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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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    How To Plan for an Exit

    January 13, 2022

    2 min read At some point, every startup will need to exit the marketplace. Being prepared is key to doing this with success. In this article, we discuss how to plan for an exit and how to prepare for exit negotiations. Planning For an Exit Here are some key steps to take in planning the exit for your company: Understand why you are exiting the business.   Is this exit going to be seller motivated or buyer motivated? Explore the options. Consider who would be the best acquirer or which company would be best to merge with. Consider the market and industry. Is your industry consolidating? Is the market growing? Know what your company is worth. Research comparable valuations of similar companies. Revenue is typically a key factor along with profit. Start talking with potential acquirers and update them regularly on your progress. Ask other founders and CEOs for their exit experience. Find out what they discovered in going through an exit. Ask your current investors about their experience with exits to see what they know. Once you have a target acquirer, make a list of what they want to see in your company in order to buy it. This list becomes your strategic plan. Negotiating an 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.  Why are you 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. Preparing to Achieve an Exit At every fundraise stage the CEO can choose to raise funding or sell the business. If you choose to sell your business, how can you go about doing so? Meet all the C-level people at companies that could acquire you, and the CEOs of companies who are potential acquirers. Gain an introduction and then generate an ongoing dialog with the CEO. In the process of doing so, you can determine their interest in your type of business. If they like what you do and can see how it fits into their business, then you have an opportunity to pursue being acquired. As always in business it is about starting and building relationships. 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 Organizations: Finding Funding

    January 13, 2022

    2 min read Every startup eventually asks the question: “Where will our funding come from?” There are several sources of funding that your organization can tap into. Some of the most common funding sources include consultation, contractor, crowdfunding, and supplier funding. Let’s take a closer look at each. Consultation Funding Consultation funding is using consultation work to pay the bills and salaries while you are building out your product. Consider looking for consultation work in addition to selling the product as some customers want more assistance in installing and using the product than in just buying the product itself.  The consultation also brings new insight into how the customer intends to use the product and what problem they are trying to solve. This is useful information to guide your product roadmap. Consulting work gives you more information about the market and the competition as you’ll encounter competitive solutions. This is also a great way to generate positive references to use when you launch your standard product into the market. While consulting may not be your ultimate goal, it can be a useful way to fund a portion of your product development. Contractor Funding Many enterprise software programs come from service businesses solving a problem for their clients. In searching for a solution on the market, they find none, so they build their own. Later, other clients come ready to buy it. This is one of the most overlooked forms of funding in the startup space. In contractor funding, you sell a customized version of what you want to build to an anchor customer for a substantial one-time fee and then use the funds to build out the platform you envision of which the customer gets a non-exclusive license.   The advantage here is you have a customer telling you exactly what they need and what they will pay for. They improve the product by testing it and telling you what changes to make. They become a happy customer that you can use to attract prospective customers. After three more of these engagements, you will have $1M of investment in your platform with zero dilution. Crowdfunding Crowdfunding can be sourced as prepayment for a good or service, or from accredited or non-accredited investors. Prepayments let you pre-sell your product before you build it. This works best for physical products that require funding for the design and manufacturing of the product. It’s a great way to test the market for a new product as it provides customer feedback on the product, price, and promotion. There are several platforms available for showcasing your product. There’s also crowdfunding from non-accredited investors. On these platforms, anyone can invest in your startup. It is for equity, so you need to understand the implications of it on your cap table. Finally, there’s crowdfunding from accredited investors which is no different than raising funding through angel investors and venture capitalists. The only difference is using a crowdfunding platform to find and engage the investors. There are a growing number of crowdfunding portals offering both general and specialized sites. Crowdfunding works well for startups with a product that is clear to grasp and easy to understand.  Supplier Funding Another source of funding is supplier funding. Supplier funding comes from those who provide services to your company such as contract manufacturing, software development, legal, accounting services, and more. Suppliers provide their services in exchange not only for cash but also for equity. This reduces the amount of equity funding you need to raise from investors. Contract manufacturers will invest in your business and in exchange they look for the startup to use their manufacturing services. Software development firms invest in startups by taking a portion of their software development fee in the form of equity. There are other examples, including lawyers and accountants who provide services in return for equity. This aligns their interest with your interest as the business must succeed for the equity to be worth something.  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

    Financial Models for Startups

    December 16, 2021

    2 min read A financial model is a summary of a company’s financial performance for a set duration of time. Financial models can be used externally to share information with investors and internally to make important business decisions. In this article, we look at what you need to include when building your financial model, the benefits of using an up-to-date financial model, and possible uses. What To Include in a Financial Model When you are building your financial model, make sure to include the following: Revenue projections: This is an estimate of revenue from all sources. Cost of Goods Sold: This projects how much it will cost to build and deliver the product or service. Customer acquisition costs: This is an estimate of the sales and marketing expenses required to acquire the customer. Operating expenses: This is the cost of running your business, such as the monthly price for office space and utilities.  Capital expenditures: This is an estimate of the cost to acquire physical assets such as equipment and machinery. Cash runway: This refers to the amount of cash available based on operations as well as any fundraises. It is also useful to include metrics such as customer acquisition cost and customer lifetime value. Benefits of Using a Financial Model An up-to-date financial model is a must-have for every startup as it can help you make management decisions. It can be used to: Determine what positions to hire and when. Measure the performance of the team and highlight problem areas. Shows areas that are out of their target cost or performance zone such as having too much of a given resource. Determine your valuation range for a fundraise or exit event Find ways to reduce the risks in the business. Create consistent results by managing both cost and revenue drivers. Provide ongoing monitoring of the business. Consider setting up the financial model for daily and monthly operational use as well as for fundraising. Ways To Use a Financial Model After building your financial model you can use it in several ways. Examples of use cases include: Raising funding for the business by determining how much you need to raise and when. Generating financial forecasts and projections for managing the business. Projecting key financial statements such as profit and loss statements, balance sheets, and cash flow statements. Setting up budgets for daily management of the business, particularly around cash flow. Determining hiring decisions including what roles to fill and when. Setting strategic plans for growing the business. Estimating the value of the business for negotiating acquisitions by other companies.    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 Use Financial Projections

    December 15, 2021

    2 min read Information derived from financial statements is used to create financial projections and is usually done on a five-year scale. These projections are used internally for business planning and managing. They are shared externally with investors, potential donors, tax agencies, and more. Below, we cover some of the ways you can use your financial projections. Purpose of Financial Projections Your company’s financial projections document, also called the pro forma, is a key document you’ll need for your fundraise. Investors will want to see a detailed, five-year financial projection to show that you’ve thought through the financial side of the business.  A quality financial projection shows investors you know your business and have a good idea about what things cost and what customers will pay. Additionally, investors also glean from the financial projections how you are going to use the funds they offer you. Financial projections are not about predicting the future with great accuracy, but instead showing the causalities and interdependencies of your business. This document answers questions such as: If sales double, what is the impact on costs? If sales drop by 50%, what happens to cash flow? Fundraise Your financial projections will be important for your fundraise. Banks will want to see your projections when you apply for a loan, and investors will want to see them when you raise equity funding.  There are two basic forms of capital: debt and equity. Debt is in the form of a loan with specific terms, including the interest rate and payback plans. Debt has some advantages including: You can maintain ownership over your business. Interest is tax-deductible. Debt can keep management focused on the core business, in particular cash flow and profits. The advantage of equity is that you don’t have to pay it back immediately, only when you sell the business or go public. Your financial projections will help you decide how much funding you should take from debt and equity. Best Case Worst Case After completing the financial projections, you may want to create various scenarios of your financial model. Startups are often optimistic, while investors are pessimistic, so it can be helpful to create a best-case scenario and a worst-case scenario. For the worst-case scenario, keep your revenue at the current level or only with small increases. Check your cash position and runway and adjust the expenses and fundraise plan accordingly. For the best-case scenario, use the revenue targets you have in mind. Check your cash position and runway and adjust the expenses and fundraise plan accordingly. Here are several common errors: As sales grow, so do sales costs – in particular commissions. Make sure these costs are included with the revenue ramp. Fundraises typically take longer than expected. For every $1M of funding you seek, it will take you one calendar year to raise it. Include your working capital needs for your fundraise planning and its impact on cash position. Founders typically work long hours for little to no pay. This is not true with non-founders. Make sure you include reasonable salaries for the work you expect from others.    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.

    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.

    What is a Business Model (and Why is it Important)

    November 18, 2021

    2 min read In starting a new venture, most start by trying to write the business plan before the Business Model because everyone tells you how much you need one. So you sit down to write the business plan and you start through your checklist: “Management team…well so far, there’s only me, so I’ll just add two more positions to be determined later.” “Problem to be Solved…well, that’s an interesting question. I’m solving so many problems, I’ll just say, we’re going to save the customer time, and make it easier for him to do his job. That should cover it.“ If the above description sounds familiar, it should. Most entrepreneurs start by trying to write the business plan but there’s not enough information to carry it through at the early stage. There are too many decisions still to be made. There’s too much information not yet accumulated. Business Plans vs. Business Models Instead of working on the business plan from day one, work on the business model. Focus on how you are going to generate revenue and what will be your core costs. If you figure this out, then you have the key elements of a business plan. You can fill in the other pieces based on the business model. For example, the management team positions will become clear once you know the business model. The problem you are solving is much clearer and so it goes with the other elements of the plan. The Nine Models for Making Money The business model in short answers the question: how do you make money? Here are the nine business models as outlined in Managing the Digital Enterprise: Brokerage Model: bringing buyers/sellers together. Advertising Model: promoting products/services to an audience Infomediary Model: gathering information about an audience and monetizing it Merchant Model: selling goods/service either wholesale or retail Manufacturer (Direct) Model: selling goods/services directly to the user without an intermediary Affiliate Model: providing purchase opportunities wherever people may be Community Model: selling ancillary products/services in a community Subscription Model: charging for ongoing usage of a product/service Utility Model: charging based on how much of a product/service is used. In today’s web-based world, it’s common to use two or more of these models in the same business. Before fundraising, it’s important to identify the business model. The business doesn’t have to generate a great deal of revenue but it needs to have a clearly defined business model that is scalable. 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.

    5 Common Misconceptions About Starting Your Own Business

    October 18, 2021

    2 min read Starting your own business is extremely appealing for a lot of reasons.  Being your own boss, running things how you want to, and doing something you love are key reasons why people consider making the immense investment in time and money — and taking on the significant risk of failure. This risk can be minimized if you actually know what you’re getting yourself into. Here are 5 common misconceptions of starting your own business with a dose of reality to clear up any confusion.  If I have my own business I won’t have to work as much. That is completely false, especially when getting your idea off the ground and trying to make a profit. Expect longer hours, more tasks, and in all likelihood more headaches than when working under someone else. You can have staff, however, you still have to set them on the right course, deal with payroll, hiring, and management, etc.  I’ll be able to set my own hours and create my own schedule. There is some truth to this statement, however, a business’ priorities lie with customers and clients. Your business has to be there for them, and as head of a business, you have to be there for your employees as well. In the mindset of being ready to assist at all times in any way necessary to keep running well. If you are looking at other business models an online-based business allows some more flexibility. It will be easy to attract investors and customers to my business. There’s a lot of competition out there for peoples’ dollars, whether it be from investors or customers. You have to appeal to both markets, and often, there is no such thing as an easy sell. Be prepared for some slow (and low on revenue) times and be prepared for the frequent “no”. To make yourself more attractive to investors and customers, just be prepared: have a polished, plan to present to potential investors and have an equally high-quality product available for potential customers and clients. The books will be easy. Taxes, payroll, and money management can be hard to understand. There are a lot of numbers to keep track of and (hopefully) a lot of money to be accounted for. Make it easier by getting an accountant and Human Resources personnel. Business owners are rich and someday I will be too. The reality is that many business owners are just scraping by, hoping to keep their business and personal finances just barely in the black. Sacrifices will be necessary until the business becomes profitable, and for many, never do. Starting your own business can be an incredibly rewarding and exciting venture, but it takes a lot of hard work and does not always end up the way you may think or wish for it to.  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

    10 Reasons an Investor Will Pass on Your Deal

    September 12, 2021

    2 min read  Investors see many deals and can spot glaring holes immediately. Here are ten main reasons an investor will pass on your deal: No Traction. You need to show some evidence of market validation. Even without a sales team and a marketing budget, there should be some demand for your product. No Social Proof. There needs to be some evidence the product works. The Team Doesn’t Fit. If there are major holes in the team or you’ve filled the secondary roles and left the primary ones empty, then it’s going to be a problem. Criteria Don’t Fit. Many funds are clear about what they invest in (SaaS, Healthcare IT, etc). Your deal needs to fit into one or more of those criteria. You Don’t Know Your Market. Those with a vague or fuzzy knowledge of the market or customer will have difficulty raising funding. The ability to site numbers (market size, growth rates, customer spend, etc) helps demonstrate your knowledge. Financial Projections Don’t Add Up. Some startups use the excuse that they can’t predict the future and therefore they have no financial projections. Most investors see this as a lack of knowledge about the business and the market. Fuzzy Business Plan Some plans are filled with future possibilities and great opportunities but fail to define the core product and how it will be built and sold. Investors can spot a lack of focus on the business plan a mile away. No “Use of Funds”. The phrase “I’m raising $1M” often triggers the bull meter because the fundraiser rarely knows how they’ll apply the funds. No Validated Business Model. There’s no evidence of a business either in product or customer activity. Lack of Follow-Up. Surprisingly, an investor will express interest and then never hear from the entrepreneur again. It can take several follow-ups to close an investor. TEN Capital has created a series of calculators to help you see how your startup compares to industry standards. You can discover if you are ready for funding, see how your deal will be seen by investors, learn how to set the price for your next raise or exit, or calculate how much TEN Capital can save you on your fundraising campaign. 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

    Successful Fundraising Habits

    September 5, 2021

    2 min read The best startups demonstrate key successful fundraising habits that can be easily replicated if you are willing to put in the work. Here are some of the key habits that will help you hone your fundraising ability: Goal setting. Know what you want from the overall raise and break it down into stages. The entrepreneur who vaguely requests $1M has not yet thought through the use of funds and most likely needs less to get started. Setting (and sticking to) a budget. Set up a timeline and budget for raising funding, and then stick to it. This is a regular (daily and weekly) exercise, not a “some time” or “whenever” thing. Calendar consideration. Starting a raise in the middle of summer or just before Thanksgiving is going to be difficult. Plan the launch of your fundraise with the investor’s schedule in mind. Knowledge of target audience. Understand the target investor and what they are looking for. It’s a good idea to see what they have already invested in and approach them from that angle. Document preparation. Spend time preparing investment documents. Make sure each document, your executive summary, pitch deck, and financial projections, are ready to go so that when an investor expresses interest you can provide them. Pitch practice. Successful fundraisers practice their pitch. Have yours well-honed and know it cold. Working the plan. Create a plan and then work the plan. Have a list of prospective investors and continually work investors through the process. Focus on metrics. Keep track of the numbers in your campaign. Know how many prospects you have and how many you need to achieve your goal. Asking for feedback. Ask investors for feedback. Be open to feedback from investors and others on your pitch and campaign. Demonstration appreciation. Solid fundraisers demonstrate appreciation. They show appreciation to those who help them in their fundraise. Fundraising is a skill just like most other aspects of running a business. These skills can be learned and honed. To learn more about the fundraise process, check out our Edu section: 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

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