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How to Diligence a Deeptech Startup

How to Diligence a Deeptech Startup

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Fundraising, Investing

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    Startup Illusions: What to Look Out For

    October 28, 2021

    2 min read  I know what you’re thinking, “Startup illusions; what does that even mean?” Don’t worry, we aren’t talking about magic here. Illusions are often based on cognitive biases or fallacies. Illusions are normal, but they can hinder the ability of a startup to thrive. There are four illusions that as a startup you need to be aware of.  it will help you be prepared and think clearly in regards to decisions being made that will affect the growth and prosperity of your startup.  Illusion of Control The illusion of control phenomenon is defined by Wikipedia as the tendency to overestimate one’s degree of influence over other external events. Startups often display an illusion of control about how their product and sales efforts will take over a market. Just as the gambler in the casino cannot make the dice come up the way he wants, the startup cannot predict how fast his product will gain adoption. A few organic sales often lead startups to believe they have a working sales and marketing plan, when in fact they have not yet developed a way to drive the process. To convince investors the startup must show a repeatable, predictable process for generating leads, qualifying the sale, and finally closing the sale. Even at the early stage startups can track the number of leads generated through a channel and how many leads convert to a sale. By showing this on a unit economics basis, you can overcome the illusion of control and provide clear evidence that you have a customer acquisition process in place. Those with strong organic sales that come without much effort are the ones most likely to believe that they can grow sales without a program or process. Money Illusion The money illusion effect is defined by Wikipedia as the tendency to concentrate on the face value of money rather than its value in terms of purchasing power. In pricing the product, a startup should list their product price in the smallest unit possible such as daily cost rather than annual cost. For example, if the price of the product over a year is $2000, then list the price as $5 per day rather than $2000 per year. The smaller dollar number will attract more customers. Startups raising funding should focus on what the funds will buy rather than the dollar amount alone. The Illusion of External Agency The illusion of external agency is defined by Wikipedia as when people view self-generated preferences as instead being caused by insightful, effective, and benevolent agents. Founders often believe someone else can make their fundraise successful. The responsibility of a fundraise for startups lies solely on the founder’s shoulders. While others may help through introductions and mentorship, the duty to follow through lies with the founder. To overcome the illusion of external agency, consider the following: The strategy and content of the fundraise comes from the founder no matter who is driving the campaign. Part of the fundraising process is to build a relationship with the investor. The founder must be integral to the fundraise campaign to do so. The founder is responsible for the outcome of the fundraise as investors look to the fundraise campaign as a proxy for the founder’s skills including communication, execution, and follow-up. The fundraise campaign is an opportunity to demonstrate those skills. While others can help, it’s the founders themselves who must own the campaign. Illusory Superiority Illusory superiority is defined by Wikipedia as overestimating one’s desirable qualities and underestimating undesirable qualities, relative to other people. New startups tend to have the perception that they are superior. Believing that they are the best of the best and should receive funding accordingly. The startup world in which investors have the advantage of seeing many startups while the founder sees far fewer. In fundraising, there’s a competition for startup investment. To overcome illusory superiority, consider the following: Maintain awareness of illusory superiority throughout the fundraise process. Remember how many other startups are raising capital and the challenge that imposes. Look at startups outside your own circle to see how they compare. Always be learning about startups and the startup world. Get an independent view of your startup to see how it compares to other startups. Look for critical views of your startup to see how you can improve. Through constant improvement, you can overcome illusory superiority. Feel free to try out our calculators and contact us if you would like to discuss your fundraise: http://staging.startupfundingespresso.com/calculators/ 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

    SAFE Notes vs. Convertible Debt

    January 26, 2021

    1 min read Many startups use SAFE Notes and Convertible Notes for their early-stage investments. So what’s the difference? A Convertible Note is a debt instrument that converts into equity later upon an event such as raising an equity round or reaching a maturity date. A SAFE Note is a Simple Agreement for Future Equity, a warrant to purchase stock in a future priced round. The SAFE can convert when you raise any equity investment amount and does not give the entrepreneur control of when. You can consider Convertible Notes to be legal debt while SAFEs are warrants. Neither a SAFE or a Convertible Note set the valuation but instead takes the equity round valuation. Convertible Notes include an interest rate while SAFE’s do not. Most Convertible Notes have a maturity date while SAFEs do not. Convertible Notes contain a discount rate that provides additional shares to the investor for investing early. SAFEs have no discount rate. SAFEs are often considered the more straightforward option than a Convertible Note, but as you can see, the Convertible Note provides more opportunities. Take our Convertible Notes vs. SAFE Notes Calculator here: http://staging.startupfundingespresso.com/note-calculator/ Hall T. Martin is the founder and CEO of the TEN Capital Network. TEN Capital has been connecting startups with investors for over ten years. You can connect with Hall about fundraising, business growth, and emerging technologies via LinkedIn or email: hallmartin@tencapital.group

    The Convertible Note: How Does it Work?

    January 11, 2021

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

    Ignoring the Noise

    May 7, 2020

    A top challenge for any given startup is breaking through the noise.  And noise is everywhere. We are privileged to be in an environment where there’s a lot of opportunity to work on a startup while trying to be innovative and entrepreneurial. The problem is, you’re in there with a lot of other people trying to do similar things. More people means more noise. So, how do you break through that noise? Try as hard as you can to not fall prey to the echo chamber. This is especially true when you see massive funding rounds or when you hear that another company you were competitive with got a term sheet from a top tier fund.  Ignore the noise. Don’t mimic what everybody else is doing. Pay less attention to what the trends are in NYC.  A startup is going to be one of the most emotional rollercoasters that you’re likely to ever embark on, so stay grounded however you can. The amount of noise and getting caught up in trying to mimic what’s going on in NYC or hearing about the gossip that gets passed around in San Francisco can be daunting. It’s very important to stay in your lane and run your own race.  Try not to get caught up.

    How to Achieve Market Positioning

    July 19, 2017

    When investors look at a startup, the one thing they want to see more than anything is revenue traction, or momentum.  The first step to building excitement in your startup is often to… Get the word out- While a traditional PR route can certainly help generate interest in your startup, investing big money may not be the most prudent move, especially at this stage.  Luckily, by taking a do-it-yourself approach, you can still launch an effective campaign.  The key to generating buzz in the press is building relationships – with bloggers, reporters, and anyone who can put the word out about your startup. The best way to do this is to give the press what they need – a good story, insightful quotes, and on-topic content.  You can add to your value as a press contact if you can also… Be an expert in your field- Knowing your space, the market players, and the latest developments in your field can help you be a go-to source for content, and allow you to build relationships in the press and beyond. Strive to be at the top of your niche—the more recognition you can get as a knowledgeable insider, the better your reputation, and the more attention your startup will receive.  Don’t be afraid to specialize, if that helps you stand out, but also don’t hesitate to… Follow the trends- Pay attention to the latest trends – what types of companies are getting funded, and why? Then do your best to innovate—whatever is working, try to do that different and better.  In other words, your product should be both relevant and distinctive.  To get this across to the market, you need to… Build a brand- Good branding is critical, and will help you stand out in a crowded field. In marketing, be clever, and consider the unconventional.  Don’t be above a publicity stunt, but only if it is cost-effective, and in-line with your overall strategy. Offer value through content marketing that will educate and entertain. Whatever you do, you must develop a target market and… Know your customers- Undoubtedly, the biggest key to gaining revenue traction is building your customer base, and to do that you must know who they are. What do your customers want? How are you helping them, and how are they using your product? What are their interests, and where can you find them? Cultivating word-of-mouth is fine, but make sure you have a complete marketing strategy as well. Revenue traction, simply put, is when your company starts earning money through organic transactions. It shows that your product is in demand.

    Three Ways to Know Your Market Better

    March 23, 2017

    One of the key criteria in funding startups is the entrepreneur’s knowledge of the target market and customer. Size of market, growth rates, and segmentation are key components the entrepreneur should know well. In this post we’ll look at three ways to know your market better. The first place to look is on the web. You’ll need to first identify which industry(s) you’re in. From that you can find out several facts about your target market size. The next step is to find out what trade associations and conferences are related to it. You can contact the trade association and find out more about the market. Usually, the director of the association has the key market information you’re seeking and will make that available to you in an email or phone call. Their job is to foster the growth of their industry segment by informing others about it. The third step is to attend a trade conference. You’ll learn more from those on the exhibit hall floor than you can from articles or other means. It’s worth a day walking the show to get the details. Finally, avoid market research reports. These reports cost anywhere from $2,000 to $25,000. Most of these are simply a compilation from a direct mail campaign that is far from comprehensive. While they can be helpful they certainly aren’t worth the money. Best regards, Hall T.

    Food & Beverage Investments in Q4 2016

    February 22, 2017

    The Food and Beverage Industry has seen over $2.8B in funding in nearly 270 deals in Q4 2016. The Ingredients and Flavorings industry leads the way with over $2B worth of funding in 19 deals, followed by Candy & Snack Foods at $221M in 62 deals. Meat, Fish, and Seafood follow with $185M in funding. Check out the complete list of funding and deals by industry: Industry Funding Total # of Deals Ingredients, Flavoring & Condiments $2B 19 Candy & Snack Foods $221M 62 Meat, Fish & Seafood $185M 13 Non-alcoholic Beverages $115M 51 Alcoholic Beverages $73M 69 Food Safety & Preservation $53M 12 Fresh Foods $49M 10 Canned & Frozen Foods $48M 13 Wholesale Food Distributors $46M 6 Dairy Products $36M 8 Bottling & Distribution $7M 2 Food Service $4M 4 Total: $2.85B 269

    Venture Capital Seeks Food and Beverage Investments

    February 15, 2017

    The food and beverage space is seeing tremendous innovation.  Venture capitalists are now making investments into innovative food and beverage companies.   Target investments must bring innovation and offer a scalable business model.  Their food & beverage investments nearly all focus on replacing common food items.  Investments typically target technologies around plant-based protein.  Often, startups raising funding are developing new processes that could change what we eat.  Several trends top the list for venture capitalists.   Here are four food and beverage trends with Texas companies leading the way: Fermented flavors – fermentation brings health benefits and for soda lovers fermentation also provides a natural fizziness to the drink.  Salt and Time and Buddha’ Brew are two Texas-based companies leading the way Food safety testing—new testing tools such as in the field mass spectrometry, and food processors are gaining attention. Evaptainers uses evaporation cooling technology to provide refrigeration for foods  and Green Ocean Sciences has developed a field mass spectrometer for food testing. Next generation foods which include cold brew coffee such as High Brew Coffee and Chameleon Cold Brew.   New fruit and vegetable offerings include novel ways of packaging and distributing fruit and vegetables.  Rhthym Superfoods offers a new way of consuming Kale.   Veggie Noodles delivers vegetables in the form of pasta, and Beanitos offers beans in the form of chips. Floral flavors – adding herbal and plant flavors to foods and beverages such as Sway Water and Daily Greens. Here’s a list of the top 24 VCs in food and beverage investing: Sequoia Capital Benchmark Capital Accel Partners Greylock Partners Andreessen Horowitz Union Square Ventures First Round Capital Bessemer Venture Partners Kleiner Perkins Caufield & Byers New Enterprise Associates Founders Fund Lightspeed Venture Partners Foundry Group Index Ventures Khosla Ventures Social Capital Emergence Capital Partners True Ventures Floodgate Fund General Catalyst Partners CRV Spark Capital Battery Ventures Redpoint Ventures

    NDAs, Not on the First Conversation

    February 9, 2017

    Everyone once in awhile I’ll come across an entrepreneur who wants to tell me about his deal but before giving me any details wants me to sign an NDA which is a Non-Disclosure Agreement that requires the signer not divulge the details of the subject matter to anyone for a certain period of time (usually 2 to 5 years). To an angel investor this is a red flag. When an entrepreneur won’t even show me his one-pager without my first signing his Non-Disclosure Agreement that tells me his deal is not protected and most likely is not protectable. I advise entrepreneurs to have a one-pager ready to share with investors who show interest after a brief discussion. The one-pager should state what the business does but doesn’t necessarily go into details about how the IP actually works. If the discussion goes far enough that it enters the due diligence phase and the investor wants to see the “secret sauce” then it’s reasonable for the entrepreneur to ask the investor to sign an NDA, but not at the beginning of the first conversation. While I understand the entrepreneur’s concern about protecting his idea and subsequently his business, it’s difficult to generate interest among the investors when you can’t even tell them the basic concept. The entrepreneur should be able to inform the investor about what the product or service does at a high level and what performance advantages it has over other methods. My rule for signing NDAs is that I should know exactly what is being protected – the technology, the business model, the concept, etc. Signing an NDA without knowing this could mean the investor is signing away his ability to invest in any deal that is related to the entrepreneur’s target market or application. To carry out the conversation, I invite the entrepreneur to tell me about the non-confidential matters. “Just tell me what you can without an NDA.” This potentially keeps the conversation going. Of course, the first subject to discuss after receiving the one-pager is how can one protect the idea – patents, copyrights, trademarks, trade secrets, etc. Best regards, Hall T.

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