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How to Diligence a Therapeutic Startup

How to Diligence a Therapeutic Startup

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Fundraising, Investing

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    Beyond Due Diligence

    May 19, 2022

    2min read Completing your due diligence with care before investing in a startup is an indisputable rule in the world of investing. However, to ensure that your deal is going to work out as close to your expectations as possible, you need to go beyond due diligence. In today’s article, we will discuss how to do exactly that using three core strategies: finding the full answer, spotting red flags, and scanning for what isn’t being said in the startup’s pitch. Reaching the Full Answer The first strategy is to find the full answer. In talking with startups, I find the investor must always probe for the final answer. A single question rarely reveals the full answer. I spoke with a startup recently who said, “We’re raising a million dollars and we have raised half of it already.” On the surface, it sounded like they had $500K invested in the business. So, I asked, “You have $500K in the bank already from your raise?” They responded, “Well, not exactly. We have several investors telling us they are interested in investing.” After four more questions, it came out that they had $100K in the bank and around $300K in soft-circled commitments. It’s good progress, but not exactly the half a million we heard at the beginning. Never take the first statement as the final answer. It takes at least 5 questions to get down to the real answer, and as an investor, you want to know the real answer. Spotting Red Flags The second strategy is actively scanning for red flags. These indicate something is wrong. Some red flags to beware of include: The founders are not investing any of their own money into the business.  The cap table is crowded with many small investors, meaning the earlier funding was a challenge. The team is incomplete. Either the solo founder wears too many hats, or everyone is a tech developer, meaning no one is outselling the product. The team lacks awareness of the industry, especially the regulatory side. There are no KPIs or operational metrics to review. Plans are generic and lack specific customer names or revenue amounts. They have loads of debt, and previous investors have no further interest in funding or supporting the business. The business appears to be set up to be the CEO’s lifestyle business. They offer hockey-stick projections with no apparent supporting evidence. There’s no board of advisors or directors. The team you see is what you will get. The financials use year 1, and year-2 naming, rather than actual years. What Isn’t Being Said In due diligence, what isn’t being said or shared is as important as what is. When a startup pitches its idea, you should be skeptical of founders that don’t mention potential risks or discuss their experience in the industry or their traction. Here are other key items the investor should look for in a startup’s pitch: what needs to be done and what risks exist in the deal market size and growth rates reflect the market the team is pursuing financial projections show the startup’s understanding of their business information about the founding team including industry experience, commitment to the startup, and no criminal records If a startup leaves any of this information out, it may be an indicator that something is wrong. Use the five-question rule from above to find the true answer. Read more on the TEN Capital eGuide: Due Diligence and Leading the Deal 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

    Overlooked Areas of Investment

    May 15, 2022

    1 min read.  There are a lot of opportunities to invest in early-stage companies, particularly in some of the areas of the country that have been overlooked in the past. We’ve seen areas such as New York City and San Francisco that have essentially turned into startup hubs. As more and more companies spring up in these hubs, investments get poured into these areas. However, we are starting to see a shift outside of these hubs as other, typically overlooked, areas begin to show more and more potential for both startups and investors.  For example, Houston is making tremendous progress in terms of building an ecosystem and creating an environment that will nurture and support startups. The Houston area has positioned itself to keep those startups in the city as they grow. Other cities are beginning to follow suit due to cheaper business costs compared to larger, more expensive cities like San Francisco. Examples of this are Charlotte, NC, and Columbus, OH. As more and more hubs begin to pop up, it’s important to build a culture of early-stage investing. An example of a city doing this today is Houston, TX. The more we continue to pay attention to these previously overlooked areas, the more investment opportunities will arise. Read more blogs at TEN Capital Network 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

    Think Like an Investor: An Inside Perspective

    May 12, 2022

    2min read The best way to successfully land an investor for your startup is to begin thinking like one. Knowing what the investor wants and how they make decisions will aid you in preparing your pitch and pleading with your case. In this article, we provide you with just that- an inside perspective into the mind of an investor to learn what they want out of a deal and how they make the final decision. What Do Investors Really Want? Most investors look for startups in which they can find a return on their investment. In the diligence and funding process, what the investor really wants is to not lose all their money. They want to reduce risk to zero.   As a startup raising funding, you can help the investor find confidence by showing the risk mitigation you have put in place. For each concern, show how you’ve mitigated the risk. For example, the investor may ask: “How do we know the team will execute?” Respond with: “We’ve demonstrated execution so far with these results.” “How do we know we can sell the product?” Respond with: “We’ve sold this much so far, and will continue using the same process.” Remember where the investor is coming from and show how the risk has been reduced, even if it’s not reduced to zero. How Do Investors Make Decisions? Entrepreneurs look at the opportunity in the deal. Investors look at the risk. There are two factors that help the investor decide to invest or not. The first is the worst-case scenario approach. They ask: “What is the worst that can happen?” Oftentimes, the answer is: “You’ll lose all your money.” Sometimes the answer is: “You could be in the deal for the next 10 years with very little return.” If the investor can live with the worst-case scenario, then they move forward. The second factor in the decision-making process is the reputation factor.  If the deal turns out to be a dud or even goes sideways, their reputation takes a ding. Investors care about reputation because it impacts how other investors treat them. In presenting your deal to an investor, consider how the investor will view the deal and its impact on them. How Do Venture Capitalists Make Decisions? Venture Capital investors make investment decisions as a group. After the initial pitch to a VC investor, the startup meets the rest of the investment team and pitches the entire group. The team decides together to pursue diligence. With the diligence results, the team again comes together to make a go/no-go decision. The advocate for the startup makes the case for moving forward with the investment.   It’s best to arm your advocate with enough information to make your case.  The startup should also remember that the advocate is taking a reputation risk as well as a financial risk on the startup and that’s never an easy thing to do.  Read more on the TEN Capital eGuide: Closing the Investor 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 to Build a Startup Ecosystem

    May 12, 2022

    2min read Considering launching a startup ecosystem? Consider this your crash course. In this article, we share everything you need to know to develop your own startup ecosystem. We cover the basics of getting started, how to achieve growth, and challenges you may face along the way. How to Launch a Startup Ecosystem For those who want to launch a startup ecosystem, follow these steps: Start with a group interested in startups and meet regularly. Encourage startups to share their projects and invite others to support them through coaching and making introductions. Set up a blog and publish a newsletter each week on startup activities in the area. Interview startups and investors. Build a resource list for all startups to use. Recruit lawyers, accountants, and other professionals to join the meetings. This provides support to early-stage companies. Set up events such as pitch sessions and happy hours to expand the network and recruit more people into the community. Put the group on website lists for startup communities to generate awareness. Set up a coworking space to give startups a place to work. Recruit startup programs to your area, such as the 3-Day Startup, to provide additional programming. Start small and grow your startup community through regular meetings and consistent newsletter mailings. Growing Your Startup Ecosystem In building out your startup ecosystem, follow these steps: Choose five successful serial entrepreneurs.  Identify their sector and type of business. Interview them on how to multiply those businesses.  Target their sector for growing new businesses.  Figure out what additional resources are needed. Set up leadership resources to carry the program over a sustained period of time, such as two five-year programs. Recruit other startups to join through meetups, events, and communications. Bring in programs and speakers from outside the area to foster the community. Cater to the non-technical skills as well as the technical ones. Identify sponsorship support from the local service providers and engage them in the programming. Showcase the core serial entrepreneurs throughout the program. Take care of the administrative and tactical support. Grow your startup community on those strengths and resources. Put the entrepreneurs at the foundation of your program. Challenges You’ll Face There are challenges in building a startup community. It doesn’t happen by accident; it takes a focused effort over a period of time. Here are some challenges and potential pitfalls to watch for and overcome: Choosing another community’s strategy instead of your own. It’s common for startup communities to look to Silicon Valley and adapt their strategy. Silicon Valley has a unique set of skills, resources, and conditions. Instead of adopting the Silicon Valley strategy, it’s best to review your community’s unique skills and resources and then choose your own strategy. While your startup ecosystem should be inclusive to all who want to join, startup builders should focus on the ones with the highest potential for scale-up success. Focus on the needs of the high-performing startups with your resources.  Apathy or lack of leadership can slow the formation of a startup ecosystem. Rally the stakeholders around the startup community cause. Identify the limitations and recruit the area leadership to help remove those barriers. Recruit founders who have achieved success to give back and help foster the effort. Reach out to the local university to gain their support as well. Build collaborative relationships among the various parties involved. It takes several years and a great deal of community building to create a startup ecosystem.   Read more on the TEN Capital eGuide: Building Your Startup Ecosystem 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

    Aerospace Investing: All You Need to Know

    May 8, 2022

    2 min read The aerospace sector is a rapidly growing and underfunded space. This makes for profitable investing. But proceed with caution. As always, you need to do your due diligence before diving in. In this article, we share a brief overview of the current aerospace industry and what you need to know before investing. What is the Aerospace Industry? The aerospace industry deals with companies that research, manufacture, and employ flight vehicles. This ranges from commercial use to military use to space travel. This space is currently on the rise in the investing realm due to the large part it plays in US exports and the increased interest in space exploration. Current Trends in the Aerospace Sector Sustainability is a huge area of interest. Two or three years ago the commercial aviation industry was trying to ask the question: “How do we be part of the wide solution space dealing with climate change?”  This refers to creating better outcomes in terms of their carbon footprint and increasing the efficiency and sustainability of their engines, operations, and fuels. Unique challenges exist in certifying aircraft and engines within the existing airspace construct. Being able to understand the nuances wherein small changes can actually yield significant benefits is what will set some manufacturers ahead in this space, making them a valuable investment opportunity.  Besides sustainability, digital twin and digital threat are most certainly areas in both manufacturings and in the maintenance space that are coming a lot more interesting. These concepts revolve around creating not just better safety outcomes in the production and maintenance of these systems, but also increasing efficiencies when it comes to sourcing and assembling these very complex machinery to perform their various transportation outcomes.  Deal Flow in Network VS. Proprietary Deal Flow  Whare are investors in the space currently doing? Do they rely mostly on deal flow based on their network, or do they also have proprietary deal flow? We talked with three experts in the field, and they all shared a similar answer. It turns out, they are engaging in both. Working within their networks, especially with universities, However, they are still incorporating proprietary deal flow. As said by expert Greet Carper- ” We’ll take deal flow where we can find it.” Investing in Aerospace When investing in aerospace, patience is fundamental. From an angel perspective, it’s not simple to make other networks or other partners in our common sport of investing. It can be seen to be difficult to invest in something that does not have that reversal beachhead market. It’s also important for investors to keep in mind when it comes to the space travel niche of the aero investing space that the challenges of space are extremely technically dense. Try to recommend the company you invest in to not go about their journey on their own, but rather to start looking at partnering up. If you see that in order for you to get some solutions out of space, you might need that infrastructure piece, or, you might need other components, or, you might need other things that create that ecosystem. If you can encourage the company to start thinking like a system, you’re more likely to find a way to succeed.  In essence, aerospace investors need patience, an open mind, and a willingness to go the extra mile. 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

    Benefits of a Startup Ecosystem

    May 5, 2022

    2min read  Startup ecosystems are growing in popularity and for good reason. If you are in the entrepreneurial space, you have likely heard of this term. You may find yourself wondering what a startup ecosystem is and if you should be involved with one. In this article, we share everything you need to know to make that decision. What Is a Startup Ecosystem? A startup ecosystem is a network of startups, investors, and others who come together to foster startup formation and growth. The network fosters innovation through shared resources such as capital, talent, and mentorship.  At the core of the network are startups led by founders who launch high-growth businesses. Accelerators and incubators provide education around the initial launch of the business. Investors, including angels, venture capitalists, online crowdfunding sites, and grant providers, provide capital. Universities provide the talent for launching and supporting startups. Freelancers provide additional talent in the form of labor. Providers offer support for legal, financial, marketing, and other services. And lastly, mentors provide coaching and guidance on how to grow the business. Events, newsletters, and blogs foster the community through communication. Local corporations may also participate through sponsorship and other support. Look for these elements in building your startup ecosystem. Components of a Startup Ecosystem A startup ecosystem is fueled by talent, funding, and customers. In building your startup community, tap successful serial entrepreneurs to lead. Use their star power to capture attention and draw investors and startups to your area. Focus your efforts on the strengths of the local community and build startups in those domains. Develop clusters of startup activity to create density. It’s the interactions between the startups, investors, and providers that count. Foster collaboration with other startup ecosystems to share resources. Generate publicity for your ecosystem through events and articles. Metric your results by capturing the number of startups formed, funded, and exited. Building a robust startup ecosystem can take up to a decade, but the results will last many more years.  Organizations of a Startup Ecosystem There are several types of organizations that may be involved in a startup ecosystem. These may include: Here’s a list of organizations to look for: universities that provide the founder talent angel groups and other investor networks for funding the startups venture capital funds providing funding incubators and accelerators for coaching the startups service organizations to provide legal, accounting, and financial services coworking spaces to provide spaces for startups government groups providing funding such as grants and loans startup and business plan competitions providing funding for startups event programs that bring the community together news and media companies covering the startup community Startup ecosystems should seek to recruit or build several of these organizations.   Read more on the TEN Capital eGuide: Building Your Startup Ecosystem 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

    Avoiding Common Pitch Deck Mistakes

    May 5, 2022

    2min read  Creating your pitch deck is an important part of raising funding for your startup. While you may think that you have covered all of your basis there is still always room for improvement. Read below to see if you have made any of these common mistakes.  Mistakes to Avoid Putting the right pitch deck together takes time and practice. It’s not something individuals often get correct on the first try. In developing a pitch deck, there are several mistakes that you can avoid. One of the most common mistakes is explaining how the product or technology works in great detail, but this isn’t necessary. Instead, use the pitch deck to focus on its benefits and what the product does for customers. Save the detailed explanations for later on in the process when you are in diligence. Some other common mistakes to watch out for are as follows: Not identifying the competition or claims there is no competition. Utilizing a font so small that no one beyond the first row can read it. Using too many words; overuse words can distract the reader. The flow of the slides does not follow a logical story form. Displaying market sizing to distract the audience from the fact that you have no traction. Not having an “investment ask” at the end of the presentation, leaves investors wondering what you want from them. The pitch deck should focus on your: Core product Team Customer Fundraise You can flesh out the more extensive details later. Finally, the biggest mistake you can make with your pitch is not asking questions and not listening. Most startups spend their time talking when they should be listening for objections and concerns. Pay attention and welcome questions from your potential investors. What Your Pitch Deck Should Do A pitch deck is a brief presentation that provides your audience with an overview of your business. Ideally, the deck should answer any questions an investor might have. The primary goal of the pitch deck is to introduce your deal to an investor. Additionally, the pitch deck should serve as a way to show what is essential to an investor who may be considering an investment in your startup. A pitch deck is not a means to explain the full history of your company. It is also not a means to explain how your product works. Tips for Pitch Deck Success After you’ve made your pitch, be sure to schedule a follow-up meeting with the investor. Good pitch decks show: What you are doing differently within your given sector. How you can grow more with funding. An ideal pitch deck showcases that the business’s proposed outcome will happen with or without the investor. In other words, your pitch deck should show that your future is inevitable. Ideally, you want to use your pitch deck to show potential investors that the results are there. Put those results up for everyone to see and show them what you have accomplished so far. The slides of your deck serve as the presenter, not the other way around. When pitching, avoid discussing multiple scenarios. Investors will find it challenging to keep track of what you’re trying to accomplish. Most importantly, focus on the core message: Product Team Market Fundraise Outcome Remember: You are the presentation; the slides are the presenter.   Read more on the TEN Capital eGuide: The 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

    How to Achieve an Exit

    April 28, 2022

    2min read As a startup investor, it is imperative that you are considering the exit strategy before beginning the investment as this is what determines your return on investment. When, how, and to whom the startup will sell are essential topics to cover at the beginning of your relationship with the startup organization. Let’s take a look at each of these topics. Timeline For an Exit Most exits come from another company buying the startup. It takes six months to a year to complete a buyout. Delays often come from the startup not being prepared or ready for the M&A process. Additionally, setting valuation and final terms can take substantial time for research and negotiations. To shorten the time, consider the following: Identify and contact the likely buyers and build a relationship before starting the process.  Position the startup leadership as a thought leader with published articles and keynote speeches to provide credibility. Build a data room of key documents that will be used in a transaction process. This is basically a gathering process but does take some time.  Beware of competitors in the diligence process as they will have access to your detailed financials and other information. Understand the interest level of the buyer and what other activities may delay their work on your deal. Set realistic expectations for how fast things will go. Early Exits In setting the exit, most investors look to maximize the exit value. It’s important to remember that the metric investors use, Internal Rate of Return (IRR), has a time component to it. The faster the exit, the higher the IRR. As an investor, consider pursuing the highest IRR and not just the biggest dollar exit as bigger exits take longer. While the news highlights the biggest exits, the vast majority of exits are under $20M. Selling a business for under $20M is not that hard, however growing a business and selling it over $100M is very hard. Most acquirers don’t need the business to be large, they just need to know the business model is defined and is profitable. Staying in the deal longer opens up the investor for dilution and other events that reduce the return on investment. A startup should be proving their business model and turning it into a repeatable, predictable process. With funding and time, it will scale. As an angel investor, you should look for early exits and structure your investments accordingly. Finding Alignment Investors should gain alignment with the startup about the exit before making the investment. This includes the size and timing of the exit. There needs to be some clear thinking and research about who will buy the company and how much they will pay. The investors and the startup need to work together to achieve the exit. One of the biggest impacts on the exit for early-stage investors in follow-on funding. It’s important to gain alignment on the subsequent financing rounds required and the impact it will have on the early investors. It’s often the case that the startup is overly optimistic and comes back later asking for additional funding.  Also, be sure to discuss the path the startup will take to achieve the exit; will the company grow organically, or will it push aggressively for growth? It’s important to maintain communication about the exit strategy and discuss whether the company is on track for it or not.  Finding The Buyer In selling a business there are two types of buyers: strategic buyers and financial buyers. Strategic buyers look for companies that can enhance their current business. Financial buyers look for companies that generate cash. Their motivations and concerns are different. The strategic buyer will look to see how closely the acquisition is to the buyer’s business and how much work it will take to integrate it, while the financial buyer will look at the financials to determine the cash flow and how long it may sustain. A company seeking a buyer will need to develop a relationship with CEO and VP-level contacts in the industry. This can be done through introductions, conferences, and other events. The company may also find an avenue through the corporate development team in some cases. Bankers are also potential conduits to potential acquirers. The board of directors of the acquiring company may provide an additional entry into the company. Finding the buyer takes time and building a rapport takes even more time.    Read more on the TEN Capital eGuide: How to achieve an exit 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 to Write a Startup Story

    April 20, 2022

    2 min read Storytelling is a key skill for any startup raising funding. In the early days of a startup, the product and team aren’t fully developed, and customers are typically not fully engaged. The investors look to the founders to understand the potential of the business. The founder who can articulate a clear vision of the company and fill in the gaps can win over the investor. Such a skill demonstrates to investors the ability to win over potential employees, future customers, and critical partners to make the business. Let’s discuss how to use storytelling more.  Crafting a Good Startup Story To pitch an investor, you’ll need a carefully crafted startup story. Tell the story in your own words as if you’re talking with a friend at a bar. Show how the story is relevant to those in the audience, something everyone can relate to. Keep the story simple. It needs to be tight and keep the audience engaged. Instead of starting at the beginning, start from the first big event whether it be a disaster or a success.  Show the mistakes you made that others can learn from. Talk about your values and those of the company. Demonstrate authenticity along the way. Finally, have a message about your company’s brand that you want to communicate and use the story to build up to it. Three Key Startup Stories to Tell Your Investor There are three stories every startup should be able to tell to investors. The first is your origin story which tells why you started the business to begin with and how you got to where you are today. This story answers the question, “Why are you doing this?” which usually comes from the storyline, “I had a problem. I couldn’t find a solution, so I created my own.”  The second story is that of your customer and the problem they have. This story starts with a day in the life of a customer. It describes what they do, how they work, and what problems they face. The customer has this problem, it costs them this much each year, and they are motivated to find a solution. You then drop your product in as the ideal solution. The third story is: We can make the world a better place. In this story, you paint a big vision of a bold future where everything is better. It states, “Imagine if we had this problem solved, how much better off everyone would be.” You then show how your solution gives everyone that better world.  Write out your version for each of these three stories and practice it before talking with an investor. 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

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