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How to Diligence a Medical Device Startup

How to Diligence a Medical Device Startup

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    The Cost of Angel Investing

    June 29, 2021

    1 min read The Cost of Angel Investing: Where are the Fees? I recently read a discussion forum in which the post’s author 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 had made a commission off of 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 this guy has been for the last 50 years. Of course people make money selling things, and financial instruments are no different. Where are the Fees? 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. This number ranges from a fraction of a percent for mutual funds to double-digit percentages in private equity. After reading the aforementioned post, I began to wonder about the cost of angel investing. Where are the fees? In a member-managed group such as the Baylor Angel Network or the Beyond Angel Network, there is a membership fee, but the members review the deals, perform the due diligence and ultimately decide what to invest in individually. The Main Cost Comes in Three Areas: 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. So an experienced angel should ask about these costs. 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 per year. You could feel the air leaking out of the room. While he was a strong manager, there was no way the business would survive paying salaries of that magnitude. 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 at how vague their duties are. Oftentimes I hear generalizations such as “they are going to help us,” but there’s no job description, no metrics, no deadlines, and it’s all very nebulous. The third cost and what I consider the most important is the Angel Investor’s Time. If the deal requires 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, which will help them. Thus, the angel investor’s time becomes the key factor in calculating the cost of angel investing. Read more about the TEN Capital Network for Investors: http://staging.startupfundingespresso.com/investor-landing/ 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

    Yes, You Can Define an Early Exit

    September 30, 2020

    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

    Finding the Exit

    September 22, 2020

    2 min read After investing in startups for twenty years and talking with thousands of angel, venture capital, and other startup investors, I’ve seen the biggest challenge is finding the exit. If you have invested as a startup investor, you know how easy it is to get into these deals and how hard it is to get out. If you are new to startup investing, you will soon learn how much it takes to grow a business. It’s not for the faint of heart. In funding startups, remember, not every startup should receive funding. If the company is not ready for funding, they will not only waste the money but also hurt their reputation in the community. Angel Investors look for a 44% IRR. IRR is the Internal Rate of Return and represents the return on investment concerning time, unlike ROI, which is return on investment without regard to time. The time value of money is important and should be part of your investment metrics. Also, there are many sources of funding for startups, of which angel investing is only one. There are venture capitalists, family offices, and more. Angel investors occupy a unique place in the startup funding ecosystem. It’s typically the first money in after family and friends funding is over. Angel funding is limited compared to venture capital or family office funding, which has deeper pockets. The longer you stay in the deal, the greater your risk for dilution by these follow on funders. Also, make sure you understand the value of your investment. While the absolute dollar amounts may not be as large as a venture capital fund, angel funding helps the startup cross the funding gap. To achieve an exit, you must define it yourself as the vast majority of startups will not do so. The key to a successful exit is a deal structure that gives you some control after signing the check. Equity only term sheets give investors little say in the future of the company or how to exit. You must have it in writing before you sign the check. Trying to come to an agreement after the signing is almost impossible as the gap between the startup and the investor is too significant to close. The deal structure is a Convertible Note with a redemption right for 3X your investment to be returned at year 3 of the investment at ‘Investor Sole Discretion.’ I call it the ‘3x in 3’ term sheet. On the third anniversary of signing the note, the investor has the option to convert the original investment to a three-times return ($100K in is $300K out) or to go on the cap table as an equity investor. In reality, there are many choices. In most cases, the startup is motivated to keep your funds in the deal and will negotiate terms to achieve it. As an investor, you must keep in mind what is suitable for the startup and yourself. In most cases, you will have ample opportunity to structure the 3X into a range of choices, including debt, equity, and cash. If you want to provide advisory services, then set it out up front with a clear definition of the work to be done and the compensation paid. At the very least, include a clause that gives you an advisory fee for work done with a stated hourly rate if the opportunity arises in the future. Read more: http://staging.startupfundingespresso.com/investor-landing/ 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

    The Due Diligence Process

    September 14, 2020

    2 min read When embarking on a new investment, it’s essential to have a Due Diligence process in place to check the basics. This process will vary from deal to deal based on the risks associated with each one. Start by making a list of your concerns. In most cases, you’ll sign a terms sheet with funding contingent on due diligence. It helps to tell the company about your diligence process, such as what documents are required, what steps you take, and how long it will be, thereby eliminating the “how is it going” calls. There are three phases to diligence: Documentation Diligence, Team Diligence, and Domain Diligence. Documentation Diligence Ask the startup for a list of critical documents. If they are not all in one spot, ask the team to put them into a Google Drive folder, or create a more secure Box.com account. It’s common for startups to continually add to their diligence boxes and have many people view them simultaneously, so keeping everything in one place is very helpful. The primary documents should be: Entity filings and articles of incorporation Patent filings Income statement Balance sheet statement 3-5 year financial projections Cap table Other documents related to the business, such as lawsuits, product breakdowns, customer breakdowns, etc. should be requested. Read each document and check to see if it matches what you understood about the deal. Note any differences and ask for clarification. You must review the diligence documents so you understand the business. You may need to sign a Non Disclosure Agreement (NDA) for sensitive information. It’s standard practice to do so as the documentation should be kept confidential, even without an NDA in place. Team Diligence Thoroughly researching the startup’s team is the most critical part of the Due Diligence process. Meet with the team and assess their skills. In almost every startup failure, the investor can trace it back to the team not being up to the task. It may be the task was under-estimated by all upfront, but with the right team, the company can succeed. Gather references for the CEO and call them up to hear what they have to say about the founder, including management style, how they pivot, and their team dynamics. In most cases, you’ve heard the CEO pitch, but it’s essential to understand the CEO skills set, including what is there and what is not. The rest of the team needs to bring the necessary skills to succeed. Domain Diligence Let’s break this process down into steps: Research the competition to determine the company’s position in the marketplace Check the positioning of the company in the marketplace Identify the value proposition and how well it resonates with customers Look at their pricing compared to the competition Check the industry to see the conditions in which it will grow or decline Once you finish diligence and have your questions answered, ask for their wiring instructions Remember, break it down into baby steps Finally, use the model of “fast no’s and slow yes’s” in reviewing a deal, so the entrepreneur is not chasing you for a response. 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

    Deal-Flow is Crucial, but Where to Get it?

    September 8, 2020

    1 min read When starting as an Angel investor, it’s essential to set up several sources to consistently find deals that fit your thesis and track those that meet your requirements; this is called “Deal-Flow”. It’s helpful to network with lead investors and build relationships with investors in general so you can share information about deals and provide/receive referrals.  Here are some sources to consider: Ping the members of the group regularly for deals they recommend. Avoid the ones in which they say, “I’m not interested but perhaps others are.” Look for the deals that members want to invest in. Identify investors outside the group who fund quality deals in the same sector and stage as your group and set up a relationship to share deal-flow. Follow up with your portfolio companies about deals they recommend. Consider other angel networks in the geographic area or sector area to provide deal-flow. Talk with service providers such as attorneys and accountants about deals they see needing capital. Join community groups that foster the sectors your group is interested in and have the members attend those group meetings. Review online portals for deals raising funding. Finally, establish a reputation for providing mentorship, feedback, and support to position the group as the go-to resource for startups. Find out how TEN Capital can help you source the right deals: http://staging.startupfundingespresso.com/investor-landing/ 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

    Building Your Investment Thesis

    September 1, 2020

    2 min read For investing in a startup, consider the future and what will be needed then; don’t just look at the world as it is today. Map the trends and extrapolate out and consider what will be needed five years from now based on the direction of technology, the markets, and other factors. From this, you can build a view of the future and inform your investment thesis and begin your preparation for investing in startups. Creating Your Investment Thesis There are too many deals to look at all of them. You’ll want to narrow the field by building out your investment thesis. There are a few crucial steps to take if you haven’t done so already. Step One: View 50 deals, then write down what you like and what you don’t. TEN Capital is a great resource to help you field deals regularly, show you how to review them, and what to look for. Step Two:  Follow up one to three months later to see how each deal is working out. Checking-in regularly will inform your investment thesis as you will see some deals progressing forward, some stall out, and others pivoting to something else. Step Three: Write out your investment thesis in full, including: Your observation about a macro trend in an area you care about The position of the company in the trend Characterization of the company that gives it a competitive advantage Conditions for investing based on price and other factors Example investment thesis statements include: “Healthcare is moving to the home.” “Companies providing technology-enabled services will succeed.” “Companies with recurring revenue and a CAC:LTV ratio of 1:8 are preferred.” “Companies with revenue above $500K and pre-money valuation below $5M are preferred.” It’s essential to write out your investment thesis ahead of time, as you’ll often return to it. Allocating Funds In general, it’s best to keep your angel investing to 3-5% of your discretionary investment funds. These are funds you can lose and not impact your lifestyle or other investments. Determine in advance how much you plan to invest. Use a five-year window. Once you have that number, know how you’ll access those funds for when you need them. Keeping these funds separated from the rest of your investments will make managing the process easier. 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

    Have a Little Fun, Make a Little Money, Do a Little Good

    September 1, 2020

    1 min read There’s an old saying about angel investing: “Angels like to have a little fun, do a little good, and make a little money.” Angel investing is more than just about money. I’ve found the successful investments covered all three of the elements of the old angel saying.  It was fun. The people were great to work with.  It had an element of making the world a better place albeit on a small scale. Finally, it provided a positive return on investment so I could continue funding startups. Have a little fun Pursue deals you like. If you don’t like the deal, then why spend the time? Ask yourself, do I want to work with these people? Do I value the work they are doing? If you can answer yes to these questions, you are well on the path to finding a deal that lets you ‘have a little fun.’  Do a little good Once you have a deal you like, then ask, “does the company align with my interests?” Invest in startups that further that in which you believe. You may want to support your local entrepreneur ecosystem, or further a technology that can solve problems that benefit the general public.  Make a little money Get agreement on the terms of the investment with a defined exit. Use the 3X in 3 redemption to define the exit. If you can help the company then consider setting up an advisory position with them.  One of the biggest sources of burnout is uncompensated work. There’s an almost unlimited amount of work that needs to be done and the startup will load you up.  Set boundaries on what you are going to do and how you will be compensated. Consider including these negotiations in the term sheet, even if you don’t intend to provide advisory work as you may later be drawn into it. Having your time negotiated in the terms upfront makes it much easier to navigate the process. Remember, successful investments let you make some money, have some fun, and do some good. 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

    Building your Entrepreneur Ecosystem

    August 18, 2020

    2 min read Building your Entrepreneur Ecosystem Your Checklist on how to build an Entrepreneur Ecosystem in your Area   Startups need networking, mentoring, and funding. A robust entrepreneur ecosystem fosters connections between the startup and a network of providers, mentors, and investors. Each type of startup: high-growth, tech, consumer product-related, healthcare, etc., will need a unique set of networks (people to hire and contract), mentorship (people who can guide and coach the startup), and funding (people who can invest in the business).   The following are a series of steps you can take to build a solid Entrepreneur Ecosystem in your area. Step #1: Map the Startups in Your Area The first step to growing your startup community is to identify the startups in your area. Start by mapping the location of each company. Then, you’ll want to capture the type of company, location, and stage of growth, categorize them by sector (healthcare, tech, consumer product goods), and then subcategorize by stage (seed, early-stage startup, late-stage startup). Having a solid list will give you a great place to start. Step #2: Map the Existing Startup Resources in Your Area The second step is to identify the startup resources in your area. Build a list of groups, organizations, funds, and other accessible resources, and then categorize each by offering (networking, mentoring, funding) and subcategorize by stage (seed, early-stage startup, late-stage startup).   Step #3: Choose the Type of Startup You Can Support Next, you’ll want to choose your entrepreneur type to support and be intentional about it. Understand the type of network they need, the type of mentorship they require, and, importantly, the kind of funding they need.   Step #4: Identify the Gaps in Resources The fourth step to growing your startup community is identifying the gaps between the resources needed and those available.  Identify the missing network, mentorship, and funding resources in the area.   Step #5: Recruit the Resources to Fill the Gaps Once you have identified the gaps, it’s time to recruit the resources to fill the gaps.   Step #6: Setup a networking platform to facilitate the connections The last step to growing your startup community is setting up a networking platform to facilitate the connections Recruit network resources. Having a platform will connect startups to providers, suppliers, customers, etc. It can also connect startups to advisors, mentors, and coaches through pitch sessions, online portals, and much more. 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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