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How to Diligence a Marketplace Startup

How to Diligence a Marketplace Startup

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    How to Move Your Angel Investor Network Online

    1 min read How to Move Your Angel Investor Network Online 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 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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    Everything You Need to Know about Deal-Flow

    2min read Everything You Need to Know about Deal-Flow Deal flow is critical to successful startup investing as it gives you experience with founders, valuations, exits, and many other aspects of the startup process. It teaches you a great deal about the market, current technology, and the startup ecosystem. So, how do you know which startup investment offers the best deal flow? Read on below to find out. Best Practices When it comes to deal flow, quality over quantity is key. The better the deal flow, the better your investment outcome. Here are some practices you can consider to help ensure better deal flow, and therefore better investment: Automate your deal flow process as much as possible by capturing consistent information into one application. Track deal flow sources and analyze them on a regular basis. This shows where the best deals are coming from and where to spend time. Use online data sources to augment your deal flow information. This step helps make follow-up decisions easier to figure out. Monitor your deal flow activity for changes. This shows the impact of the market and conditions and signals for a change in follow-up. Set up workflow processes so the deal goes to the right people in the proper sequence. Flag your most important deals to make sure they don’t fall through the cracks. Optimize your system for your deal flow by gathering only the relevant information. Connect your deal flow system to your email and other systems to integrate into the overall workflow Remember that deal flow can be expensive in time and money, so it’s important to apply these steps to reduce the end cost. Finding Deal Flow It’s important to set up sources to provide quality deal flow consistently. Here are the steps to set up your deal flow sources: Map out the entrepreneurship and funding groups in your geographic area or sector. Use the web and social media searches for an initial pass. Check out universities for their entrepreneurship programs, including business plan competitions and accelerators. Review the Chamber of Commerce for the trade associations for your area or sector to find programs related to startups. Meet with venture capitalists, angel groups, and other investors in your sector or area. Map out the accelerators, incubators, makers markets, and other groups that support aspiring startups. Identify lenders such as banks, factoring companies, and equipment leasing companies, and more who may have deal flow. Create and maintain a calendar of events to track their activities. Reach out to those groups regularly to offer support such as education, mentorship, and coaching. Consider creating a newsletter to share with those in your sector or community to foster the relationship. Start with those in your network to gain access to their deals and offer to return the favor. Seek out quality accelerator programs to find more resources. Consider joining an angel network for deal flow, as you can share the feedback with others. Join online portals with the deal flow so you can learn the current state of valuations, technologies, and sectors. Reach out to venture capital, family offices, and other investors to join as a syndicate partner in their deals. After following these steps, follow up to support the best sources of deal flow and increase your engagement with those groups. Never fall into the trap of thinking that you have enough deals under your belt- the more significant number of deals you review the more choices you have, and the more you know about the market. 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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    Guide to Startup Ecosystems

    2min read Guide to Startup Ecosystems If you are a serial entrepreneur or are otherwise serious about startups, building a startup ecosystem may be an attractive option for you. Startup ecosystems provide built-in connections and ongoing support, making the growth of a startup from the grassroots stage to a mature business far easier to manage. In this article, we discuss the best way to begin building your startup ecosystem. What is a Startup Ecosystem? A startup ecosystem is a network of startups, investors, and others who come together to foster startup formation and growth. At the core of the network are startups led by founders who launch high-growth businesses. This network encourages innovation through shared resources such as capital, talent, and mentorship. Each member of the network has something to offer: Accelerators and incubators: provide education around the initial launch Investors: provide potential capital Universities: provide talent for launching and supporting startups Freelancers: provide additional talent in the form of labor Providers: offer support for legal, financial, marketing, and other services Mentors: provide coaching and guidance on how to grow the business How to Build a Startup Ecosystem In building out your startup ecosystem, consider these points: First, investigate every kind of funding and consider 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, equity funding should be considered if you plan to pay back when you sell the business. 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. Start with a group of entrepreneurs interested in startups and meet regularly. Encourage startups to share their projects and invite others to support them through coaching and making introductions. Set up a blog and publish a newsletter each week on startup activities in the area. Interview startups and investors. Build a resource list for all startups to use. Recruit lawyers, accountants, and other professionals to join the meetings and support early-stage companies. Set up events such as pitch sessions and happy hours to expand the network and recruit more people into the community. Put the group on website lists for startup communities to generate awareness. Set up a coworking space to give startups a place to work. Recruit startup programs to your area, such as the 3-Day Startup, to provide additional programming. Start small and grow your startup community through regular meetings and consistent newsletter mailings. Remember that your role in building a startup community is to create connections and networks for players in the space. Therefore, facilitating communication and connection is key. 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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    Due Diligence Box: What Is It and How to Prepare One

    2min read Due Diligence Box: What is it and How to Prepare One After an investor expresses interest in funding your deal, the first question to ask is: “What is your diligence process?” Having a due diligence box with the standard documents helps a great deal. It shows you are prepared and typically only requires minor additions for each investor.    The Due Diligence Process While most diligence processes follow the same document review and analysis format with a round of follow-up questions, each investor has their own start time, work timeframe, and specific documents they look for. It’s best to ask for their process, and then follow along with it. If the investor does not have a specific process, then presenting the due diligence box should be enough. For new investors who are not sure what to do, you can offer to walk them through the diligence document by showing them all the relevant information. It can be helpful to contact the associate or analyst who will be doing the detailed work and open a direct line of communication with them. By building a rapport, you may contact them directly for progress status and updates. You can also position your calls as opportunities to answer questions and to help the associate find specific pieces of information. Investors are busy and can get drawn away by other deals, so it’s important to be timely with your follow-up. Having a due diligence box with the standard documents greatly helps with this. It shows you are prepared, and typically only requires minor additions for each investor.   Due Diligence Box In preparing a due diligence box, also called a data room, there are basic documents to include. These documents consist of:  Income Statement and Balance Sheet 3-5-year Financial Forecast Cap Table- including shares outstanding Entity Filings including Articles of Incorporation Intellectual Property Filings- including patents, trademarks, etc. C-level Team Resumes  There may be other documents you may need to add based on your situation.   Reps and Warranties Contract One document that is helpful but not required to include in the due diligence box is a reps and warranties contract. Information taken in by investors about a startup’s product, team, financials, revenue, and more can change rapidly during the startup phase of the business. One method of assuring the investor the information provided is true and accurate is for the startup to sign a Reps and Warranties contract. This is often tied to the diligence provided.   This contract states that everything provided in the diligence is true and accurate and that no material has been omitted. If it later turns out that there’s a material difference between the business and the diligence, then the Reps and Warranties contract provides legal recourse to the investor for recovering any damages. For example, if the financial statements indicate there’s no debt in the business, then the investor assumes the business is debt-free. If the startup does in fact have debt, then the investor can take legal action against them.  Some investors demand such a contract to be signed to ensure they have the full picture of the business. Signing a Reps and Warranties Contract can strengthen a startup’s case on the diligence provided.   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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    You have to look beyond your backyard

    2min read  You have to look beyond your backyard Recently there has been a lively debate about the lack of funding in Texas. It’s not a new debate but an ongoing dialog between entrepreneurs and investors.  Entrepreneurs feel funding is scarce in Texas compared to other parts of the country.  Investors counter that they would invest more and more often if the deals were further along and better prepared. The debate is not new.  It comes up every year.  The solution is to change the way fundraising is handled.  It’s no longer in your backyard.  You must have a national focus on your fundraise from day one. When I was the director of the Central Texas Angel Network, we had just restarted the formal angel community in Austin.  The previous group, the Capital Network, had gone out as they were tied to the dot com world, and when that went away, they went away with it. At that time, it was a great boost to have a formal angel group in Austin so central Texas entrepreneurs could raise money in their backyard.  It worked for a while.  When we started, we had 15-20 deals on each round, of which 4 would receive presentation slots and 2 would get funding on average. As the years progressed, two things happened.  First, the number of deals grew.  Today it’s not unusual to see 75 to 100 deals considering CTAN, of which 4 will get to pitch to the membership, and 2 will get checks.  The funding rate is higher because there are more members, but fundamentally, entrepreneurs looking for funding have a 2% chance of getting it from the group. Daunting odds. Crowdfunding The second thing that happened is that crowdfunding came into its own.  After several years of debate and government ()activity, the rules are starting to change.  It’s now possible to raise from non-accredited and accredited investors who are not in your backyard.  At CTAN, we all gathered at the Headliners club in downtown Austin to see the live pitches.  With crowdfunding, one can source angels from across the country, if not further, because the pitches are online.  The tools are improving, and the entrepreneur’s ability to use those tools is increasing. The world of angel investing is going vertical.  The chance that an angel investor interested in your particular application (mobile apps, enterprise software, consumer product goods, etc.) is in your backyard is shrinking.  You must reach the country to reach an investor interested in your stage and type of deal. Crowdfunding is how you do that.  By placing your deal, online angel investors can now find you.  You can now reach angel investors from a broader area. It’s helpful to have some support from your local area, but from day one, entrepreneurs should have a national perspective on their fundraise.  If you have a real business (not just an idea), you probably have an investor out there who would be interested in your deal.  He’s no longer in your backyard. 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 Three Levels of Due Diligence

    2min read How much due diligence is enough? While there are many checklists and rules of thumb surrounding the process of due diligence, the endpoint never seems clear. Most investors dedicate a certain number of hours, 20, 30, or more, and when those hours are used up, they make the investment decision. In my experience, there are three levels of due diligence: First Level The first level answers the question, “do we invest or not?” After reviewing the standard documents and talking to customers and industry professionals, the investor decides if the potential rewards outweigh the risks. Second Level The second level of due diligence answers the question,” what will the startup have to accomplish to be successful?” This is not always an obvious answer, such as making sales, or gain a 10% market share, or ensuring the product works. There are often one or two critical factors that determine success. In today’s world, it increasingly comes down to cost. The cost of customer acquisition, product development, or something else. Yes, the startup can find customers and sell a product, but at the end of the day, the margins come out razor-thin, if not negative. Another critical factor I see is building the team. Can we find the right people to fill the gaps (and there are always gaps)? Do you know what the startup must do to achieve success? Third Level The third level of due diligence answers the question: What can the investor do to help the startup succeed? Nothing is more frustrating than seeing a startup failing and not being able to do much about it due to a lack of knowledge of the industry, the market, or the technology. If you can’t help the startup, it’s questionable that it’s a good investment for the angel.  I’ve never invested in a startup that, at some point, didn’t need help. On the other hand, if I can help the startup through connections, mentorship, or team building, then it may be a good fit. 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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    Five Characteristics of a Lead Investor

    2min read Five Characteristics of a Lead Investor I often hear of entrepreneurs stuck in their fund raise efforts with several prospective investors but no one willing to be the first.  That’s because the first investor could be the last in a deal, and no one wants to be that investor. The lead investor breaks down that barrier by providing the initial capital and due diligence that paves the way for others to join the deal. Here are some key characteristics of a lead investor: The Lead investor provides a substantial sum of capital, at least $100K. The $25K check writer should not be leading the deal. The Lead investor also gives advice. He should have experience in the industry and know well the problem the company is solving. By going first, he’s putting his reputation on the line, making him your lead advocate.  Keeping the lead informed is essential as he’s championing your deal more than other investors. He should also bring a strong reputation that attracts others to your deal. Finally, the lead investor performs the initial due diligence. All investors should be performing their due diligence, but most will use the lead investors’ work as the basis for their decision.  This can easily reach 30 to 40 hours of work.  Signing up a lead investor can be challenging if the entrepreneur doesn’t offer compensation. Finding a lead investor helps to start with those who know your industry and market.  Those with a successful business track record are ideal candidates. They say it takes seven touches to close a sale, so it takes seven touches to close an investor. Read more TEN Capital Network 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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    How to Identify Quality Companies for Investment

    3 min read When starting out, it can be difficult to know how to identify quality companies for investment. In funding startups, investors need to find a source of deal flow that provides venture-fundable deals. Venture-Fundable Deals Venture-funded companies typically share these characteristics:   Recurring or repeat revenue business model   Doubling revenue year over year   Tech-enabled   Strong team with industry experience   Large target market allowing the firm to scale In searching for a startup in which to invest, you should look for all of these characteristics. Learn About Sectors Before Investing Many startup investors begin with a portfolio theory approach in which one makes a few investments across a broad range of sectors. I often hear, “My strategy is to invest in good deals.” This is easier said than done. A broad-based investing approach requires the investor to come up to speed on each and every sector. That’s a lot of homework for an investment in one or two deals. Some investors choose to focus on a few key domains and become an expert in those areas. By diving deep, one can understand the trends, challenges, and factors that drive company success. There’s a risk that if you have too many companies in a sector, you are at risk for major disruptions. If the sector is broad enough, you can move to new areas within the space as it matures. How to Find Deals in a Sector To find deals in a sector, you can search Crunchbase for industry-specific reports. Pitchbook produces funded reports by sector by subscribing to their daily newsletter. Conferences are a great place to find personal introductions and meet with new startups. Also, venture capital is evolving into service models in which they not only fund the companies but also help with operations such as sales, CFO, etc. It’s not hard to find a list of VC firms focused on a sector. Identifying the Risks Every sector comes with its risks, such as regulations. Also, disruption from new technologies is an ever-present risk in the industry. By spending time with startups and investors in the space, it becomes clear where the threats come from and what one can do to mitigate the risk. Read more on the TEN Capital eGuide: How to Invest in a Startup 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 Cost of Angel Investing—Where are the Fees?

    3 min read I recently read a discussion forum in which the author of the post had bought a financial instrument and later discovered that the investment advisor who sold it to him actually made a commission on the sale. The author was incensed that someone actually made a commission off selling him something and to top it off the investment advisor didn’t disclose his commission. As I read the post I began to wonder where has this guy been for the last 50 years. Of course, people make money selling things and financial instruments are no different. When I sit in pitches from investment advisors promoting their fund, or whatever their financial instrument may be the first question that nearly always comes up from the audience is how much are the fees and commissions. Of course, this number ranges from a fraction of a percent for mutual funds to double-digit percentages in private equity. What are the fees? After reading the post I began to wonder about the cost of angel investing. Where are the fees? In a member-managed group such as the Central Texas Angel Network, there is a membership fee to belong to the group but the members review the deals, perform the due diligence and ultimately decide what to invest in. The main cost comes in three areas and while those costs aren’t paid directly by the angel investor, the business pays the costs and ultimately the angel investor takes a reduced return based on those costs. An experienced angel should ask about the costs. Management Salaries  The first cost is the management salaries. Management salaries are kept low in the early days of a company to give the business every chance of succeeding. I was recently in a deal in which the members asked about the CEO’s salary. He replied it was $300K/year. You could feel the air leaking out of the room after he said that. While he was a strong manager there was no way the business was going to survive paying salaries like that. Consultant Costs The second cost is that of consultants whether they are on the board or as advisors. It’s fair to ask who is getting paid and how much for the work they are providing. There are good consultants out there but I’m often amazed by how vague their duties are. Often times I hear things such as “they are going to help us.” There’s no job description, no metrics, no deadlines and it’s all very nebulous. Angel Investor’s Time The third cost and what I consider the most important is the angel investor’s time. If the deal will require a day a month or worse a day each week, then the deal must be spectacular to make it worthwhile. The angel investor should figure out upfront what value he can add and if the business runs into trouble who is going to help them. The angel investor’s time becomes the key factor in calculating the cost of angel investing. Read more TEN Capital Blogs 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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