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The Art and Science of Screening a Deal

The Art and Science of Screening a Deal

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Fundraising, Investing

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    Best Practices for Startup Advisors

    March 4, 2022

    2 min read Being an advisor to startup organizations can be rewarding in many ways. Advisors can make a significant difference in a startup’s likelihood of success with the right insight, connections, and resources. For those who are beginning their career path as a startup advisor, it is important to understand the industry best practices to ensure they are providing the best help possible to the startups they engage with. In this article, we discuss these best practices and provide advice on how to be the best advisor. Characteristics of a Good Advisor The following are characteristics of a good advisor and great goals to aim for as you develop yourself professionally: The advisor has first-hand experience in the industry, running a business, closing sales, and more. They listen and can relate startups’ problems to actionable solutions. The advisor has been through the same challenges and experiences as the startup is going through. They ask meaningful questions and probe to get to the bottom of things. Understand the startups’ point of view and can motivate them. They have opinions and share them even if those opinions are not popular. Advisory work is an important part of their time. They are effective communicators. They are articulate and can persuade. Provide actionable steps to help accomplish goals. They bring a network of investors, other advisors, and collaborators. Understanding of others’ opinions. Their work is their passion. How to Be a Good Advisor In choosing a startup to advise, it’s important to find the right fit. Here are some key points to make sure you are a good advisor to the startup you are aiming to collaborate with: Spend time with the startup to really understand if you can add value and if they are ready for an advisor. Make sure you communicate well with each other and ensure the personal style fits. Spend as much time on selecting a startup as you would an investment. If they have other advisors, check with them about their experience. Find out where they need the help the most.   Ask what’s slowing them down and where they avoid engaging. That’s an indication they need help. Avoid the day-to-day minutiae and focus on strategic objectives. For the day-to-day work, make introductions to people who can solve those issues. Make clear you will play the role of devil’s advocate and that you will ask a lot of difficult questions as part of your job. Spend the majority of your time with the startup listening and only talking when you have something important to say. Get to know the founder and others in the startup outside of work.  Come to an agreement about the time commitment for your work with the startup. Give the founder the hard answers as in the end, they will appreciate that more than the kudos. If the founder seems to be scattered, help them focus on a few key priorities. If it turns out not to be a good fit, then help the founder close it out. Finding a Startup to Advise Here are some key points to consider when finding a startup to advise: Choose startups that you can help. Make clear the work you plan to do such as introductions, networking, advising on the domain, or just sharing business experience. Define the duration of the advisor work- one to two years is a common timeframe. Determine the frequency and type of meetings, for example by phone, in person, or in a group meeting. Set aside time to do the work.  Negotiate compensation based on the work to be done. Compensation consists of a half percent to one percent of equity vested over time.  Be prepared to sign a non-disclosure and non-compete agreement. Have informal reviews with the company throughout the process to make sure you are meeting expectations. Add your name to the team as an advisor to help with fundraising activities. Join sales meetings where you can add value. Keep in mind, advising can be rewarding but it always comes at a cost: time and effort.   Read more on the TEN Capital Guide: 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

    Raising Funding for Startups

    March 3, 2022

    2 min read Most startup organizations are running on limited resources, a vital one being funding. Successfully raising rounds of funding for your organization can make or break the business, therefore it is important you know how to do it well. Part of successful fundraising includes knowing how much capital to aim for and when to begin your raise. In this article, we provide some insight to help your organization better decide on these two factors. How Much Funding Should You Raise? Every day I ask entrepreneurs how much they are raising. Most begin with the big number; the full and complete raise they anticipate running. This ranges usually between $1M and $10M. It’s good to have the big picture in mind, but some entrepreneurs are anticipating to raise this big number all at once because “they want to get the fundraising out of the way.” I remind them that raising too much money around will cost you the equity you don’t have to give up. Your valuation is low at the beginning. It’s best to raise only the funding you need to reach the next milestone and no more. As you grow the business, your valuation will go up and you’ll give away less equity. With this in mind, it can be helpful to consider breaking your fundraise into tranches.  This approach will save you time as well as make each fundraise easier. When Should You Raise Funding? When considering how much funding to raise, consider your funding requirements. To start, calculate your cash burn and estimate the need for new cash. Next, consider the preparation and timing issues. Start your preparation six months in front of the launch. Launch you’re fundraise six months before you need the funding. Use this six-month preparation time to introduce the deal to the investors and educate them on your current status. Finally, there are seasonal issues to consider. I wouldn’t start in early June, but rather wait until late August to kick off a campaign.   Read more on the TEN Capital Guide: How to Prepare for a Fundraise 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 Structure of Angel Groups

    February 27, 2022

    2 min read Angel investor groups require diligent administrative attention. There is a lot of required structure and organization. If you are managing or considering starting an angel investor group, it is important to keep the following structural considerations in mind. Investment Structure In setting up an angel network, you need to choose an investment structure. Here are some structures to consider:  Individual investments: The members can each decide if they want to invest and how much to invest in each deal. This allows for maximum flexibility for the members to invest in the deals they want. The drawback is the administration is high, as you must work with each investor in determining their amount of investment and signing of the documents. Group investments: The members invest as a group. In this structure, the investors can create a pledge fund to allow the group to decide which deals to pursue. Members have some decision-making control over the investment decisions. This reduces the administrative overhead. The group can choose to create a fund in which a screening committee or manager determines which investments are made. This requires the least amount of administration as the manager or committee makes the decisions on their own. Lastly, the group can choose to create a sidecar fund that invests from a fund into deals the members have funded individually. The sidecar fund provides members diversification on top of their individual investments. This is also a low-cost administrative structure as the sidecar investment is typically a calculation based on the members’ investment and does not require a manager to run it. Legal Structure There are several legal structures to use when setting up your angel network. Most angel networks form a Limited Liability Company (LLC). This gives the angel network a legal entity with which it can conduct business. The members often pay an annual fee to fund the operational activities of the company. Angel networks form in association with a university. Since the university is a non-profit organization, the angel group can work inside the university for its mentoring, networking, and other non-financial activities. For running a fund or making investments, the angel network inside the university must set up an entity outside the university, since non-profit organizations cannot engage in investment activities. Some angel networks form a not-for-profit LLC and then apply for non-profit status 501(c)3 with the IRS. Again, mentoring, education and other non-financial aspects can be done within the organization, but the financial aspects such as investing must be done outside. Finally, there are angel networks that form a not-for-profit LLC and then apply for trade organization status or 501(c)6. This structure allows the organization to engage in political activities. Those angel networks choosing a non-profit or trade organization structure must set up a separate legal entity for any funds they want to raise and deploy. Organization Structure There are two ways to organize your angel network: member-led or manager-led. Member-led groups let the member’s source deals, lead the investments, and recruit the members. They hire staff members to handle the administrative tasks. Alternatively, manager-led groups hire experienced professionals to perform key functions such as determining which startups to fund.   Managers work on screening the deals so only the fundable ones go through to the members. They prepare the founders to ensure that their documents and presentations are ready. They maintain communication with the startup throughout the process. They lead the diligence process and produce the diligence report.  Some angel groups partner with incubators, accelerators, universities, and other groups. The partner provides meeting space and shares the operational cost of the group. Some partners provide administrative support. The choice of member-led versus manager-led often comes down to the availability of someone to take the role of the manager.  Meeting Structure In setting up your angel network you’ll need to set up the meetings. Here are some key points to consider: How many deal flow cycles are you planning? Are you online, in person, or conducting both at the same time? How will you set up the screening meeting, the presentation meeting, and the diligence follow-up? Will there be time between the meetings? Do you include a meal, appetizers, or drinks? Where will you meet? How much time will the meeting take? What is the number of companies that will be pitching? How much time is set aside for networking? What are the duties to be done before, during, and after the meetings? How often will the board meet and when? Where do sponsors fit into the meeting agenda? Will there be education sessions? What are the needs of the members and how best to facilitate the education? Who is the best to provide the training? Consider these points in setting up the meetings as it’s a key decision set for the group. Read more on the TEN Capital eGuide: Leading an Angel Group 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

    Angel Investing: The Deal Process

    February 20, 2022

    2 min read The aim of every angel investor is to profit, and this is done by closing successful deals. In this article, we take a closer look at the deal process discussing topics such as stages of the deal, performing due diligence, and how to effectively lead the deal as an angel investor. Stages of the Deal Process A startup investment goes through a series of stages. It starts with the pitch presentation in which the startup introduces the deal to the investors. Then there’s the first follow-up meeting in which the investors dig into the deal to learn the details. Investors want to think about it and also want to see the startup continue to make progress. Then comes the Due Diligence phase in which the investors perform a more rigid review of the startup’s documents, team, and market. If the terms sheet has been established by other investors, then the investors review those documents. If not, the investor must negotiate the terms including valuation. Investors then check with their network to see who else may want to invest or put it out to other investors for syndication. Finally, there’s the closing of the round with the signing of documents. Not every startup makes it all the way through the process. Here are some key challenges: When the investors come together to dig into the deal, it must have enough traction and value propositions to maintain the investors’ interest before the investors commit significant time to it.  Deals may stall because the diligence process didn’t continue because the investors were distracted. Some deals stall because the startup and the investors cannot agree on valuation. Deals can stall out or come up with a lower investment amount because investors fell out at the closing stage.  It’s important to keep the momentum going throughout the process both on the investor side and the startup side. Deal Diligence Below are some tips on how an investor group can make the diligence process manageable: standardize the diligence process break it down into subtasks and define the process for each task assign the tasks to team members set target dates for completion and have periodic check-ins with each team member  focus on the key risks and not every aspect of the deal make clear to the startup how the diligence process works keep the startup apprised of the progress and status of their deal In most cases, the startup will find the process manageable if they understand how it works and if they see consistent progress to the goal. A good diligence process often provides new information and insight to the startup. Reducing time, making it efficient, and helping the startup, are the signs of a good diligence process. Leading the Deal In early-stage investing, someone needs to take the lead and screen the deals, diligence selected ones, and negotiate the valuation with the chosen ones. In most cases, the lead investor doesn’t want to be the only one in the deal and promotes other investors to join. This promotion process is called syndication. Most investors are looking for someone else to take the lead and actively follow the deal as it progresses. As a deal lead, make sure you do the following: Setup a strong process for diligence and bring legal, accounting, and other resources that can help in the process. Know the deal economics such as valuation, investor rights, control terms, and the path to an exit.  Keep other investors informed to attract them to the deal. Invest enough of your own funds to show commitment to the startup. Coach the startup on fundraising, especially for first-time founders. Move the funding process forward consistently without stalling out. Set aside time to join the board of directors. Add value to the startup where you can. Move to Close After the diligence is complete and the open questions answered, the team must decide whether or not to invest. It’s important to identify the risks and write them out in the report. The team should articulate an investment thesis that includes the opportunity in the deal such as how big it could become. The team should include the potential exit value and how long it will take to reach it. The team should also clarify their assumptions around the deal and write it out as well. To decide to go forward, take the temperature of the team. It’s either heating up or cooling off. Monitor the company’s progress to see if it continues to demonstrate a growth story. If enough investors want to move forward, then the investors should pursue it. If not enough investors want to move forward, then it’s a pass. It’s important to make a timely decision as the entrepreneur needs to know the group’s position.   Read more on the TEN Capital eGuide: Leading an Angel Group 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

    Joining an Angel Group

    February 14, 2022

    2 min read You may find yourself contemplating joining an angel investment group. As with all investment decisions, there are both benefits and drawbacks to joining an investment group. Familiarize yourself with both before making the final decision. Benefits The angel network can build resources to share with the angel such as due diligence. This is time-intensive work, so it helps to share the load. Angel networks provide more and better deal flow than individual investors can find. The bigger the angel network, the more likely there will be investors that are knowledgeable about the market segments and startup business models. This lets the angel investor pursue deals outside their core expertise. Angel groups can write bigger checks than individual angels and thus command better terms with the startup. Experienced angel investors can share their knowledge with new angels. This is particularly helpful in setting valuations, defining term sheets, and supporting the company. Angel investors can find diversification through the angel network and its deal flow. An angel network will have more influence over its startup scene than an individual investor.  Challenges Here are some challenges related to angel investment groups to consider: Angel investing requires hands-on work with the startups, not only in funding but also in supporting them after the investment. They are often left filling in the gaps left by the local incubators and accelerator programs in coaching them into a place where they can raise funding. First-time angels can find it time-consuming and expensive to learn the process. Newmarket segments require the angel investor to continually learn new industries and business models.  There’s no collateral for the investment and it can all go to zero as it’s a risky investment class. One out of ten investments will be a home run. Two or three will provide a small return on investment. And the rest will fail.  Angel investing can be a rewarding endeavor but it’s not without its challenges. Read more on the TEN Capital eGuide: Leading an Angel Group 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

    Starting an Angel Investor Group

    February 7, 2022

    2 min read Starting an angel investment group can be a tempting option for some investors. It can definitely be a rewarding and lucrative process. Keep in mind however that this does not come without its difficulties. If you are considering starting an angel investor group, consider the information below before getting started. Should You Start an Angel Network? Next, before launching an angel network, assess your community as follows: Do you have accredited investors interested in startup investing? You have any investors who will take the lead on diligence and investing for each deal? Do you have a champion who will organize and lead the angel group for the first two to three years? Do you have a flow of startups seeking funding that you can access? Is there a resource for incubating and educating those startups in the area? Are there local service providers such as attorneys, accountants, financial advisors, and others who can support the startups? Are there other investor groups that currently fund those deals in your community to support syndication? Is there access to follow-on funding for startups? Research your community to see what currently exists and what must be built. Check with the local entrepreneur groups to make this assessment and get their potential support for starting an angel group. Considering Service Providers In setting up an angel network, it’s important to have support from services providers such as lawyers, accountants, and financial advisors. Startups will need legal, accounting, and financial support. Review your community for current service providers who are already helping the startups. Assess the skills of the providers to see if they are a fit for early-stage companies. Some providers only work with more mature companies, but the angel network will be dealing with very early ones. Discuss with local entrepreneur groups and professional organizations about their experience with the providers. Identify the ones who provide the best experience for their clients. Reach out and develop a relationship with them as potential speakers, sponsors, or even members. For those services missing from the community, reach out online to other organizations that can provide the support virtually. If the demand is big enough, providers will move to the area to support the community. This often occurs in entrepreneur hubs that are growing fast. Liabilities and Disclosures There’s risk in startup investing as most investments don’t pay a return to the investor. In running an angel network, one must take steps to mitigate liability. It’s a best practice to have all members sign liability waivers stating they understand the risk of startup investing and take responsibility for it. The waiver should indicate that each member makes their own investment decisions and the angel group is not recommending any startup for investment. Members in the group should provide full disclosure. If the member has any relationship with a proposed startup such as advising, consulting, or otherwise, the member should disclose this to the other members. Each member can decide for themselves how that impacts their investment decision. In syndicating deals to other groups, an angel network should have those groups sign liability waivers indicating that each investor is responsible for their due diligence. Most startups are raising capital from angel investors who are doing so under an SEC exemption. The angel group should have written confirmation from the members indicating that they are accredited investors. Take care to cover these areas of liability for your angel network.   Read more on the TEN Capital Network eGuide: Leading an Angel Group 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

    Investor Connect Interview: Ander Iruretagoyena of Impact Engine

    January 13, 2022

    2 min read On this episode of Investor Connect, Hall welcomes Ander Iruretagoyena, the Senior Associate at Impact Engine. Headquartered in Chicago, Illinois, Impact Engine is a women-owned and led venture capital and private equity firm investing in companies driving positive impact in education, economic empowerment, health, and environmental sustainability. Impact Engine was launched in 2012 as an accelerator fund with the goal of identifying promising entrepreneurs starting businesses with the potential to drive both attractive financial returns and positive social impact. Impact Engine raised two subsequent accelerator funds in 2013 and 2014, all focused on investing in pre-seed stage companies. Across the three accelerator funds, Impact Engine invested in a portfolio of 23 companies. Between 2015 and 2016, Impact Engine shifted its investment strategy and raised a $10 million venture fund which invested in 22 companies. Between 2018 and 2019, they began operating as a public benefit corporation, raised a $25M second venture fund, and raised a $31.5M first PE fund, allowing them to invest in impact funds for the first time. Impact Engine’s investors include institutions, family offices, foundations, and individuals who believe in investing for both financial return as well as social impact. They are also committed to cultivating community among their investors. Their goal is to help their investors learn from each other and leading-edge impact investors who deploy capital across asset classes and geographies. Prior to joining Impact Engine, Ander was an investment banking associate at Bank of America Merrill Lynch, working with Latin American corporations. During these years, Ander worked on a total of 17 transactions for $10.7B across 4 products, 9 industries, and 6 geographies. Ander also previously worked on financial inclusion strategies at the Bill and Melinda Gates Foundation. Ander holds a BA in Economics as well as Latin American Studies from the University of Chicago and earned his MBA degree from the Chicago Booth School of Business. Ander is originally from Mexico and loves FC Barcelona. Ander shares what excites him now and discusses the state of impact investing, how he sees the industry evolving, the challenges investors and startups face, and more.  You can visit Impact Engine at www.theimpactengine.com/, via LinkedIn at www.linkedin.com/company/theimpactengine/, and via Twitter at www.twitter.com/TheImpactEngine.  Ander can be contacted via email at ander@theimpactengine.com, and via LinkedIn at www.linkedin.com/in/ander-iruretagoyena/.  If you would like to read the full transcript click here or listen to the interview click 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

    Startup Valuations

    December 13, 2021

    2 min read Startup valuations differ from standard valuations in that they don’t solely rely on expected cash flows, book value, or other tangible aspects of the business. Intangibles such as quality of the team, intellectual property, product status, and customers are the driving factors. In this article, we look at why startups may want to perform a valuation and how they can maximize their results. Why Perform Startup Valuations Most angel investors want 25% of the equity for an initial round of investment. In addition, they want to have a say in the business through a board of directors or advisory role. To justify your startup value, focus on articulating the values that are already in the business as follows: Highlight the team you have built so far and their experience. Show what the team is doing to make the company successful. Show the current product development and highlight what has been done so far. Outline the intellectual property you have including provision patents. Make sure you file your provisional patents in advance of launching a fundraise so you can point to having patent-pending technology. Always note customers even if they are not yet paying for your product. Customer involvement results in a higher valuation. If you have revenue, use it to prove market validation showing customers will pay for it.  If you cannot sell the proposed valuation for the raise consider cutting the fundraise target in half to make the risk appear lower. Maximizing Your Valuation Valuation is a negotiation and not a formula. While there are formulas and rules of thumb to help determine valuation, it ultimately comes down to positioning and negotiating. Here are some key points to maximize your valuation: Emphasize the team and show what they are doing to help your business. Highlight the repeatable, predictable nature of your revenue rather than the absolute value of it. Emphasize your most recent milestones showing customer demand and past market success. Calculate your valuation with various models to find the one that puts your deal in the best light with the highest valuation. Consider the market in timing your fundraise.  The hotter the stock market, the higher the valuation you can demand. Investors pay more for new, trendy technology. Connect your startup to a technology trend if possible. Positioning your deal properly will earn you a higher valuation. And remember, valuation is a negotiation. This means everything counts.    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.

    Tips For Starting an Angel Investment Group

    December 4, 2021

    2 min read There are many things to consider when starting an angel investment group. What kind of deals you will pursue, how much you will invest, and who will be on your team are all things you will need to consider during the planning process. Below are some tips and best practices for recruiting members, branding, and allocating funds for your angel investment group. Recruiting Members It’s important to recruit members to join your angel investment group. The first step of recruitment is showcasing the deals you have to prospective investors to gauge interest. Send them recently funded deals as an example of the type of deals your group offers. You can also give them access to all of your deals for a period of time and then see if they want to join. Network through your current investors to find potential new members. Have the current members bring friends and colleagues to the presentation meetings and invite them to invest in deals the members are funding. Provide the returns for the group to show the track record. It helps to have a fund that investors can join for those who don’t have the time to review specific deals. For every four investors who want to participate, three will join the fund and one will join the group. Setup a syndicate that takes care of the diligence and makes it easy for investors to join the deals. Make the goal and mission of the group clear to prospective investors as the why is stronger than the return in gaining new members. Branding Your Group In running an angel network it’s important to establish a brand for the group and to then promote it. Branding can make your group appear larger and shows it is an established and well-thought organization. A brand consists of a unique name, logo, mission statement, and mantra. Your brand helps your group stand out from the crowd. It helps build trust and is a promise to the investors and startups you serve. It helps people remember your group by giving them a name to associate it with. A brand also helps attract investors as investors want to belong to a group that stands for something. Finally, a brand helps attract startups. Startups need to recognize your group as a viable source of funding for their company.  Allocating Funds In preparing for Startup investing, determine upfront how much you are willing to invest. In general, it’s best to keep your startup investing to 3-5% of your discretionary investment funds- funds you can lose and not impact your lifestyle or other investments. When determining how much you plan to invest, use a five-year window. Separate these funds from the rest of your investments to make it easier to manage the process. The amount you invest per deal will determine what platforms you will use. You invest $5K you will most likely be on an online funding platform. If you invest $25K you can join a group and invest with angel investors. If you invest $50K you can join a syndicate. And if you invest $100K or more you can invest through investment banks.  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.

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