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The Diligence Playbook for Frontier Innovation

The Diligence Playbook for Frontier Innovation

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Fundraising, Investing

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    What Investors Look For

    October 5, 2023

    2 min read What Investors Look For So you’re about to raise funding for your startup and wonder what investors look for. Startups can be pretty shy about discussing their current revenue in the business’s early stages. Being pre-revenue or just beginning to show traction is typical in the beginning, and investors know this. Even if you are pre-revenue, you can show traction with your startup. You define your traction as customer activity, and you don’t need to have revenue to show there’s traction with customers. To exhibit that you have traction while pre-revenue, focus on customer engagement at all phases, even before you have a product. One of the most important things to understand as an early-stage startup is this: The investor doesn’t care about the size of the revenue. What investors look for is the predictability of that revenue. If you do have a sales funnel, it’s helpful to share that with the investors. Having visibility on that progress is vital because the investor can then see the traction you have in your sales prospecting process. Use the funnel in multiple investor updates to show how prospects are moving through it. When speaking with investors, mention your process with phrases such as: “For every ten leads, we generate one customer worth $5000 in revenue.” Showing leads is precisely what investors are looking for. It shows that you have a system with repeatable and predictable outcomes. Additionally, when communicating with investors, always include the customers in your discussions. Never engage in an investor meeting without new information about your customers and always mention any updates you have on revenue. TEN Capital helps startups, growth companies, and investors, raise funding through its extensive network of accredited investors. Our Funding as a Service program includes investor introductions, an email campaign with updates, pitch events, webinars, podcast interviews, and assistance with investment closing documents including pitch decks and data rooms. In short: we provide the leg-work, saving you time and money. Read More TEN Capital Education 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

    The Many Startup Investor Types and Who is Right for Your Deal?

    September 4, 2023

    2 min read The Many Startup Investor Types and Who is Right for Your Deal? There are many kinds of startup investors today. Venture Capital, MicroVC Funds, Corporate Venture funds, Family Offices,  Angels, High Net Worth Individuals (HNI), and crowdfunders to name some of the current types of investors. Venture Capital- Most startups think of venture capital when they start their fundraise. The reality is that venture capital is only for a small number of startups. VCs draw their funds from outside sources called LPs or Limited Partners. The VC charges a management fee and a carry (share of the profits) from the funds raised. There are VCs who still raise the funds in what is called committed capital- the funds are committed by the LPs. Newer VC funds are often called “Pledge funds” in which the LPs pay the management fee for access to the deal flow but they review each deal before funding and have a say in the funding process. For some VCs you may notice the turnaround time on questions and deal flow takes longer. For pledge funds, the VCs must gain the approval of the LPs to move forward- hence the turnaround time is longer. VCs fund only the top 10% of all qualified startups. They look for high-growth, large target markets with scalable business models. MicroVCs are venture capital funds with less than $100M in funding. Typically, MicroVCs start with $25M to $50M funds and then deploy the funds to 10-12 companies. They often have very specific investment criteria since the management fee on the fund doesn’t add up to much and one needs to keep the costs low on such a fund. Corporate VCs are often called strategic investors in that they invest for strategic reasons rather than financial ones. They seek new technologies, talent, and other tools to help grow their business. They often invest as follow-on investors and typically do not lead the fundraise for startups. Some firms had a strategic fund in the past, but today just about every company has a fund for startup investment. Family offices are investors based around a family partnership that allocates some of their funds to startup investing. Some family offices go it alone and are called single-family offices while others band together into groups and are called multi-family offices that share the deal flow and due diligence. For every venture capital fund in the US, there are five family offices. They are less prominent since they invest privately and provide very little publicity around their work. Angels are individuals that meet the SEC-accredited investor requirement. That means they have $1M in net worth not counting the house they live in. Angels invest their own money. Some band together into groups to share the deal flow and the due diligence. Sometimes the group is formed around the “dinner club” model and a formal application process is used to recruit the deals. Others form syndicates in which a deal that is led is shopped to others in the group. The dinner club model can be a heavy time sync since most of the meetings are in person and only occur at specific times of the year. The Syndicate model is lighter and focuses on deals that have a lead. Angels look for the same thing as VCs but often invest outside those parameters since it’s their own funds.  They often invest in something that matters to them personally such as impact funds. High Net Worth Individuals are similar to angels but typically have more investing experience. They most often invest their own funds in areas they understand well. Some HNIs band together in informal syndicates to share the deal flow and due diligence. Crowdfunders are either accredited or unaccredited investors seeking to make a return by investing with many other investors in startup deals. Because their investment size ranges from $100 to $5000 in most cases, the startup needs a large number of them to complete a round. Crowdfunders more than any other investor make their investment decision on factors other than financial return. They often invest to support family and friends, or businesses they care about in some manner.  Read More TEN Capital Education 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

    Investing in Diversity

    August 14, 2023

    2 min read  Investing in Diversity As an investor, it’s essential to consider investing in human and social capital. Research suggests that investing in human and social capital alongside traditional capital is most predictive of any startup’s success. Data shows that having diversity on a team benefits a startup’s performance. An additional dataset from the likes of McKinsey, American Express, and the Kauffman Foundation shows that diversity makes for better financial outcomes for a company. Given the data, looking at diverse teams should be a priority for investors. Here are a few benefits of investing in team diversity: Superior decision-making and problem-solving Diverse backgrounds mean diverse solutions being brought to the table. This leads to a more informed and well-rounded decision-making process and improved results from the team.Increased innovation A diverse team is a melting pot of ideas. People with different backgrounds and views will bring different solutions to a problem. This, in turn, pushes innovation forward. More talent and skills Individuals from different backgrounds each bring in their own set of skills, talents, and experiences. Not only does this increase performance, but it also creates a natural learning environment in which team members can learn from each other. A larger talent pool and long-term employees Diversity means attracting more candidates. A progressive company is attractive to prospective employees who value equality and higher employee retention is likely with a more diverse team. Read More TEN Capital Education 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

    Three Important Questions to Ask Before Investing

    July 31, 2023

    2 min read Three Important Questions to Ask Before Investing The startup world is full of big ideas. Entrepreneurs have grand plans to make these big ideas a reality, and in some cases investing in these plans can lead to a hefty ROI for investors. But how do you know if this startup is the one to invest in? We’ve boiled this down to three main questions to ask before investing in a startup company. If even one of these answers is wishy-washy, you may want to consider saving your investment for a company in steadier waters. Let’s take a look at what these three questions are. Do They Have Sufficient Traction? The first question to ask is if the startup has sufficient traction.  You can track them on their sales growth, team changes, product development, and fundraise.  As you receive reports, you can start to build out a list of crucial traction points– leads, sales, channels, etc.   As one investor said, “I don’t invest in dots. I invest in lines.”  It’s essential to build out a picture of how the business is growing. By watching the deal over time, you can better understand it and hopefully see an upward trajectory, at which point an investment makes sense. Are They Serious? Here are a few signs that an entrepreneur may not take the business seriously enough to be successful: Job titles are overly vital to them, and they are generally more concerned with receiving titles and credit for the work than they are about the actual work. They are not focused on the customer. In fact, they may not even have a clear understanding of who their customer is or what that customer wants. They don’t take responsibility for problems the startup may have. They blame others for the issues and may claim there can be nothing to fix the problem.  Know your entrepreneur. An entrepreneur who isn’t committed to the cause will raise funding and ultimately waste it. You do not want to invest money in those who aren’t going to see it through. Do They Have a Well Thought Out Plan? They might have a great idea, but they’ll need to do more than just lay out a slide deck with goals they hope to achieve. A promising startup must be able to back it up with a well-thought-out plan to accomplish those goals. Here are some questions you can ask to get a better idea of what kind of plan they have in place: How will they generate leads, and what does that look like? What is their current sales pitch/angle, and how will it work for them? Where are their customers coming from, and how do they make the sale? It shows potential for investment if they’ve done their homework and have clear answers and processes in place. Read More TEN Capital Education 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

    The Three Levels of Due Diligence

    October 28, 2022

    2min read How much due diligence is enough? While there are many checklists and rules of thumb surrounding the process of due diligence, the endpoint never seems clear. Most investors dedicate a certain number of hours, 20, 30, or more, and when those hours are used up, they make the investment decision. In my experience, there are three levels of due diligence: First Level The first level answers the question, “do we invest or not?” After reviewing the standard documents and talking to customers and industry professionals, the investor decides if the potential rewards outweigh the risks. Second Level The second level of due diligence answers the question,” what will the startup have to accomplish to be successful?” This is not always an obvious answer, such as making sales, or gain a 10% market share, or ensuring the product works. There are often one or two critical factors that determine success. In today’s world, it increasingly comes down to cost. The cost of customer acquisition, product development, or something else. Yes, the startup can find customers and sell a product, but at the end of the day, the margins come out razor-thin, if not negative. Another critical factor I see is building the team. Can we find the right people to fill the gaps (and there are always gaps)? Do you know what the startup must do to achieve success? Third Level The third level of due diligence answers the question: What can the investor do to help the startup succeed? Nothing is more frustrating than seeing a startup failing and not being able to do much about it due to a lack of knowledge of the industry, the market, or the technology. If you can’t help the startup, it’s questionable that it’s a good investment for the angel.  I’ve never invested in a startup that, at some point, didn’t need help. On the other hand, if I can help the startup through connections, mentorship, or team building, then it may be a good fit. Read More TEN Capital Education 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

    Five Characteristics of a Lead Investor

    October 23, 2022

    2min read Five Characteristics of a Lead Investor I often hear of entrepreneurs stuck in their fund raise efforts with several prospective investors but no one willing to be the first.  That’s because the first investor could be the last in a deal, and no one wants to be that investor. The lead investor breaks down that barrier by providing the initial capital and due diligence that paves the way for others to join the deal. Here are some key characteristics of a lead investor: The Lead investor provides a substantial sum of capital, at least $100K. The $25K check writer should not be leading the deal. The Lead investor also gives advice. He should have experience in the industry and know well the problem the company is solving. By going first, he’s putting his reputation on the line, making him your lead advocate.  Keeping the lead informed is essential as he’s championing your deal more than other investors. He should also bring a strong reputation that attracts others to your deal. Finally, the lead investor performs the initial due diligence. All investors should be performing their due diligence, but most will use the lead investors’ work as the basis for their decision.  This can easily reach 30 to 40 hours of work.  Signing up a lead investor can be challenging if the entrepreneur doesn’t offer compensation. Finding a lead investor helps to start with those who know your industry and market.  Those with a successful business track record are ideal candidates. They say it takes seven touches to close a sale, so it takes seven touches to close an investor. Read more TEN Capital Network Education 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

    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

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