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How to Diligence a Therapeutic Startup

How to Diligence a Therapeutic Startup

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    Investing in Emerging Markets

    3 min 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 examine 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 will look at a company in the MarTech space. We will briefly look at each component listed above to decide whether this company is 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 begin positioning 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, many 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 much 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 is 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 standards 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 has no definite answer to these two potential problems, we would advise not to invest as this can quickly become a startup undoing. 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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    Team Due Diligence

    1 min read No one wants to invest in a startup that is doomed to fail; enter Team Due Diligence. “What we hope ever to do with ease, we must learn first to do with diligence.” – Samuel Johnson Performing the proper Team Due Diligence is an essential part of the investing process. The most critical factor in that process is understanding the startup’s team. Since a startup has only a developing product and perhaps some intellectual property, digging into the team is an excellent indicator of its potential success. It can be your number one key to understanding if the business is worth your investment. Here are some things to look for when doing your team’s due diligence: Team Resumes. Look at the resumes of those who are prospected to join the team when funding becomes available. The CEO should know who they are planning to bring on once they have the funding. Domain Knowledge. Who has the expertise, and how current is it? Complementary Skills. Do they have a team member with sales skills? Is there someone who is going to develop the product? Is there a member with people management skills who can grow the team? How long has the team worked together? Ideally, the team has some experience working with each other. The more time they’ve had together, the better. 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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    The Importance of Diversity in Your Portfolio

    1 min read The Importance of Diversity in Your Portfolio According to a Harvard Business Review study on increasing diversity in venture capital partnerships, the more similar the backgrounds shared by the investment partners, the lower the investment performance. Diversity, put, leads to better-performing teams. Diversity of perspective breeds a startup that has a better understanding of the pain points that they’re trying to solve. The more a startup ensures that its team includes both women and minorities, the more likely it is to uncover the solution to the problem it set out to solve, and the more likely it is to yield a high performance. However, the fact remains that minority and women-owned businesses still struggle with funding when compared to their white, male, counterparts. While the investment space is working to shift this imbalance, the work is far from over and many still face an uphill battle toward equality. Minorities and women continue to face both structural barriers and biases when it comes to career paths. These individuals are expected to fit within a specific mold and stay within that mold. For example, less than 30% of the CEOs in the US are women. Statistically, however, there are more women in the US than men at roughly 97 men to 100 women. As Ola Gambari, COO of Hungry Fan explains: “It’s the idea of this preconceived notion that we have a lane, and we’re supposed to stay in it and, as a minority, if I’m not running a business focused on minority problems, I shouldn’t be running that business, neglecting the fact that I share all of the other pain points of other human beings in this society.” Instead, investors should be evaluating the business on its merits, not just the fact that it has minority founders. Again, it breaks down to recognizing that different perspectives matter and yield better results. As more investors embrace this knowledge, the more equality we’ll begin to see. 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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    To Invest or Not to Invest

    2 min read To Invest or Not to Invest In the startup world, everyone has a grand idea, but how do you know when to invest? The startup needs more than just goals in the slide deck; they need systems in place to accomplish the goal and show the growth story in progress. As an investor, how do you know which startups can talk the talk and walk the walk? There are characteristics to look out for in a startup that raise either green or red flags. When to Invest After you have applied the traditional investment thesis to the startup’s plans, check for the following positive traits: There should be a strong team with integrity, industry knowledge, and business experience. They should have product validation and market validation, meaning that the product works and people will pay for it. The startup should already have the prospects for high growth and be demonstrating this at some level now. The business needs to be scalable and something that other companies will want to buy into eventually. The potential return needs to be significant to allow you as the investor to reach a 44% IRR or better. Finally, you need to help the startup in some way, such as finding other investors, providing domain knowledge, or making other meaningful connections for the startup. When Not to Invest There are traits you can look for that will tell you not to invest in the startup. Here is a checklist of showstoppers: There’s no business plan, as well as no plan for an exit. There’s no vision for the company. There’s no growth in the target market. The business doesn’t provide enough of a return on investment. The team has too many holes to stand up. The projected growth rate is too high and is unrealistic. There’s no differentiation over the competition. You should also beware of the “Pretend-preneur,” the entrepreneur who likes the idea of running a startup but is not committed to the work required to make it a success. Here are some tell-tale signs to watch out for: They are overly worried about job titles and credit for the work. They don’t seem too focused on the customer and what it will take to make them happy with the product. They view this as a “detail to figure out later.” They focus on the superficialities of the business and not the core functions of building the product and selling it. They look for ways around the hard work rather than working their way through it. Problems are the fault of everyone else, and there’s nothing that they can do about it. They don’t know who their customers are, and this doesn’t bother them. They think funding will solve all problems and life will be easier after the raise. They don’t know their numbers, but someone else in their organization does, and that’s good enough. Making The Final Decision The decision to invest or pass is entirely up to you. No one knows what the future may hold. But we can make the most informed, rational, and logical choice possible in this scenario. Taking the positive and negative characteristics lists above into consideration, you can use the process of elimination to remove deals from your potential investment list, allowing you to focus on the ones that can bring success to you and your team. 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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    Startup Investing: What You Need to Know

    2 min read Startup Investing: What You Need to Know Startup investing is an attractive venture for many in the world of investing. Before investing in a startup company, it is important to have a well-thought-out plan. In this article, we discuss what percentage of discretionary funds investors typically allocate for startup investing, the difference between early- and late-stage investing, and how to apply your investment thesis to a startup. Allocate Funds The first thing you need to do when preparing to begin investing in startups is to set aside funds for this purpose. In most cases, investors dedicate 5% to 15% of their discretionary funds to angel investing. There are several issues with asset allocation for angel investing compared to publicly traded stocks, bonds, and mutual funds. Startup investments are illiquid as there’s no market for reselling. Transferring stock is greatly limited due to SEC rules. To achieve this again, you must hold the stock for up to 7 to 10 years in most cases. Many startups fail completely and are tax write-offs. Determine upfront how much you want to invest based on 5% to 15% of your portfolio. Divide by ten to get the total number of startups you can invest in. Divide the investment amount by 2 to get the initial investment per startup leaving the second half for a follow-up round.  For example, let’s say I have a portfolio of $3.5M. 15% of $3.5M yields $525K to invest in startups. Dividing $525K by 10 gives me $52K per startup that I can invest. Dividing the $52,500 by 2 means I can invest $26K for each startup leaving another $26K for each follow-on investment. It’s important to be selective in the beginning. You should start with only 3 investments per year. After a few years and some gains, you can re-invest some of the profits into more startups. There are tax laws that make it attractive to roll your gains from one startup investment into another.  Choose Your Niche Venture capitalists have two choices in funding startups- they can invest in early-stage or late-stage companies. Each option has its own pros and cons Early-stage companies come with a high risk for startup failure, but an easier time to reach a successful investment exit. Late-stage startups have a lower risk of startup failure but a more challenging time to reach a successful investment exit. As the rule of 5 tells us, a good investment requires an exit of 5 times the post-money valuation.  Later-stage companies often come with $20M to $30M post-money valuations which means they would need to exit at $100M to $150M to be a successful investment. Early-stage startups simply need to launch and grow reasonably well. Later-stage startups need to become the leader in their category as acquisitions usually focus on the leader and not the various followers. Apply Your Investment Thesis Before investing in a startup apply your investment thesis to it to see if it makes sense. Write out the company’s strategy and how it fits into the overall market. Review their position relative to the competition. For the target company, look for a material event that recently occurred such as a jump in sales or hiring of a new CEO. Write out what is significant about the change and why. Include any challenges the company may face. Consider what factors may impact their performance such as the economy, a new competitor, etc. Writing it out helps you think through the investment thesis and gives you a document to reference later to check your thinking. Reviewing your write-up in light of the outcome may update your investment thesis. 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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    The Many Startup Investor Types and Who is Right for Your Deal?

    2 min read The Many Startup Investor Types and Who is Right for Your Deal? There are many kinds of startup investors today. Venture Capital, MicroVC Funds, Corporate Venture funds, Family Offices,  Angels, High Net Worth Individuals (HNI), and crowdfunders to name some of the current types of investors. Venture Capital- Most startups think of venture capital when they start their fundraise. The reality is that venture capital is only for a small number of startups. VCs draw their funds from outside sources called LPs or Limited Partners. The VC charges a management fee and a carry (share of the profits) from the funds raised. There are VCs who still raise the funds in what is called committed capital- the funds are committed by the LPs. Newer VC funds are often called “Pledge funds” in which the LPs pay the management fee for access to the deal flow but they review each deal before funding and have a say in the funding process. For some VCs you may notice the turnaround time on questions and deal flow takes longer. For pledge funds, the VCs must gain the approval of the LPs to move forward- hence the turnaround time is longer. VCs fund only the top 10% of all qualified startups. They look for high-growth, large target markets with scalable business models. MicroVCs are venture capital funds with less than $100M in funding. Typically, MicroVCs start with $25M to $50M funds and then deploy the funds to 10-12 companies. They often have very specific investment criteria since the management fee on the fund doesn’t add up to much and one needs to keep the costs low on such a fund. Corporate VCs are often called strategic investors in that they invest for strategic reasons rather than financial ones. They seek new technologies, talent, and other tools to help grow their business. They often invest as follow-on investors and typically do not lead the fundraise for startups. Some firms had a strategic fund in the past, but today just about every company has a fund for startup investment. Family offices are investors based around a family partnership that allocates some of their funds to startup investing. Some family offices go it alone and are called single-family offices while others band together into groups and are called multi-family offices that share the deal flow and due diligence. For every venture capital fund in the US, there are five family offices. They are less prominent since they invest privately and provide very little publicity around their work. Angels are individuals that meet the SEC-accredited investor requirement. That means they have $1M in net worth not counting the house they live in. Angels invest their own money. Some band together into groups to share the deal flow and the due diligence. Sometimes the group is formed around the “dinner club” model and a formal application process is used to recruit the deals. Others form syndicates in which a deal that is led is shopped to others in the group. The dinner club model can be a heavy time sync since most of the meetings are in person and only occur at specific times of the year. The Syndicate model is lighter and focuses on deals that have a lead. Angels look for the same thing as VCs but often invest outside those parameters since it’s their own funds.  They often invest in something that matters to them personally such as impact funds. High Net Worth Individuals are similar to angels but typically have more investing experience. They most often invest their own funds in areas they understand well. Some HNIs band together in informal syndicates to share the deal flow and due diligence. Crowdfunders are either accredited or unaccredited investors seeking to make a return by investing with many other investors in startup deals. Because their investment size ranges from $100 to $5000 in most cases, the startup needs a large number of them to complete a round. Crowdfunders more than any other investor make their investment decision on factors other than financial return. They often invest to support family and friends, or businesses they care about in some manner.  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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    Investing in Diversity

    2 min read  Investing in Diversity As an investor, it’s essential to consider investing in human and social capital. Research suggests that investing in human and social capital alongside traditional capital is most predictive of any startup’s success. Data shows that having diversity on a team benefits a startup’s performance. An additional dataset from the likes of McKinsey, American Express, and the Kauffman Foundation shows that diversity makes for better financial outcomes for a company. Given the data, looking at diverse teams should be a priority for investors. Here are a few benefits of investing in team diversity: Superior decision-making and problem-solving Diverse backgrounds mean diverse solutions being brought to the table. This leads to a more informed and well-rounded decision-making process and improved results from the team.Increased innovation A diverse team is a melting pot of ideas. People with different backgrounds and views will bring different solutions to a problem. This, in turn, pushes innovation forward. More talent and skills Individuals from different backgrounds each bring in their own set of skills, talents, and experiences. Not only does this increase performance, but it also creates a natural learning environment in which team members can learn from each other. A larger talent pool and long-term employees Diversity means attracting more candidates. A progressive company is attractive to prospective employees who value equality and higher employee retention is likely with a more diverse team. 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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    Three Important Questions to Ask Before Investing

    2 min read Three Important Questions to Ask Before Investing The startup world is full of big ideas. Entrepreneurs have grand plans to make these big ideas a reality, and in some cases investing in these plans can lead to a hefty ROI for investors. But how do you know if this startup is the one to invest in? We’ve boiled this down to three main questions to ask before investing in a startup company. If even one of these answers is wishy-washy, you may want to consider saving your investment for a company in steadier waters. Let’s take a look at what these three questions are. Do They Have Sufficient Traction? The first question to ask is if the startup has sufficient traction.  You can track them on their sales growth, team changes, product development, and fundraise.  As you receive reports, you can start to build out a list of crucial traction points– leads, sales, channels, etc.   As one investor said, “I don’t invest in dots. I invest in lines.”  It’s essential to build out a picture of how the business is growing. By watching the deal over time, you can better understand it and hopefully see an upward trajectory, at which point an investment makes sense. Are They Serious? Here are a few signs that an entrepreneur may not take the business seriously enough to be successful: Job titles are overly vital to them, and they are generally more concerned with receiving titles and credit for the work than they are about the actual work. They are not focused on the customer. In fact, they may not even have a clear understanding of who their customer is or what that customer wants. They don’t take responsibility for problems the startup may have. They blame others for the issues and may claim there can be nothing to fix the problem.  Know your entrepreneur. An entrepreneur who isn’t committed to the cause will raise funding and ultimately waste it. You do not want to invest money in those who aren’t going to see it through. Do They Have a Well Thought Out Plan? They might have a great idea, but they’ll need to do more than just lay out a slide deck with goals they hope to achieve. A promising startup must be able to back it up with a well-thought-out plan to accomplish those goals. Here are some questions you can ask to get a better idea of what kind of plan they have in place: How will they generate leads, and what does that look like? What is their current sales pitch/angle, and how will it work for them? Where are their customers coming from, and how do they make the sale? It shows potential for investment if they’ve done their homework and have clear answers and processes in place. 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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    Fundraising 101

    2 min read Fundraising 101 Are you considering starting a round of funding for your startup? If this is your first time running a raise, you likely have a lot of questions. In this Fundraising 101 guide, we will share when you should consider starting a round of funding, what type of funding to consider going after, how to prepare, and how long it will take. Read below to better understand the basics of fundraising for your startup. When to Raise Funding Most founders go out for a fundraise prematurely because they need money, not because they are ready for fundraising. Consider the following to understand when it is best to raise funding: Do you have a compelling idea that you can articulate? Do you have a validated customer, market, and product lined up? Are your investor documents prepared? Your pitch deck will change over time, but it always needs to show the core product, team, and fundraise. Can you demonstrate the product, even at an early stage? Can you show customer interest through engagement as well as revenue? Have you spoken with some investors to identify what risks they see in the deal? Do you know how you can mitigate those risks? Only after completing the above preparations should you consider launching your fundraise. You can then successfully engage investors with your deal, and remember to never show up to an investor meeting empty-handed. Always have some customer engagement to discuss. Types of Funding Before choosing a type of funding, consider the following: Investigate every kind of funding and think about where it may fit into your overall funding plan. It’s most likely that you will use two or three types of funding over the life of your business. To understand the type of funding you should look for, ask: “How will you pay the investor back?” For example, if you plan to pay back when you sell the business, equity funding should be considered. On the other hand, if you plan to pay back out of the company’s cash flow, then debt funding is a better choice. If you have a consumer-facing product, consider crowdfunding which offers both debt and equity options. Break your funding down into parts, and consider using more than one type of funding for your business. How to Prepare for a Raise Before launching your fundraise campaign, prepare your business, complete your investor documents, and build your investor network. Preparing your business is the first step in preparing for a raise. The preparation consists of checking in with your team, the board, and both potential and current investors to gain alignment- your fundraise launch should not come as a surprise to them.  Next, complete your investor documents, including a pitch deck, financial proforma, and diligence room. Your financial proforma should lay out how much you should raise and what you will do with it. If you’re unsure how to set this up, write down your current revenue and the revenue you predict to have in the next 24-36 months. From this, you can extract how much funding you will need to raise and how many people you’ll need to hire. Finally, your pitch deck should tell the story of how your business makes money and why it will succeed. Finally, build your investor network. Make a list of investors to contact, including existing investors. Set up a few initial meetings and tell the prospective investor you plan to launch a fundraise in three months. This removes the pressure from the investor and often elicits feedback on how much to raise, how to structure the deal, and more. What Are Fundraising Differences by Stage In raising funding over the life of the startup, you’ll find there are differences in the fundraise at each stage. The goal at the Seed stage is to show you can sell the product. At this stage, the investors will look primarily at the team since there’s little product or revenue. However, you will still need to show a working prototype and initial customer validation. Finally, you must convince the investor that customers will pay for the product and use it. At the Series A stage, the goal is to show you can grow the business. At this stage, you need to establish a repeatable and predictable process for acquiring the customer, delivering the service, and retaining them. Show a sales funnel with prospects tracking through the process of turning into customers.  At the Series B stage, the goal is to show you can scale the business. You need to show you have growth drivers built into the business that scales the company at this stage. This includes systems that can drive scale growth, such as a partner network, sales force capability, and expansion into new markets with the same platform. At each stage, the pitch deck will need to reflect the goal for the fundraise and show what the business is doing to achieve it. Fundraising Timeline As a rule of thumb, for every $1M of funding you want to raise as an early-stage startup, you should expect one calendar year to grow it. This includes time to prepare the company, the investor documents, the pitch, contacting, pitching, and following up with investors.  It’s best to have your pitch deck and financial projections prepared before the fundraise, as well as a primary data room with the essential documents investors expect. This shows you have the fundraise well organized. Investors have their diligence process and are remarkably busy, so you have to work through their schedules. Fundraising should be a full-time job for the CEO, with support from the team for document preparation. The first few investors are the most difficult as no investor wants to go first. Therefore, this stage takes the most time. Once you reach 50% of your fundraise goal, you can estimate the remainder of the raise will take about 30% less time than the first half of the raise. The process may run faster if

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