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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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    Thinking Out of the Box: Creative Sources of Funding for Startups

    January 27, 2022

    2 min read Finding funding is an indefinite ongoing process for startup organizations. Equity funding is a typical go-to for many startups, however, it is not always the most ideal form of funding. Below are a few creative sources you can look to for your next raise. Loans Loans are debt instruments that must be repaid. Startups can find it difficult to get a traditional loan from a bank. The Small Business Administration offers several loan types for early-stage companies. These loans come with personal guarantees and cannot be closed out with the dissolution of the business. There’s also debt through the use of credit cards and microloans. It’s difficult to use debt to pay for your core product development. Debt makes sense when you have some revenue coming in to pay for the loan.  There are other types of debt including accounts receivable factoring in which you raise money on what customers owe you. There’s also equipment financing in which the equipment collateralizes the debt. Factoring works when you have to pay customers and want to shrink the cash float from the time you build the product until the time you receive payment. Equipment financing works well if you need machinery to build your product or run your business. Credit Lines A line of credit is a short-term loan from the bank to help smooth out cash-flow cycles. Unlike a bank loan in which you receive an injection of funds, a line of credit lets you draw upon it when you need and pay it back when you can. The interest rate on a line of credit is substantially lower than credit cards and offers a higher borrowing limit than most credit cards. However, the interest rates are often variable and not fixed. A secured line of credit is backed by an asset, while an unsecured line of credit is not. An unsecured line of credit will come with a higher interest rate. There are both personal and business lines of credit. Personal lines of credit are often secured by personal property. For a business line of credit, the bank determines your credit limit based on the business assets and cash flow. The bank determines the interest rate by adding the interest to a margin that is affected by your credit history, profitability, and business risk. The line of credit is a useful tool for early-stage businesses to help with cash-flow issues. Licensing You may be able to reduce the amount of funding needed to grow your business by licensing your technology to others. Instead of building and selling a product, you can license to others who will build and sell the product. In licensing, you must have a patent to protect your technology and oftentimes a series of supporting tools to help those who license your technology for using it.  Licensing brings the following benefits: It reduces the amount of capital you need to raise. It can generate a substantial return given the costs are low. The risk of product failure is shifted to the licensee. The disadvantages are: You don’t control how it is used. Your licensee may later compete with you. You don’t receive the full revenue as if you had built and sold the product yourself. Licensees can also bring you new ideas for improvements on the technology. For applications requiring high-capital expenditures for building and selling the product, licensing is a good fit. Grants Grants are typically provided by government organizations to spur research and make a small contribution to the business. Commonly used grants include SBIR, Small Business Innovation Research, which provides phase 1, 2, and 3 grants that add up to $1M. You can search for grants at www.grants.gov. Grant funding is mostly one-time offerings and need not be paid back. They are non-dilutive which means they don’t take any space on the cap table. Use grants to cover costs that customers will not. For example, customers will not pay for basic research but only for finished products. Grants often come with rules on how they can be spent. Be careful in spending too much time with grants. I once worked with a company that had raised over $4M from grants over a five-year period. The team became experts at writing grant proposals but no one could sell, market, or do much of anything for a customer because for five years they focused on writing and winning government grants. Read more TEN Capital eduction:  http://staging.startupfundingespresso.com/education/ 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 Exit Strategy

    January 17, 2022

    2 min read  The end goal of most startup organizations is to eventually exit the marketplace. This is when everyone involved in the deal makes their largest profit off the business. Strategy is key to a successful exit. In this article, we discuss how to plan for an exit, ways to exit, and how to negotiate the exit. Planning For an Exit Startups should start planning for an exit after they achieve product-market fit. The following are some key points to consider when planning your approach to an acquirer: What are the key metrics the acquirer will look for? What are the company’s metrics and how do they currently look? How big is the market for the company’s product? What initiatives are underway that will produce value for the company? How is your companies product compared to the competitor? What is your primary competitive advantage? How consistent is your growth rate? What is your forecast for the coming three years? How will your company be perceived by the potential buyer? Use them to guide your funding, hiring, and strategic plans. Looking For An Exit Startup investors look for an exit in the 5– to 7-year range. As a startup, you need to consider the exit from the beginning as the exit strategy can inform your decisions around funding, hiring, and more. Here are several exit options to consider: Mergers and acquisitions – most companies exit by being bought by a bigger company. Going public – some companies still use an IPO for an exit. It can be expensive due to compliance, so fewer companies take it. Private equity firm – more companies are staying private longer and often use PE firms to give the early investors an exit. Revenue sharing – some investors exit by taking a revenue share for their return. Liquidation – some companies can be sold for the assets to provide a return to the investors. Share buyout – some investors will accept a buyout of their shares from the company to provide an exit in the event there is no other option. If your investors are family members or others who do not expect to be paid back, then you can skip the exit and just maintain the business.  As you launch and grow your business, keep a list of potential exit options and consider what you would need to do to achieve it. Negotiating The Exit In negotiating the exit with an acquirer you’ll need to know the following: Key metrics about your business, both those that show the company in a positive light as well as a negative one. The total addressable market for your company. The top three opportunities your company can attack. The company’s competition and competitive advantage. The company’s track record in meeting forecasts and accomplishing milestones.  Also, acquirers will ask why you are selling the company and why now? Why is the acquiring company a good fit for your company? How closely aligned in operations is the company to the acquiring company’s operations? How much integration work will need to be done? What role will the CEO play after the acquisition? Think through the answers to these questions as most of them will come up.  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

    Doing Your Due Diligence

    November 20, 2021

    2 min read There are several approaches to due diligence. The most common is the “Thorough Approach” in which you review each aspect of the business and focus on the top items. The main areas to cover in due diligence are the market and the team. In this article, we will cover how to diligence the market, how to diligence the team, and what key documents you should have in your due diligence box in following the thorough approach. How To Diligence the Market When implementing due diligence in a startup, the size of the market is a key question. The larger the market, the greater the growth potential of the startup. There’s rarely a need to pay for research as so much exists on the web. In searching the web, you’ll find research reports giving market sizes, trends, analysis, and more. The key here is to analyze the market at three levels. The first is Total Available Market which is anyone the company could ever sell to. The second is the Serviceable Market which is the target market the company wants to serve. The third is the Beachhead Market, which is the first niche the company will pursue. Ideally, this is a small but well-defined group of companies that fit the startup’s current product. The startup should have some interactions with the companies in the Beachhead market already. How To Diligence the Team In doing diligence as a startup, the team is the most critical factor in the process. For implementing diligence in the team, first, review the resumes of those who are on the team or plan to join when funding becomes available. Next, look for domain knowledge. Who has it, and how current is it? After that, look for complementary skills. Is there someone who has sales skills and will spend their time selling the product? Is there someone who is going to build the product and will manage either an internal development team or an external one? Outsourcing the product development with no one actively managing it is a recipe for disaster. Next, look at how long the team has worked together if at all. Ideally, the team has some experience working with each other. The more the better. Finally, look at completeness. Many successful teams follow the Designer, the Hacker, and the Hustler formula. The Designer knows the customer problem and plans the product development, including how it will be monetized and promoted. The Hacker is the developer who builds the product, and the Hustler is the one who sells it. Due Diligence Box Key Documents You’ll need to gather your basic company documents for investors to review. In preparing a due diligence box also called a data room, the following are basic documents to include: Income statement Balance Sheet Three- to five-year financial forecast Cap Table including shares outstanding Entity filings (LLC, C-Corp, and Articles of Incorporation) Intellectual Property filings including patents, trademarks, etc. C-level team resumes There may be other documents you may need to add based on your situation. 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.

    How to Set Up and Organize Deal Flow

    November 15, 2021

    2 min read Deal flow is key to successful startup investing. It can take a substantial amount of time for the startup investor, so it’s important to build a strong process for managing it. A well-structured and organized deal flow lead to maximum efficiency for the startup investor. In this article, we will learn how to set up deal flow, how to organize it, and how to automate the process How To Set Up Deal Flow Start with these key steps for running deal flow: Set up a deal flow source with angel groups, venture funds, online portals, and others. Capture key deal information into a software tool. Run an initial screen to see if a deal meets your criteria- have 3-5 key points to check. Set up a first call to find out more details. Update the deal flow software with the results. Set up a partner meeting to review the deal with others in your fund, syndicate, or network. Negotiate valuation and terms. Perform diligence on the deal. Close the investment. Set tasks and reminders for ongoing follow-up and reports. In each step, capture the results into software. Ask the following questions to aide in this process: Which sources gave you the best deals? How much time did the calls take to capture the necessary information to decide? What key factors died the startup need to go all the way through to funding? After anaylysis, update your process to screen out details that wont make the cut. How To Organize Your Deal Flow It’s important to keep your deal flow process organized and efficient. Below are some poiters on how to keep your deal flow well organized:  Set up a separate email for deal flow and use it to capture deals from websites, social media, and other sources. Have everyone on the team send any new deals to that email address. Take all submitted deals and place into a CRM with contact information, sector, stage, and other key information. Update that record with the deal status and next steps. Create a series of follow-up emails to send to those in the deal flow pipeline such as how your deal flow process works and when to expect a follow up. Develop a process for screening the deals for basic criteria and send “pass” notices to those deals that don’t meet them. Set up calls with those that meet the criteria to qualify them and move them through your standard process. Run reports to understand the deal flow and how well it is providing quality deals. It’s important to review your successfully funded deals for key information so you can prioritize those deals for follow up. How to Automate the Deal Flow Process When your process is well organized, you can automate to achieve maximum efficiency. Some key pointers to help you automate the process include: Standardize the information you collect by using forms on the website. Capture referral partners or sources so you can measure the results. Collect the startup submissions to run metrics and track progress. Use well-structured data sets so you can apply automation tools for analysis and data pulls from other platforms and software applications. Set up search tools to look up the founder and company to provide background information. Maintain a filled-out dataset to enable running reports on trends on the deal flow such as sector, stage, and fundraise amount. Capture information from online databases such as Crunchbase and other tools to fill out more details. 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.

    Should I Raise Funding?

    November 11, 2021

    2 min read Not all capital needs are best addressed through fundraising, and not all startups are ready to start a round of funding. Before beginning your raise, consider if fundraising is the best way to go for your startup. In this article, we will help you determine if you should raise funding by looking at your organization’s metrics, team, and product or service.  Should You Raise Funding for Your Startup Not all capital needs are best addressed through fundraising. Before beginning your raise, consider if fundraising is the best way to go for your startup. Ask why you need funding. See if you have a specific need for funding that is tied to growing the business.  If you have a business that is on a high growth trajectory, consider venture funding. If the company is not high growth or has no vision of selling it, consider other forms of funding such as SBA loans or revenue-based funding.  Investors expect a return in the ballpark of five times their investment in five years. Angel and venture capital funding goes to those startups that can provide this level of return. Other factors to consider for venture funding include the following: You have a large addressable market. You are building a scalable business. You are using a recurring revenue monetization model. You are building a platform-based business rather than a single product. You plan to sell the business rather than keep it for a lifestyle business.  You have built enough business to prove product and market validation- the product works, and people will pay for it.  When to Raise Funding Most founders go out for a fundraise prematurely because they need money, not because they are ready for fundraising. Consider the following to understand when it is best to raise funding: Do you have a compelling idea that you can articulate? Do you have a validated customer, market, and product lined up? Are your investor documents prepared? Of course, your pitch deck will change over time, but it always needs to show the core product, team, and fundraise. Can you demonstrate the product, even at an early stage? Can you show customer interest through engagement as well as revenue? Have you spoken with some investors to identify what risks they see in the deal? Do you know how you can mitigate those risks? Only after completing the above preparations should you consider launching your fundraise. You can then successfully engage investors with your deal, and remember to never show up to an investor meeting empty-handed. Always have some customer engagement to discuss. Can You Show Product and Market Validation? In talking with startup investors, the first two questions are Product Validation and Market Validation. Essentially, these measures show that the product works and that someone will buy it. Investors look for evidence of this before moving into further diligence, so it’s essential to show this in your pitch. Beta users are a great way to show the product works, as well as customer interest. In many cases, the product is a website supplying some value in data storage or analysis. In today’s world, the chance of getting the product up and running is relatively high- but will someone use it? And more importantly, will someone pay for it? Customers who pre-pay for your product check the market validation box. This demonstrates you are solving a real problem. If you don’t have anyone paying for it, you’ll need to resort to pipeline metrics showing the number of downloads, trials, and pilot programs. While these metrics are not as valuable as showing proof of a paying customer, they indicate that the customer will most likely buy. It’s helpful to show the funnel prospects in engaging your product. This includes lead generation, qualification, closing, trials, pilot tests, and signed customers. Investors look for a consistent signup percentage on the leads going through your program. While the absolute number of signups may not be high, the repeatability of your model can be compelling to the investor. How To Know If Your Startup is Venture Fundable The following points will help you to understand if you are venture fundable. But, first, consider if you have the following: Recurring Revenue – Do you have recurring revenue in your model?   Platform-Based Approach – Are you taking a platform-based approach to the product/service delivery, or do you sell one-off products?   Data-Centric – Are you capturing key data elements that improve your process and product?   Strong Team- Do you have a strong team? Does each member bring expertise about their field to your business?   Fast growth (>50% YoY) – Are you growing at least 50% YoY?   Large Target Market – Are you targeting a market over $1B? The more checkmarks you have on this list, the more fundable you are with VCs. 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.

    The Golden Rules of Fundraising Success

    November 11, 2021

    2 min read  Here are the basic rules of fundraising that all startups should keep in mind: The Golden Rules of Fundraising Success. Know your investors It’s important to know what kind of investor will benefit your business. You want to understand what that investor wants to see in your deal. Educate your investors After you pitch to the investor, it’s essential to educate the investor through updates about your deal. It’s often the case the investor is unfamiliar with your application or space. Build trust Demonstrate that you can be trusted by showing examples of how you’ve performed in the past. Respect your investors Actively show respect to the investor throughout the process. Please do not take the investors’ time and advice for granted. Investors will lose interest and look for other fundraising opportunities if their feedback and advice go unrecognized.  Focus on current supporters Make sure you keep your current investor and investor prospects updated on your startup. If you don’t articulate progress in your deal, the investor will most likely not know. 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

    Guide To Startup Ecosystems

    November 6, 2021

    2 min read If you are a serial entrepreneur or are otherwise serious about startups, building a startup ecosystem may be an attractive option to you. Startup ecosystems provide built-in connections and ongoing support, making the growth of a startup from the grassroots stage to a mature business far easier to manage. In this article, we discuss the best way to begin building your startup ecosystem. 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. At the core of the network are startups led by founders who launch high-growth businesses. This network encourages innovation through shared resources such as capital, talent, and mentorship. Each member in the network has something to offer: Accelerators and incubators: provide education around the initial launch Investors: provide potential capital Universities: provide 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 Mentors: provide coaching and guidance on how to grow the business How To Build a Startup Ecosystem In building out your startup ecosystem, consider these points: First, investigate every kind of funding and consider where it may fit into your overall funding plan. It’s most likely that you will use two or three types of funding over the life of your business. To understand the type of funding you should look for, ask: “How will you pay the investor back?” For example, equity funding should be considered if you plan to pay back when you sell the business. On the other hand, if you plan to pay back out of the company’s cash flow, then debt funding is a better choice. If you have a consumer-facing product, consider crowdfunding which offers both debt and equity options. Break your funding down into parts, and consider using more than one type of funding for your business. How to Prepare for a Raise Before launching your fundraise campaign, prepare your business, complete your investor documents, and build your investor network. Start with a group of entrepreneurs interested in startups and meet regularly. Encourage startups to share their projects and invite others to support 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 and support 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. Remember that your role in building a startup community is to create connections and networks for players in the space. Therefore, facilitating communication and connection is key. 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

    Overcoming Common Investor Biases

    October 23, 2021

    2 min read In this article, we look at five common investor biases.  It’s natural to have biases – we all do. We’re only human after all. However natural or not, some of these biases may be interfering in our relationships with our startups. It’s important to be aware of these biases so that we can do our best to overcome and understand them. Overcoming these biases can help strengthen your startup relationships and your deals. Who knows, you may even break through a current issue with a startup and see a higher return on investment. Bias Blind Spot The bias blind spot is a cognitive bias defined by Wikipedia as the tendency to see oneself as less biased than other people. To clearly identify more cognitive biases in others than in oneself. All investors have blind spots and biases, investing in experiences causes one to be biased unconsciously. To overcome biases, focus on self-awareness. Learn more about the common types of bias such as anchoring and confirmation bias. Pay attention to how you react and respond to different pitches. Question your judgment to see if it’s based on fact or on personal feeling or opinion. Identify what type of deals and founder types make you uncomfortable. Question your judgment process to see where it may be flawed. Are you biased against certain types of people because of past experiences? If certain types of startups and founders make you uncomfortable then spend more time with them. Becoming familiar with them will make you more aware of potential biases you may have. Self-Serving Bias The self-serving bias is a cognitive bias defined by Wikipedia as the tendency to claim more responsibility for successes than failures. Investors use successful investments as proxies for their skill but attribute the failures to other causes. Investors are naturally optimistic, and when things go wrong it’s easy to blame external factors. To overcome the self-serving bias, consider the following: Maintain awareness about the self-serving bias. Check yourself when giving yourself the credit and give credit to other factors for success. For failures, take some time to review it so you understand it well. Make yourself accountable for any failures on your part. And look for ways to improve your skills and process. Selective Perception Selective perception is a cognitive bias defined by Wikipedia as the tendency for expectations to affect perception. Investors tend to see what they want to see in a startup deal. Investors choose those elements in the pitch that match their experience and expectations. Selective perception comes from previous experiences with startups both good and bad. Make sure you are an active listener, truly hear what the person speaking is saying. Ask questions to confirm understanding and that you heard correctly. Check with other investors for their perception to see how it matches and differs from your own. It’s easy to focus on parts of the deal that matches your understanding and ignore those elements that don’t fit.  Stereotyping Stereotyping is a cognitive bias defined by Wikipedia as expecting a member of a group to have certain characteristics without having actual information about that individual. Investors can stereotype startups based on their previous experience. This can be a bias against a sector of business, a leadership style, or other. To overcome stereotyping, investors should set aside preconceived notions and examine the facts available. Investors should look at the deal, the team, and the market as a growth opportunity. Look at similar investments by other investors to learn more about the deal. Investors need to generate self-awareness to understand biases that come into their decision-making. Staying in the know will make changes easier as the startup world is constantly changing. Out with the old and in with the new.  Reactive Devaluation Reactive devaluation is defined by Wikipedia as devaluing proposals only because they purportedly originated with an adversary. Founders tend to ignore and or discredit lessons and or advice given by their competitors as they see it as just that, their competition, and how would their competition know better than them.  To overcome reactive devaluation, consider the following: Maintain awareness of reactive devaluation and watch for it when making decisions. Separate yourself from the situation and view it as an impartial bystander to evaluate the information without bias. Consider the same information but coming from another source.  Would you perceive it differently? Check with others about their view of the situation and if the information is worthy of consideration. If so, review the information with other founders to verify it is legitimate. It’s helpful to separate the information from its source in order to remove any bias either for or against it. 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

    The Most Common Reasons Why Startups Fail to Raise Funding

    October 13, 2021

    1 min read There are many reasons why startups fail, these are the most common. Working with entrepreneurs every day on starting and growing their business, in addition to building a product/service that the market wants, recruiting a team that is effective, and finding customers, they must also raise funding.  A select few have the funding to start and grow the company but the vast majority of today’s startups do not.  They have to raise funding from outside sources and they know it. The most common reason why startups fail to raise funding is that they don’t budget the time or financial resources to do it.  When they ask me for help in fundraising, I ask for their business plan.  In reviewing it I find they have a time and financial budget for building the product.  They also have resources set aside for marketing and selling it. When I ask for their time and financial budget for raising funding, I often receive a blank stare. The four components of a startup are product, team, customers, and funding.  They budget time and dollars for the first three but many miss the fourth one–funding. Fundraising typically doesn’t require a lot of financial resources upfront but it does take some.  Pitching to angel groups requires application fees. Putting investor docs in order requires some cost as well.  The cost is not great but a budget of zero dollars makes it harder. The primary cost in raising funding is time.  It’s nearly a full-time job for three to six months in most cases.  Who on your team is dedicated to the process?  Closing investors is not unlike closing a customer.  You must have several interactions.  For a new company with a new product is almost never one visit and you’re done.  You have to go back and show how the product is improving.  Getting the first customer is the hardest and as you gain more users it does get easier.  The same is true with investing from investors.  If you’re starting to raise funding, I recommend you review your time and financial budget and make sure you are prepared for it. 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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