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The 3×3 Framework for Predictable Startup Investing

The 3×3 Framework for Predictable Startup Investing

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Fundraising, Investing

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    How to Identify Quality Companies for Investment

    July 27, 2022

    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

    How do VCs Make Money?

    April 25, 2022

    2 min read Many individuals looking to enter the investor realm will consider becoming a venture capitalist. This can be a profitable endeavor, however, it does come with unique challenges and obstacles to overcome. In this article, we discuss some of the challenges of being a VC as well as how VCs raise money and venture funding. Challenges of Being a VC Many people want to work for a VC especially those straight out of college. Most are not aware of the challenging dynamics that come with the VC life.  Here are a few: Raising Funding: Just like startups, the VC has to raise funds too.  LPs tend to be rear-view-mirror oriented and not focused on the cutting edge of new technologies and markets.  Working With Partners: You rarely make the decisions alone, but rather with the other partners.  Ego and other agendas are often at play. Getting Deals Done: You have to convince others you have a winner on deck and sell it all the way through the process.  Managing the Deal Flow: Untold numbers of startups want to talk with you and only a small fraction are meeting your funds’ criteria. Dealing with Co-Investors:  It’s rare for a fund to take the entire round. There’re usually other investors in the deal.  Who gets how much of the deal and what board seats, are often an issue.The rollercoaster ride that is the startup life- things often don’t go well at the portfolio companies and this weighs heavily on the VCs who invest in them. How VCs Make Money VCs charge the limited partners a management fee on the funds raised. This is traditionally 2% paid out every year for the life of the fund. Some funds stop the management fee around year six or seven as proceeds from the investments start coming in. MicroVCs often charge 2.5 or 3% of the funds raised since the number of funds is lower than standard.  The second source is called “carry” and is a percentage of any proceeds going back to the investor from the investments. This is traditionally 20%. Some funds start taking carry at the beginning of the investment returns, while other funds start this after the investor receives their initial investment. How VCs Raise Venture Funding VCs raise funding from limited partners which include family offices, high-net-worth individuals, foundations, pension funds, and other sources. Institutional investors, such as pension funds, require a track record. Due to this, first-time VCs tend to focus on family offices and high-net-worth individuals.  The VC develops an investment thesis which is a reason why their approach to selecting and funding deals will be successful. They build out their investment prospectus which includes the investment thesis, how it’s unique, the fees the limited partners will pay, and how the profits will be distributed. The VC then meets with limited partners to pitch the investment thesis, track record, and view of the market. Limited partners look to fund VCs who have a unique investment thesis and access to deal flow they do not. You can read more in our TEN Capital Network eGuide: How to Raise a VC Fund 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

    Five Key Elements to a Startup Story

    April 13, 2022

    2 min read Your story is a critical part of your fundraise pitch. There are five key elements to a startup story and they are the purpose, the hero, the mission, the obstacle, and finally, the plot. Continue reading below to learn more about each of these elements and how to incorporate them into your startup story. Purpose The purpose comes from what inspired your startup. There’s something about the world that you want to change, so you started the company to fix it. Next, connect your theme to a universal principle or truth that everyone recognizes. Now, build your story around that theme. Show how your startup’s mission reflects your core principles and values in your story. Also, avoid common mistakes such as trying to tell the investor how your product works in minute detail. It’s better to focus on the benefits of what your product does rather than the features. Hero The hero is the character whose journey the audience cares about the most. In a startup fundraise story, this is the CEO. Most heroes are trusty and likable. The audience empathizes with them in some way. Your story should focus on the hero and not just the product. Investors are seeking to build a relationship with people. The company takes on the persona of the CEO. If the CEO is trustworthy, then the company will be considered reliable. In your startup fundraise story, think how the CEO fills the role of the hero. Mission The Mission is the job to be done. It’s the goal of the hero both now and beyond the story. For your startup story, focus on what the CEO is trying to accomplish and how they plan to solve it. Outline how complex the problem is for the customer and how it can be easier. Show how the proposed solution will save time and money for the customer. Talk about the steps to accomplish the mission and how you will bring the solution to the market.  Finally, show how the product achieves the customer’s desired outcome. In telling the startup story, use the mission to set the direction. Obstacle The obstacle stands between the hero and the goal. All good stories have a conflict that needs to be overcome. Obstacles could be competitors, lack of knowledge, regulations, and more. The obstacle creates tension which holds the audience’s attention and helps them experience the story for themselves. For your startup story, show the CEO facing the challenge of bringing the product to the market.  Investors will empathize with the plight as they have been there themselves. Show how the CEO overcomes those challenges as the investors look for grit, determination, and persistence. Plot The plot is a series of events that leads to achieving the mission. Plots can be set up in several ways and choosing the right model will help make the story more engaging. You could play the David fighting Goliath, the small startup taking on the big corporation. You could tell a Rags to Riches story- how a small startup hit upon a big idea. Or you can position it as a quest by showing the entrepreneur’s journey and the lessons learned. From the story, the investor should see how you, the CEO, had an idea that changed the world.  Read more on the TEN Capital eGuide: How to Craft a Startup Story 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

    How do you know when to invest in a startup?

    April 8, 2022

    2 min read As an investor, it helps to have a specified investment strategy. This helps narrow down investment decisions and ensures that you are making the right decisions for your specific circumstances. In this article, we discuss the difference between investing in funds and investing in startups. Investing in Funds Investing in a fund works best when you are not familiar with a sector or geography and don’t have the time to research and learn more about it.  Additionally, if access to deals is time-consuming or difficult, then a fund may be a better approach. If the funding requirements are greater than your resources, you may want to invest through a fund. For example, some sectors require several millions of dollars to participate in a deal so it’s a good strategy to pool your funds with others to participate. Finally, funds provide diversification that can be more difficult to achieve with direct investments.  Investing in Startups Startups are very risky, and managing a startup investment can be a lot harder than it looks. Here are the basic points to consider: How much should you invest in startups? Invest no more than 3% of your discretionary income.  There are many good deals out there but for the most part, the investment is illiquid for a long time.  Where do you find deals? There are many sources including angel groups, networks, syndicates, and MicroVC funds that let you invest directly in the startup as well as the fund. Should you invest alone or in a group? This depends on your investing style.  A group can give you access to more deal flow and due diligence support.  On the other hand, the group may pursue deals you are not interested in and vice versa.   How do you get started? Figure out what you want to invest in and then ask what resources you need to do so successfully.  Seek investors and groups that can help you achieve your goal.    Read more in our TEN Capital Network 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

    The Art of Pitching Q&A with CEO Hall Martin

    April 7, 2022

    2 min read Strong pitching skills are imperative when trying to communicate your idea and capabilities to an investor. The art of pitching goes beyond presenting the standard deck. It includes crafting a story through the intentional use of language, tailoring the pitch to each interested investor, and emphasizing how your current systems will lead to long-term success. The Craft of Writing When pitching investors, sometimes we need to condense our pitch deck into an elevator pitch. Instead of thinking about this as a rushed version of the pitch deck, you should think of it as presenting the information in story format. Instead of talking faster to cram more words into the allotted time, choose your words carefully and craft a meaningful anecdote about your organization and its mission. Think about keywords and phrases that communicate the value of your deal. Choose only one or two key financial numbers to share at this time. The key here is this: anecdotes tell and numbers sell. Tell your story, and then top it off with the crucial financial elements. Tailor the Pitch When pitching your deal to an investor, it helps to know your investor first. You’ll find you can make a much better presentation by customizing it a little bit. There are different kinds of investors out there that you may be pitching: venture capital, angels, and high net worth. The key is that they each have different care. And so, you want to think about the whereabouts and concerns are of the investor that you’re working with, and cater to those in your pitch.  Venture capital investors want a 10x return.  You need to prove there is a very large market and a very high growth rate. Angels have some capital preservation and therefore look for initial traction and revenue. They want to see some of the risks coming out of the deal. High net worth investors are also looking for very good returns, but there tend to be risk-averse. Emphasize Long-Term Success Most startups don’t have a lot of revenue- almost no one does as an early-stage startup. What investors care about more is predictable revenue. Use your pitch deck to show investors that you have systems running in your startup behind the scenes that are generating leads, closing sales, keeping the customers happy, and retaining those customers. Even if the numbers are small now, you can show that with these systems in place, the numbers will grow over time in a predictable manner. A scalable, growable organization is a real value proposition for the investor.   Read more on the TEN Capital Fundraise Launch Program 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

    Alternate Startup Funding Options

    April 7, 2022

    2 min read There are several ways for startups to gain capital. At times, the most common methods, for example, securing investors, aren’t the most beneficial. If your startup is looking for alternative funding options, consider one or more of the methods below. Promissory Notes A promissory note is likely used to set up a loan it is for friends or family. Here are some key points to consider in reading a promissory note: The ‘Note Summary’ section establishes the relationship between the borrower and the lender, the date of the note, the total loan amount, and the agreed-upon interest rate.  The ‘Terms of Repayment’ section defines how the loan will be repaid. The ‘Late Fee’ clause typically includes a late fee penalty. This clause documents either a fixed amount, such as $100 in addition to the current payment due, or a percentage of the payment due such as 1% per week. There is an option to include a prepayment option, which may help the lender as well as the startup. For example, follow-on accredited investors might prefer a loan to be paid off prior to closing their investment deal. Family and friend loans are intended to be more supportive, so you may choose a language that allows time to remedy the default within a predetermined number of days or weeks.  Revenue-Based Funding Revenue-based funding makes a startup investment and pays back the investor at the rate of top-line revenue. This aligns the investor and founder to the same goal, to create a business and grow sales. The higher the sales, the faster the payback to the investors and the higher the compensation to the founders. Revenue-based funding typically sets the payback rate at 1-3% of top-line revenue. In revenue-based funding, the investors receive a revenue share until they reach a predetermined payback amount. This is different from a loan which sets the payout rate regardless of the seasons or cycles within the business.  Revenue-based funding keeps early-stage investors off the cap table so it’s clean for future investors. Once the payback amount is reached, the investors are finished and are no longer in the picture. It works well for businesses that have recurring revenue and healthy margins and is a good way to reduce dilution for the founders. Salary-Based Funding Salary-based funding makes a startup investment and pays back the investor at the rate of compensation the founders take. This aligns the investor and founder on the same goal: to create a business that can sustain itself and pay the team. The investors receive an agreed-upon percentage of any salary or profit the business takes in. In salary-based funding, the investors receive payback until they reach a predetermined payback amount. This is different from revenue-based funding which is a debt instrument that pays out based on a percentage of top-line revenue. This keeps early-stage investors off the cap table so it’s clean for future investors. The investor can choose to take their payback in cash, or they could convert it to equity. This is a good way to run an initial raise when it’s not clear if additional funding will be required.   Read more on the TEN Capital Network eGuide: Alternate Investing 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

    Fundraising Basics

    March 31, 2022

    1 min read Fundraising can be an exciting venture, yet it can also be a bit nerve-wracking if you don’t feel secure in your campaign decisions. Learning the basics will help you to raise funds confidently and successfully. In this article, we discuss the basics of fundraising including how to know when it is the right time to start your raise and the basic principles of fundraising. Continue reading below to learn more. When to Start Your Raise In launching your startup, look for a trigger that indicates when to start a fundraise campaign. Common triggers include: closing a lighthouse customer account or achieving a revenue target signing up a new team member or advisor finishing a beta version of your software or an MVP version of your product closing funding from a lead investor In short, investors look at sales, team, product, and fundraise as the four core areas for progress. When you achieve a milestone in one or more of these areas, then it’s a trigger to consider launching a fundraise campaign. In approaching an investor, you should have a milestone completed AND a milestone to accomplish with the funds to be raised.  Principles in Fundraising There are basic principles around fundraising that apply in every situation. The first and most important principle is to build a relationship with the investor. The more you know the investor and the more they know you, the better the outcome. Next is that you’ll need to demonstrate results in every contact. Never show up without a currently relevant result or a proof point. With this said, it is still important that you be honest at all times.  It only takes one deception to ruin the relationship. The next principle to consider is that it’s the number of touches and consistency that counts, not how long the discussion or pitch deck runs. It takes four touches for an investor to understand what you are doing and seven touches before they make a final decision.   Lastly, include the “Why?”: Why are you doing this startup?   Read more on the TEN Capital Network eGuide: Running a Fundraise Campaign 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

    What You Need to Bring to the Table

    March 31, 2022

    2 min read When you are raising funding, investors want to know what progress the company is making. After the initial presentation, the investor wants to hear about progress in four areas: Sales  Team  Product Fundraise Updates on the market size, growth, and competition status are not of interest. The most important thing to understand is that the investor wants to know what you are doing. Focus your updates on these four core items in each communication with the investor to give them a sense of traction and momentum. Sales Most startups focus on the product first and treat the customer as an after-thought. However, the investor knows that in the long run, customer revenue will make or break your business, not the product. Even before you have a product you should be talking with customers about their needs and relaying that to investors. As you build the product, you want to maintain customer interactions with you and your product and share that with investors. When talking with investors, be sure to highlight the customers’ problems and the solution they would like to see. It’s important to show the investor that customers are with you on your journey and they are not something to be recruited later when the product is done. The Team Investors will look closely at your team since they are a crucial part of your company’s potential success. One of the first things investors will look for is skill and completeness. Your team must have the skills needed to accomplish the work. Investors also want to know that you’re not missing anything important when it comes to the structure of that team. At the seed level, a complete team consists of: An individual who is building An individual who is selling You cannot have a team where everyone is building and no one is selling. Focusing on building without selling is one of the most common mistakes startups make by thinking they must have a product before they can sell it. In reality, you should be selling your product as soon as possible. You may not be generating revenue, but you should be bringing the customer through the process just as you are doing so with the investor. Product Sometimes entrepreneurs spend a large amount of time writing a massive business plan that talks about the startup’s services and the benefits that come from those services. The problem is, it can focus so much on the benefits and services that it becomes hard for an investor to understand exactly what the product is. Investors want to know what your product is; not just your technology or the benefits it offers. You must show the product and define it clearly so investors know how you will approach the market. Make sure the product has a name when you’re going to pitch. This helps establish the product as a tangible thing in the investor’s mind even if the product is still in development. Tell the investor what the product is in 5 words or less so they have an understanding of exactly what it is you are selling. Even if the product is not yet ready for sale treat it like it has form and function now. This helps investors grasp what you are doing. IP When it comes to investing, investors tend to look for protection over the idea they are investing in. Patents and trade secrets can help. The truth is, ½ of the value of a patent is simply for a show because investors want to see it. In practice, it’s difficult to use patents as the sole means of protecting your business from the competition; however, it can still help in the long run. If you have patents, investors want to know: What was filed When it was filed  If it is a provisional patent, design patent, or utility patent Most investors don’t expect you to have awarded patents for utility or design patents since the process typically takes over 3 years to complete. If you don’t have any patents, consider filing a number of provisional patents so you can tell investors that you have a patent-pending technology. One advantage of provisional patents is that it gives you a year to figure out if patents can provide any reasonable protection. If so, then file for a full patent. Keep in mind that you don’t have to pursue patents if it doesn’t make business sense in the long run. Fundraise Investors look for traction in your fundraise just as they look for traction in your core business. During a raise, investors will first express interest and then make a commitment before they invest. You want to capture all 3 levels in your pitch in a fundraise. Add up how many investors have expressed interest. This is often called soft-circled interest. Present that number as investor interest. Take all the committed amounts of investment and add that number to your presentation as well.  Take the amount of funding that has come into your bank account and show that number. Over the course of the campaign, those numbers will change. Make sure you show the prospective investor interest from other investors throughout the campaign.   Read more on the TEN Capital Network eGuide: Art of Pitching 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

    What is a Startup Advisor?

    March 14, 2022

    2 min read What is a startup advisor? Startup organizations often require guidance from those with more experience and connections in their prospective field. Many startups are experts at their products or service but lack the business know-how needed to thrive. Startup advisors can help bridge these gaps, helping the startup to launch, develop, grow, and ultimately succeed. Let’s take a closer look at what a startup advisor is and what they specifically do Types of Advisors There are several types of startup advisors. Some of the most common include:: The Brand Name: This type of advisor offers their name to your company. This can be helpful to attract investors, employees, and customers. They typically bring some value in the form of advice, but it’s primarily their name. The Domain Expert: This type of advisor knows the industry well, both in technology and business. They can be helpful if you are moving into a new domain or the industry is changing rapidly. The Networker: The networker knows everyone in the industry or region. Those with a Rolodex and the ability to make connections can be very helpful, especially in fundraising and growing sales. The Business Modeler: This type of advisor may come from other industries, but they know business models and can bring new monetization tools to your business. The Confidant: The confidant can coach on the emotional side of running a startup. Startups have highs and lows that take the founder through the full range of emotions. This advisor can help the founder navigate through the ups and downs. Consider which role you best fill, and market to your appropriate niche. Advisor Roles In addition to there being many types of advisors, advisors also take many roles in their work with startups. For example, some advisors’ role is simply to fill gaps in the early stage of the startup. Advisors can be signed on as formal advisors, or some may provide support as informal advisors. In this scenario, there are no set goals, meetings, or formal advisor agreements. This is the most common way startups work with advisors. Some advisors take the role of a mentor in providing guidance. These mentors tend to focus their efforts on the founder. Some advisors take the role of consultant in performing very specific tasks for the company while others take on general responsibilities. Others may take on the role of a board of directors. This can be helpful in early-stage companies that are not yet ready to form aboard. Advisors here can provide oversight to the company and help the founder keep the broader picture in mind. Regardless of the role, you choose to fill, as an advisor, you will aim to bring experience, contacts, and networking to the startups you work with. Purpose of an Advisory Board An advisory board is a group of three to five people who provide advice on how to grow your startup. They bring experience, contacts, and domain expertise. Advisory boards help the company grow and succeed. In recruiting for your advisory board, startups typically try to consider the following: Advisory board members should contribute a diversity of skills, networks, and experiences. The advisors should fill in the gaps of the startup team which is most often a skeletal group. The board members should raise the profile of the startup with their reputations. They can additionally give the startup branding to help position the company with clients. Advisory board members should make a strong face for the company. Startups can use these members’ influence for recruiting the team, investors, and customers.  Advisory boards are different from a board of directors in that they don’t have any fiduciary roles and work informally with startups to grow the business.   Read more on the TEN Capital eGuide: Advising 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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