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Starting an Angel Investor Group

Investing /

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

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How to Raise Funding at Every Stage of the Business

Fundraising /

1 min read Crowdfunding can be used to raise funding throughout the life of a business.  When the idea of a new business strikes you, and there’s nothing built yet, then you should run a donations campaign–ask family and friends to donate $10K collectively.  Make sure they understand that no one is getting paid back.  The value of this step is that it establishes a network to support your business.  The money can be used for some initial costs such as filing patents, building websites, and starting work on a prototype. Rewards The next step is to use a Rewards/Prepay campaign to pre-sell 50 units of your product.  It can be anything.  The key here is that you start to build your customer network.  If you can’t presell 50 units, then you have a product problem that needs to be solved first before you go any further.  The funding you raise should be enough to build the first version of your product. Crowdfunding Campaign With a successful rewards campaign behind you,  you now move towards turning those customers into investors using the Texas Intrastate crowdfunding campaign.  The Texas Intrastate law gives anyone the ability to invest in your business.  Again, the funding helps, but building your network is the crucial point.  If all fifty of your Prepay customers invested in your business you now have fifty brand ambassadors supporting your business–not trivial support by any means. With support from your customers, and now investors in your business, you approach angel investors and start to raise funding to grow the business.  Angels invest $250 to $2M to grow a working operation.  When you arrive at the angel investors’ door, they are expecting you to have a product at some stage of usage and some revenue.  The previous steps give you the ability to do that. If you need more funding, then you can go back and raise revenue-based funding.  The investors at this stage take a piece of the revenue as payment rather than an equity stake.  If you find yourself having trouble raising funding, it may mean that you skipped some key steps. You should go back and fill in the gaps of building your support network and your customer base before proceeding. Read more in the TEN Capital eGuide: https://staging.startupfundingespresso.com/how-to-raise-funding-eguide/ 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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How to Raise Funding – A Little at a Time

Fundraising /

1 min read Traditionally fundraising takes a tremendous amount of time on the part of the startup CEO. Some CEOs drop everything to run the fundraise.  I advise against spending too much time fundraising but instead set up a system to help with the fundraise. With the right use of online tools (analytics, CRM, Drip campaigns, etc) the CEO doesn’t have to let fundraising become a huge distraction. Building a list of investor prospects and keeping them informed of your progress, the CEO can reach out to ask for an investment at the right time. Instead of raising two years’ worth of funding, the CEO can raise a few months which is a great deal easier. This type of funding works best for early stage, and those with recurring revenue business models. These techniques were popularized by crowdfunding but can be applied to accredited investor raises as well. As investors see more and more deal flow, they need help in finding, qualifying, and following up the deals. At TEN Capital we let the investor select the deals they want to see and then send updates only on those deals. We work with the startups to build upgrades to share with interested investors, All of this happens online. At some point, interested investors set up a call to talk with the CEO and later they decide to invest or pass. Most of the process if not all takes place online. Read more the TEN Capital eGuide: https://staging.startupfundingespresso.com/how-to-raise-funding-eguide/ 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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Need-To-Know Metrics for Investors

Investing /

2 min read As an investor, there are several metrics to keep in mind while evaluating and managing your startup investments. Today, we are going to talk about four key metrics: redemption facilitation, 3X in 3 terms, IRR, and ROI. Continue reading to learn what these metrics are used for and how to put them into action for your investment portfolio. Redemption Facilitation: In an early-exit term sheet, it’s important to have a redemption facilitation process. This includes the steps for setting up the bank accounts, capturing the investor’s interest, providing payouts, and investor updates. The process also tracks escrow of repayment funds and later revenue share payments to complete the redemption process. For the redemption exercise, here is the timeline and steps: 180 days from Note maturity: Capture the current version of the cap table and financials, including the current income statement and balance sheet. Send a notice to the investors to consider their decision to redeem. 90 days from Note maturity: Confirm the investors’ decision to redeem. Prepare payment options for the company to consider.  60 days from Note maturity date: Send notice to the investors of impending maturity and confirm their decision on redemption. 30 days from Note maturity date: Update investors with status on a regular basis. Send notice of redemption to the company and ask for payment due in one week. 23 days from Note maturity date: If payment is not received, then a payment plan will be due in one week by the company. 16 days from Note maturity date if no payment plan is provided: Set up a follow-up meeting with the company to discuss options. Upon maturity of the Note or in the event of a Corporate Transaction payment: Create a promissory note of the debt due. Elect a board of directors with investors having majority control. 3X in 3 Terms I analyzed the results of several angel networks and found that 65% of the investments after three years were still in business but were no longer on the venture track. In most cases, they were growing businesses but we’re not going to be bought out for a significant return to the investor as the market conditions had changed, the competition had taken over, or the founder was no longer interested in keeping pace to achieve a venture exit. The best-case scenario was the entrepreneur would sell the business for 2-3X after 10 years, in which case the investor would get a minimal return on investment. In my investing experience, three years into the investment, it becomes clear if the company will continue on the venture path or not.  I often saw the entrepreneur signal their departure from the venture path by taking above-market rate salaries.  I called this taking the ‘payroll exit’, in which case they no longer needed an ‘equity exit’.   This left the investor stranded on the equity plan with no way out. I set up a deal structure that would allow the investor to go on the payroll exit in the event the startup chose that path. In this structure, the investor receives three times their investment three years from the date of investment. Therefore, $100K in yields $300K out. If the company continues on the equity exit, then the investor may choose to stay in the investment.  ROI ROI is the return on investment without respect to time. If I invest $100K and 5 years later I receive a return of $300,000 then my ROI is 3X as I’ve tripled my initial investment. Since ROI doesn’t reflect time passed, if I receive my return 10 years later my ROI is still 3X. As you’ll see in the next section, this is where ROI and IRR differ from one another.  IRR IRR is the internal rate of return which is the return on investment with respect to time. It’s easiest to calculate IRR using an excel spreadsheet. Follow the steps below: Open up a column Set each row as one year Put the amount invested in year 1 (use a minus sign for this input) The amount returned in the appropriate year (use a positive sign for this input) Put a zero in each unfilled row Apply the IRR formula from Excel to make the calculation To understand your investment results better, you’ll find IRR is often a better metric than ROI as it considers the time factor. Read more TEN Capital eduction:  https://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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Thinking Out of the Box: Creative Sources of Funding for Startups

Fundraising /

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:  https://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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Timing Your Exit

Investing /

2 min read For every business, there comes a time to sell. Whether you are a startup or an investor, recognizing when this time is key to success. In this article, we cover when you should consider selling a business, how long it takes, and the benefit of taking an early exit. When to Sell Your Business Ask the following questions to find if now is the right time to sell your business: Do you still want to run the business? You may want to move on to new projects and opportunities and the current business may no longer be fulfilling. Do you still believe in the business and what it can do for you? Sometimes the market changes and the business opportunity is no longer there. What can you get from the business today versus two years from now? Waiting a few years to sell may give you a better exit. Do you need more funding, and can you raise it? If your business needs funding to continue and you can raise it, then do so. If you cannot, then consider exiting. What do the other team members want to do? Aside from your own interests, what do the other stakeholders want? It takes a team to run a business. If they want an exit, that should be part of the consideration. Early Exits In setting the exit, most investors look to maximize the exit value. It’s important to remember that the metric investors use, IRR or Internal Rate of Return, has a time component to it. The faster the exit, the higher the IRR. As an investor, consider pursuing the highest IRR over 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. Growing a business and selling it over $100M is very hard. Most acquirers don’t need the business to be large, they only 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 its 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. Timeline for an Exit Most startups are launched with the idea of selling the business for a substantial gain in five to seven years. Many companies reach that stage and find they can’t sell the business, at least not for the price they want. 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. Also, 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 from the buyer and what other activities may delay their work on your deal. Set realistic expectations for how fast things will go. Read more in the TEN Capital eGuide: https://staging.startupfundingespresso.com/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

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Managing Startup Failure: Early-Exit Procedures

Fundraising /

2 min read Not every startup launched can be a success. It’s okay to fail. The important thing is that you recognize when the startup is failed and exit early. This allows for as much redemption as possible. Fail, but fail smart. In this article, we discuss early-exit procedures and redemption strategies. But first, let’s take a look at startup success and failure rates. Startup Success Rates The early-stage failure rate of startups is quite high. Out of 100 startups, only 40% go to the next level at Series A. Only 22% of startups reach Series B. Only 15% of startups reach Series C. Only 8% of startups reach Series D. As for the success rate, only 9% of pre-seed companies reach an acquisition. Only 12% of Series A companies reach an acquisition. Only 14% of Series B companies reach an acquisition. The most any startup can reach an acquisition is 16%. The failure rate is near exponential. It’s a hit business. You have a hit or you most likely will lose your investment. Redemption Strategies In an early-exit term sheet, the investors have the right to redeem their stake in the company before an acquisition. There are several redemption exercise strategies. The first strategy is to recover the principal investment. This makes the investor whole and now lets them play with “house money”. The second strategy is to place a third of the shares into a cash redemption to recover the initial investment, a third into the company as an equity stake, and a third as a cash redemption to place into the next startup. This keeps the investors’ fund evergreen, supports the current company, and expands the portfolio. The third strategy is to take half in debt and leave the other half for equity. This evenly divides the funds into both sides of the investment options. These are the most common strategies investors use to redeem their stake in an early exit term sheet. It’s important to take into consideration the needs of the startup and how best to support them. Payback Plans Not every funded startup continues on the venture path to a high payoff from the sale of the business. For those startups, investors using an early-exit term sheet can find a path out of the deal. There are several options for the startup to pay back the investors. The company can use a revenue share agreement. While the funds may not be available immediately for payback, the company can pay out of incoming revenue over time. This is typically 2-3% of top-line revenue and is paid monthly. In many cases, this will take more than a year to pay off. Other options include the following: The CEO can put the company up for sale and pay off the investors with the proceeds. The CEO can pay off the debt or assume the note with a personal guarantee. Other investors in the company can buy out the early-exit investors as well.  The follow-on investors can pay off the debt to remove the investors from the cap table.  The company could declare a dividend to the investors and pay it out over time.  The purpose of the early-exit term sheet is to provide the investor a path out of the deal. Operational Involvement In managing an early-exit term sheet, it’s important to facilitate the ongoing information rights due to the investors. Most term sheets provide rights to the company’s financial statements, including the income statement and balance sheet as well as the cap table. This duty is often left up to the founder to follow up. In the rush to close sales, hire employees, and make the company successful, the founder sometimes leaves the information rights duty undone. For an early-exit term sheet, it’s important to maintain this duty. It’s best to set up a service that accesses this information regularly, say monthly to provide the investors the information. Most investors believe that legal control is the best way to enforce the terms and conditions of the term sheet. A better way is operational control. By gaining access to the company’s accounting system and bank account, the investors gain a better understanding of the company. The more the investors know the company’s situation, the more they can help the company achieve its goals. 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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Managing Your Capital Effectively

Fundraising /

2 min read Startups often struggle to obtain, preserve, and manage the amount of capital needed to get the proverbial ball rolling. Today, we share two tricks on how to get around this problem: equipment leasing and accounts receivable factoring. Learn how these methods can earn you capital upfront and help you maintain throughout your production and sales processes. Equipment Leasing Equipment leasing lets you borrow funds to obtain assets such as computers, machinery, and other items you may need to build your product and run your business. This method works best for cash-flow management when you have a long-term need for the equipment.  Instead of raising equity funding to buy the equipment, you can lease the equipment- an less expensive method that spreads the payments over a period of time rather than requiring the funding for the equipment upfront. This works well for businesses that are capital-intensive. There are two types of leasing. The Finance Lease (also called the Capital Lease) and the Operating Lease. The Finance Lease is a long-term arrangement in which the startup is required to pay the lease rent until the end of the contract, which is usually the life of the asset. The Operating Lease is for a shorter period of time and is often cancelable.  Providers of equipment leasing must have a license and cannot hold or offer real estate. The lease period cannot be fixed for less than three years, except for IT and computer equipment. Leased equipment appears as an expense on the income statement rather than on the balance sheet, which would reduce the startups’ liquidity. Over the long term, the cost of the asset will be higher than that of an outright purchase. It’s best to look for a closed-end lease without a balloon payment at the end. An open-end lease requires you to pay the difference between the value of the equipment and what you’ve paid for it so far. Factoring Factoring is selling your accounts receivables to a finance company at a discounted rate. It’s not a loan, you are not taking on debt. Rather you are selling your invoices for cash, albeit at a discount. Businesses with a cash-flow shortage often use factoring as it’s a fast way to access capital without taking on debt.  When you sell a physical product and invoice the customer, it can take up to sixty days or more before they pay.  Factoring provides funding by reducing your accounts receivable by selling the invoice. The factoring company gives you cash immediately when you sell and takes a transaction fee on the use of their funds. The factoring company is now at risk for non-payment. Factoring works well for consumer product companies that have cash-flow challenges as the business requires capital to build the product, sell and ship the product only to collect payment later. This method reduces the amount of working capital needed and may reduce the amount of funding you need from equity capital raises.  A typical factoring arrangement gives the business 85% of the value of the invoices and keeps 15%. The factoring company often charges a processing fee and a fee for however many days it takes the customer to pay the invoice. These two costs add up to be the discount the business is paying for the receipt of cash.  Keep in mind that your customers will know you are factoring as the invoice will be retitled into the name of the factoring company. Read more in our TEN Capital eGuides: https://staging.startupfundingespresso.com/eguide/ 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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Ways a Startup Can Achieve an Exit

Fundraising /

2 min read There are many ways to exit a business, each with its own benefits and drawbacks. In this article we discuss the many ways in which a startup can exit the marketplace. Buyer Options There are several options for selling your business. Below are a few buyers from which you can choose: Strategic: The buyer buys your business to provide strategic value for their company. Financial: This buyer looks solely at the financials, in particular the cash flow, and buys the company without consideration to the strategic implications of their business. Management Team/Employee: This buyer works in the company and wants to own the business or continue to run it. Competitor: This buyer is a competitor and wants to take your business off the market by merging it into their own. Private equity: This is a buyer who plans to take over the business with a new management team and business plan. Generational transfer: This is typically a family member who wants to take over the business. Other Exit Options There are several other ways to exit a business. Some options include: Selling the business to an investor. This provides liquidity to the owners. The downside is it’s not clear what happens to the employees and the direction of the company. Develop an employee stock ownership plan. This transfers ownership to the employees and brings tax benefits to you. The downside is that the valuation will most likely be lower than an outright sale. Use a management buyout. This provides liquidity to the owners but can take some time to complete, even years. Transfer the business to a family member. This provides the family member with an income and potentially a career. There are estate tax consequences that must be considered with this option. In exiting your business, consider the impact not only on yourself, but also on the employees, customers, and others associated with the business. What If It Doesn’t Sell? Most startups are launched with the idea of selling the business for a substantial gain in five to seven years. Many companies reach that stage and find they can’t sell the business, at least not for the price they want. Here are some options: Reduce your burn rate to zero and keep running the business. Split up the business into its component parts (team, inventory, technology) and sell to multiple buyers. Sell the business to the other founders or to investors and take a revenue share for your equity portion of the business. Line up a manager of the business to take your place and then dividend back to the investors a portion of the revenue until they receive a payback amount. While you may not reach a full acquisition as planned, there are several ways to exit the business and pay back the investors. Read more in the TEN Capital eGuide: https://staging.startupfundingespresso.com/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

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