beachhead market would be a small yet well-defined group of companies that fit the startup’s current product. It doesn’t necessarily need to be the biggest or most lucrative market but the easiest to pursue. The startup should already have some interactions with the companies in the Beachhead market. Product Management Best Practices Product management involves continuous market analysis and monitoring of customer needs. To effectively implement product management at your startup, it is crucial to prioritize the customer over the product itself. Shifting the focus from your product to the customer’s challenges can help you gather valuable feedback and generate innovative ideas. Develop a clear mental model of the customer you are researching, understanding the problems they face and their workflow. This approach can unveil new applications for your product. By observing the customer and their workflow, you can gain deeper insights into the problem, potentially leading to novel problem-solving approaches. Document your customer research in a format accessible to all team members, organizing and structuring it to facilitate data analysis and idea generation. Conduct collaborative meetings to review the research data and brainstorm potential solutions. Present these solutions to the team for feedback and input. Engage the entire organization in customer research to leverage diverse perspectives and generate the best ideas for product development. Product Experiences Best Practices Product experience encompasses the customer’s journey with the product, from initial adoption to trial and ongoing usage. It is distinct from the broader customer experience, which includes interactions with the company, such as purchasing, training, and support. A seamless product experience enhances the overall customer experience, reducing churn rates and increasing customer retention. Integrating essential elements like purchasing, unsubscribing, support, training, and community within the core product becomes the customer’s central hub. Leveraging the product as a tool for

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    The Thorough Approach to Due Diligence

    3 min read  The Thorough Approach to Due Diligence. A startup investment goes through a series of stages. The first stage is the pitch presentation, in which the startup introduces the deal to the investors. Next comes a follow-up meeting where the investors can dig in to learn the details. After this meeting, investors typically take time to think about the deal and observe the startup as they continue to make progress. The third stage is the due diligence phase. In this phase, investors review the startup’s documents, team, and market thoroughly. If the terms sheet has been established by other investors, the investors review those documents. If not, the investor will negotiate the terms- including valuation. This article will look at the due diligence phase in detail, outlining how to perform a thorough diligence approach. The Thorough Approach There are several approaches to due diligence. The most common is the “Thorough Approach. ” In this process, you review each aspect of the business and focus on the top items. The main areas to cover in due diligence are: Market What’s the market size (total, serviceable, beachhead?) How fast is it growing? Product What is the state of the product, both technical and market? Does it solve a burning need or add a general value? What has actually been developed? What remains to be developed to go to market? Who has used the product, and what do they say about it? Legal What contracts are in place? Are there any lawsuits? Intellectual Property What patents have been filed/approved, and when? What trade secrets do they have? Financials What revenues have come in? What financials are pending? What is the burn rate? Capitalization What is the capitalization structure? Who are the major players? People Who are the key players, and what are their roles and responsibilities? What contracts are in place with each key player? Market Due Diligence As an investor running due diligence on a startup, the key issue to focus on is the size of the market- the larger the market, the greater the growth potential of the startup. Luckily, there is rarely a need to pay for research since so much exists on the web. In searching the web, you’ll find research reports giving market sizes, trends, analysis, and more. The key is to analyze the market at three levels: Total Available Market: Anyone the company could ever sell to Serviceable Market: The target market the company wants to serve Beachhead Market: The first niche the company will pursue Ideally, the beachhead market would be a small yet well-defined group of companies that fit the startup’s current product. It doesn’t necessarily need to be the biggest or most lucrative market but rather the easiest to pursue. The startup should already have some interactions with the companies in the Beachhead market. Team Due Diligence The team is the most critical factor for an investor to analyze during the due diligence process. Since the startup likely has only a nascent product and some intellectual property, the team is the only thing that can really be dug into. First, the investor team should review the resumes of those who are on the team or plan to join when funding becomes available. Placeholders of ‘We’ll look for someone later’ is a red flag. The CEO should know who they are planning to bring on. It is also important to find out how long the team has worked together and if they even have worked together in the past. Next, look for domain knowledge: Who has it, and how current is it? Investors should also look for complementary skills. For example, if there is a team member who has complementary sales skills, will they spend their time selling the product? Or will the person who will build the product manage an internal development team? This question is still valid even if the startup is choosing to outsource. Outsourcing product development with no one actively managing it is a recipe for disaster. Finally, look at ‘completeness’. Many successful teams follow the Designer, the Hacker, and the Hustler formula. The Designer knows the customer problem and plans the product development, including how it will be monetized and promoted. The Hacker is the developer who builds the product, and the Hustler is the one who sells it. Does the startup you wish to invest in have a formula? Quantitative vs Qualitative Due Diligence There’s a quantitative side and a qualitative side to due diligence. The quantitative side includes checking the list of documents in the data room to verify the accuracy of those documents. For example, Do the entity filings match what the company claims to have? Do the intellectual property documents match what they claim to have? The qualitative side of diligence includes evaluating the team and the growth prospects in the market, sizing up the competition, and predicting the company’s ability to execute. Somebody should do the quantitative side with industry experience as it requires more discovery. An analyst or assistant can help with the phase.   Read More from TEN Capital Education 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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    Challenges in Angel Investing

    1 min read Investing Challenges in Angel Investing. Angel investing can be fun and financially rewarding to the investor as well as helpful to the startup. It can also be challenging. Before considering becoming an angel investor, there are some challenges to consider: It’s Hands-On Angel investing requires hands-on work with the startups in funding and supporting them after the investment. Angels often fill in the gaps left by the local incubators and accelerator programs by coaching them into a place where they can raise funding. First-time angels can find it time-consuming and expensive to learn the process. It Requires Continuing Education New market segments require the angel investor to learn new industries and business models continually. It’s Risky There’s no collateral for the investment, and it can all go to zero as it’s a risky investment class. One out of ten investments will be a home run, two or three will provide a small return on investment, and the rest will fail. But it Can be Worth it Angel investing is not without its challenges, but it can truly be a rewarding endeavor. Read More from TEN Capital Education 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. Are you currently raising funding? Contact us today about how we can help! https://tencapital.group/contact-us/

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    Challenges in Angel Investing

    1 min read Investing Challenges in Angel Investing. Angel investing can be fun and financially rewarding to the investor as well as helpful to the startup. It can also be challenging. Before considering becoming an angel investor, there are some challenges to consider: It’s Hands-On Angel investing requires hands-on work with the startups in funding and supporting them after the investment. Angels often fill in the gaps left by the local incubators and accelerator programs by coaching them into a place where they can raise funding. First-time angels can find it time-consuming and expensive to learn the process. It Requires Continuing Education New market segments require the angel investor to learn new industries and business models continually. It’s Risky There’s no collateral for the investment, and it can all go to zero as it’s a risky investment class. One out of ten investments will be a home run, two or three will provide a small return on investment, and the rest will fail. But it Can be Worth it Angel investing is not without its challenges, but it can truly be a rewarding endeavor. Read More from TEN Capital Education 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. Are you currently raising funding? Contact us today about how we can help! https://tencapital.group/contact-us/

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    How to Invest in Startups- Learn From Other Investors

    1 min read How to Invest in Startups – Learn From Other Investors  As an investor, I helped launch three angel networks in Texas. In the process, I set up training programs, attended conferences, and talked with many other investors. Hearing and speaking to other investors was a wonderful learning tool. One of the best resources I found was a podcast by Frank Peters. Frank was an angel investor out of the Tech Coast Angels in southern California. The Frank Peters Show Frank interviewed every angel, VC, and startup in the southern California community. He later ran interviews across the US and all over the world. He ultimately recorded over 450 episodes, which he posted on the web. As I drove my car, I listened to many podcasts and heard from angel investors about how they invested in their investment thesis and the lessons they learned from the process. I recommend listening to podcasts that focus on startup funding. Podcasts are an excellent tool to learn from experts in the field. Some of my favorites are Jason Calacanis’s Angel Podcast, Patrick O’Shaughnessy’s Invest Like the Best, and there is also my personal podcast, Investor Connect.  Read More from TEN Capital Education 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. Are you currently raising funding? Contact us today about how we can help! https://tencapital.group/contact-us/

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    Should You Start an Angel Network?

    1 min read Should You Start an Angel Network? Before making that decision, there are several questions you will need to ask yourself. Before launching an angel network, assess your community as follows: Do you have accredited investors interested in startup investing? Do you have any investors who will take the lead on diligence and investing for each deal? Do you or do you have a champion who will organize and lead the angel group for the first two to three years? Do you have a flow of startups seeking funding that you can access? Is there a resource for incubating and educating those startups in the area? Are there local service providers such as attorneys, accountants, financial advisors, and others who can support the startups? Are there other investor groups in your community that currently fund those deals to support syndication? Is there access to follow-on funding for startups? Research your community to see what currently exists and what must be built. Check with the local entrepreneur groups to assess and get their potential support for starting an angel group.   Read More TEN Capital Education 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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