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The Due Diligence Process

The Due Diligence Process

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    Startups in Trouble

    3 min read What are some warning signs of startups in trouble? Often, startups will find themselves falling into unfavorable business conditions. Whether you are on the side of the startup or an investor, it is essential to recognize when a startup is in trouble and know how to manage it best. Warning Signs As an investor, you can often see warning signs of trouble in small ways before becoming full-blown in the startup. The following are warning signs to look out for: The CFO quits unexpectedly. The paychecks to employees bounce, and it’s called an “accounting error.” Information from the CEO becomes limited, and they don’t return phone calls. Administrative people are let go without explanation. They missed revenue expectations- again. Founders leave the company without six months’ notice. When you notice things seem out of the ordinary, it’s best to contact the team and ask for a straight-up answer. Managing In A Downturn When running a startup, there will be upturns and downturns. Managing a downturn takes a different approach than the upturns. In an upturn, it’s about increasing your top line, hiring new employees, and increasing market share. In a downturn, it’s about keeping the lights on, getting more productivity with fewer team members, and living to see another day. Here are some things you can focus on doing: Seek advice and guidance from others such as investors, mentors, and CEOs. Don’t delude yourself into thinking it’s better than it is, or it will turn around soon. Acknowledge that it’s a bad situation and take action. Get a little aggressive with the steps that you must take. Reconfirm your commitment to your company and mission statement. You’ll most likely need to take on extra responsibilities, which will require more of you. Downturns bring new market opportunities, so start looking for them. Common Startup Mistakes Startups make many mistakes. Here are two common ones to avoid: Thinking you must have the perfect product before you talk with anyone; including customers. Many startups go into development mode until they have their first product and then launch it to the world. Often with a thud. Involve customers at every step of the process. Customers should come before the product. Not after. Hiring the wrong people. Many startups hire people they know rather than people with skills. Some hire with the notion that the candidate ‘needs a job’ rather than ‘they have the skill.’ Other hiring mistakes include: Hiring B people instead of A people. Hiring someone to fill a specific position without fit to culture of the company. Hiring someone for work that is not yet defined or funded. The Must-Dos In running a startup, it’s essential to focus on the essentials of the business. In your strategy planning, identify the Must-dos. The Must-Dos have to get done. Beware of the Nice-to-Haves. If you hear yourself saying, “Wouldn’t it be nice if we did this?” it most likely will be taking you away from the essentials. Here’s how to protect your time in the business: The first rule is to say no, and often, freeing up time for the Must-Dos. Watch out for commitments that are recurring, such as meetings that happen every week. If you can’t say no entirely to a commitment, then bound your commitments. Don’t sign up with open-ended projects that aren’t well defined. Focus your efforts on the core aspects of the project, such as building the processes and enabling others to carry the project forward. Skew to the activities that can grow, then scale. Look for activities that directly contribute to the Must-Dos and focus on those. The Value of Confidence An entrepreneur raising funding must demonstrate confidence. Investors will look for someone who has faith in their plan, their team, and themselves. Often, entrepreneurs fake confidence and come off looking cocky. This is unfounded confidence. True confidence inspires others and persuades them to support the company. Investors look for this in the founder as he must attract others to join the team and customers and partners. Founders who inspire others have a greater chance of success at the early stage of a startup. Read more in the TEN Capital eGuide: https://staging.startupfundingespresso.com/negotiations-and-valuations/ 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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    Are you Ready for a Series A Fundraise?

    1 min read Are you considering launching a Series A fundraise? For startups not requiring FDA, you will need the following before starting a Series A: A product with revenue preferably above $500K/year A growth plan to reach $10M annual revenue A strong team with growth company experience A credible funding plan to maintain growth with reasonable burn rates Updated financial proforma showing growth plan and use of funds Pitch deck showing your growth plan You May Have to Run a Seed + First If you are aiming for a target valuation, you may have to raise a Seed+ round of $500K to position the company with the proper KPIs and growth rates before pursuing the Series A. Read more from TEN Capital: 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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    What do VCs Invest In?

    1 min read  What do VCs Invest In? What do VCs Invest In? I’m often asked what venture capital looks for. When looking to invest, VCs look for emerging tech markets with strong growth projections. These sectors include blockchain, AI, Data Analytics, and other strong growth areas. They do this partly because there’s usually a strong deal flow and it’s easy to explain to limited partners. VCs also look for platform-based businesses, rather than solo products. They look for the following: Recurring revenue, Virality factors, Network effect components, Very large markets, Strong teams, and a scalable business model. Also, traction in your business and exits of other companies in the sector drive interest as well. Are You Venture Fundable? If you want to raise venture capital funding, then check these points to see if you are venture fundable: Do 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? Read more from TEN Capital: 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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    Team Is the Only Thing

    1 min read  Team Is the Only Thing Vince Lombardi once said, “Winning isn’t everything, it’s the only thing”. In startup investing, “Team isn’t everything, it’s the only thing”. All problems will ultimately be solved by the team. If they can’t solve it, then the business will fail. In many years of angel investing, almost all failures trace back to the team not being up to the task. In reviewing a deal, the investor often makes the mistake of matching the team to the current problem but not future problems. In the earliest stages, one looks for a team that can build and sell the product, but will they be able to grow the business and later scale it? These are the future problems that must be solved. Hopefully, the CEO will change the team to match the needs of the business. Character Confidence Coachability In evaluating a team, there are elements to look for in a CEO for early-stage companies. The first is character. The CEO must have integrity and demonstrate character. Over time, the company will adopt the character of the CEO. If the CEO cuts corners, so will the rest of the company. The second is confidence. The CEO must have enough confidence in their vision, plan, and team that they can execute. Starting up brings challenges that require confidence to succeed. The third is coachability. This is especially true for first-time CEOs in that they don’t know what it is they don’t know. Experienced CEOs understand this better and recognize their limitations. CEOs who shun advice or forego coaching will run into problems later. Read more from TEN Capital: 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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    How to Get the Most from Your Board Meetings

    3 min read How to Get the Most from Your Board Meetings Board meetings are essential Board meetings are essential for gaining input and advice on how to run the business. To get the most out of your board meeting, start with an objective for the meeting, a set agenda, and prepared documents such as company financials. It’s helpful to get feedback from the participants before the meeting to adjust the agenda if necessary. This type of prep also ensures everyone comes prepared to tackle the objective. Recruit a board member to help you keep things on track by watching the clock and reminding the group when the time limit is up on a topic. Maintain the time allowed for each topic and create an offline conference call/meeting to handle topics that go over. Board meetings can be an invaluable resource to the CEO, but only if you manage it well. Preparing for A Board Meeting It’s essential to prepare appropriately for board meetings. You should set the meeting schedule well in advance, as much as a calendar year out. In addition to planned meetings, you may need to call additional board meetings in crises, such as when the company runs out of cash unexpectedly or gets hit with a lawsuit. Prepare documents far enough in advance, so the members have time to read the materials and prepare for the meeting. Use the board package to give the status updates and focus on the critical decisions to take. Use a standard format for the board package so the members can find things more easily. Set up the meeting agenda to cover the most important topics first. You may want to include a slide deck covering your planned talking points. These should consist of the company financials, including cash position. What to Expect Most of the work tasks performed in a formal board meeting are perfunctory duties such as approving minutes and reviewing financials and metrics. The board also weighs in on critical decisions around fundraising, strategy, and other topics. Board members will discuss whatever you put on the agenda. Ensure the agenda items are of strategic importance and prioritized, as the top items get the most attention while the lower items often get rushed. The more preparation you do before the meeting, the better outcome you’ll have. It takes time for board members to come up to speed on issues, so it’s best to send out background information before the meeting, so they have an opportunity to prepare. Read more from TEN Capital: 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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    It’s About Execution and Momentum

    2 min read  What do investors look for? It’s About Execution and Momentum. It’s About Execution Some startups think their business will succeed based on the idea, the technology, the market, or something else. They think their technology will win the day, or their ideas are so great, or the market is growing so fast that they will succeed based on it. For the investor, all of these are important but in the end it’s about execution. Execution turns the technology, idea, or market into a winning business. In your pitch, demonstrate your past execution successes and talk about how you will execute on the idea, how you will execute on your technology and how you will execute to penetrate the market. Investors determine investments based on the startup’s proven ability to execute. Traction vs. Momentum Many investors look for traction in a startup to gauge their progress. Traction declared as a single number on a pitch deck can be hard to judge as sufficient for investment. Many investors tell the startup, “nice traction, but we’d like to see more” Instead of traction look for momentum. Momentum demonstrates things are continuing to progress and move forward. Sales, team, product, and fundraising are the core four to look at. Investors look at these four because they represent the results of the startup’s work and not that of the market’s progression. Momentum must be shown over time in numerous updates by email, phone, or in person. It takes four touches before an investor gets a sense that there is momentum and it will continue. Startups should always have some engagement with customers. This includes alpha testing, beta customers, MVP customers, etc., so they have something to talk about with investors. For startups pursuing the enterprise sale, show your momentum through the sales funnel with your large customers. It typically follows the model of interest, qualification, trial negotiations, pilot test, full product launch, and ongoing support. Show how prospects are moving through the funnel and customers are upgrading and expanding seats. It’s the continuing forward progression that counts. Read more from TEN Capital: 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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    Who Should You Put on Your Board of Directors?

    5 min read  Who Should You Put on Your Board of Directors? The board of directors is a vital part of what makes a startup successful. If you are in the early stage, using funding from family and friends can create an informal advisory board. Try to meet with them monthly, and keep the group limited to a maximum of three members. After you launch your product and start raising funding from outside family and friends, create a formal board with three members- two members from the team and one investor. As you grow into a Series A raise in which you seek institutional capital, you can consider increasing the board to five members- two from the team, two from the investors, and one from the independent industry. The board will expand to include domain knowledge experts and investors who can help with growth issues. As you start to scale and raise Series B funding, you can expand to seven members- two from the team, three from the investors, and two from the industry. Later-stage investors gain a more significant portion of the board as they invest sizable sums of capital in the company and demand a board seat in exchange for their investment. The Ideal Board Member Board members are a crucial part of a growing startup. Building out the board is an essential step in setting up the company for success. Here are some characteristics of an ideal board member: Coming prepared to the meetings. They have read the material and done their research. Having an open dialog with the CEO and other board members outside of board meetings. Understanding the CEO and adjust their approach accordingly. Making efficient use of time with short and to-the-point questions and discussions. Prioritizing and focus on essential things. Encouraging others to participate and speak. Following up after the board meeting to make things happen. Having experience and steadiness in times of crisis. Board Member Types There are several types of board members, each contributing to the dynamics of your board. Here are some of the types you may see in your board room: The Cheerleader- Always optimistic and sees the upside to every proposal or situation. The Pessimist- Always pessimistic and sees the backside of every proposal and situation. The Analyst- Always analyzing the situation and commenting on the implications. The Skeptic- Always questioning the data and the implications of proposed solutions. A healthy mix of all the above is desired. For example, a board that is all cheerleaders leads to little scrutiny given to plans, whereas a board of pessimists will lead to no solution ever being good enough. The Independent Board Member You may want to consider adding independent members to your board of directors. The independent board member may add value to your company by bringing domain knowledge and operating expertise. Look for someone who has run a company of similar size and industry in the not-too-distant past. The independent often brings a new perspective to the company that can be helpful. Investors often look at independents as a sign of transparency, and in times of conflict, the independent can bring neutrality to the discussion to help resolve disputes. However, you should double-check that they have adequate time to commit to the board work. It helps to choose someone who is close to the startup or where the meetings will be held. The Board Observer? In general, the board observer is just that- an observer. This is a member who listens to the discussion but doesn’t actively participate unless called on to join in. The board observer attends your board meetings but does not have voting rights. They gain access to the board documents but don’t have a legal say in any decisions. They may even be asked to leave during discussions of a sensitive nature. Some investors negotiate a board observer position as part of their investment to monitor the company’s progress. Angel investors, corporate VCs, and others will use this as a means of staying connected. Read more from TEN Capital: 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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    To Raise Funding

    1 min read What does it take to Raise Funding? First-time fundraisers make many mistakes. Here’s a list of key points to consider before your next meeting with an investor for your startup. It’s show, not tell. There’s an old saying: If you tell me, it’s an essay. If you show me, it’s a story. To raise funding you have to show, not just tell. Forecasting alone doesn’t close the round. You must demonstrate progress towards it. Never show up to an investor meeting or call without something new in hand to show your growth story. Always talk about a customer and their engagement with your product or team. Show how the team is making things happen. Show how other investors are interested in committing funds.  Show how the product is working and what it is doing for the customer today. You must own it. In raising funding just as in running your business, investors look to see if you own it. Do you own the challenging problems, or do you avoid them? Do you own the core business, or do you delegate it to someone else?  Do you abide by the contracts you sign, or do you try and duck out when it goes against you? Investors are looking at how you run your business to see if you own it. So, in the fundraise, do you own the numbers?  Do you own the investor relationship? Do you own the results you show them after the fundraise? Read more in the TEN Capital eGuide: https://staging.startupfundingespresso.com/due-diligence-and-leading-the-deal/ Hall T. Martin is the founder and CEO of the TEN Capital Network. TEN Capital has been connecting startups with investors for over ten years. You can connect with Hall about fundraising, business growth, and emerging technologies via LinkedIn or email: hallmartin@tencapital.group

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    The Most Common Reason Why Startups Fail to Raise Funding

    1 min read What is the Most Common Reason Why Startups Fail to Raise Funding? I work with entrepreneurs every day on starting and growing their businesses. 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 great deal 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 a near 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. So if you’re starting to raise funding, I recommend you review your time and financial budget and make sure you are prepared for it. Read more in the TEN Capital eGuide: https://staging.startupfundingespresso.com/due-diligence-and-leading-the-deal/ Hall T. Martin is the founder and CEO of the TEN Capital Network. TEN Capital has been connecting startups with investors for over ten years. You can connect with Hall about fundraising, business growth, and emerging technologies via LinkedIn or email: hallmartin@tencapital.group

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