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How to Invest in Startups- Learn From Other Investors

How to Invest in Startups- Learn From Other Investors

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    How to Answer the Investor’s Questions

    1 min read In raising funding, the startup will meet with many investors, so how should they answer the investor’s questions? First, listen to the investor’s questions carefully. Answer each one directly and to the point. If a question requires a number, give that number. For example, if the investor asks how much revenue do you have, answer with: “We have $200K of revenue so far this year” or, “We have $10K of monthly recurring revenue”. Be careful not to answer every question with a story. Long-winded answers waste the investor’s valuable time and often miss vital information. If the investor wants to hear the back story for a particular question, they will ask. For example, “That sounds interesting. Tell me how you arrived at that model”. The investor often has a list of questions to go through and a limited amount of time. Not responding with direct and to-the-point answers only serves to lengthen the pitch process. Also, some investors may interpret the long and winding response as avoiding the answer, which raises a red flag. It’s best to be straight up. Read more in the TEN Capital eGuide: https://staging.startupfundingespresso.com/the-art-of-pitching/ 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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    Five Things Investors Love to Hear in a Pitch

    1 min read What are some things Investors love to hear in a pitch? Investors hear pitches continually throughout the year. There are so many that it can be hard to truly hear them all. But, from time to time, an entrepreneur will make a pitch that stands out from the crowd. Investors are listening for a few key things that show you have a real business with real growth. The rest is filler. Every entrepreneur has a story. Many are interesting; some are not. For investing purposes, there has to be five key elements to capture their interest: Real Traction Entrepreneurs who have sales and show it are head and shoulders above the rest. Most talk about the traction they will have in the FUTURE but not what they have today. In an investor’s mind, this equates to “No Traction.” Real Pain Point The entrepreneur has found a real pain point in the market and is filling it. Someone once said, customers pay for pain to go away. They don’t pay for nuisances or inconveniences. Real Team The company has someone building it and someone selling it, and those team members know what they are doing. Real Product The product works and is non-trivial to build. It’s more than just spin marketing. Real Growth Prospects The market opportunity has strong growth potential and will not run out of steam in a year or two. A startup pitching with each of these elements in place will always capture the investor’s attention. Read more in the TEN Capital eGuide: https://staging.startupfundingespresso.com/the-art-of-pitching/ 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 Secure Investor Funding

    2 min read How to Secure Investor Funding: A Guide to Your First Investor Meeting. Preparing for your first investor meeting can be daunting. You have to consider what you need to prep, how to answer investor questions, how to pitch the deal, and more. Preparing to Meet a Prospective Investor In meeting with a prospective investor, come prepared to discuss the following: Sales: ALWAYS have something to say about customer interactions. Even at the pre-revenue stage, you should talk about prospective customers and their reactions to your product idea. Team: Talk about your team and how they are closing sales, generating leads, building product, and in general, how great they are. Product: Talk about the customer’s ROI from the product, but don’t talk about how the product works in minute detail. Stay at the benefits level. Fundraise: You should talk about how other investors are interested in your product idea and demonstrate your fundraise traction. Also, ask questions of the investor such as: What do they invest in? What can they do for their investments beyond the check-writing? What advice do they have for you based on what they see so far? Who else do they recommend you talk to? How to Answer Investor’s Questions In raising funding, the startup will meet with many investors to answer their questions. So, how should the startup answer the investor’s questions? Listen to the question and answer it directly and to the point. If the problem requires a number, then give that number. For example, if the investor asks how much revenue you have, answer with: “We have $200K of revenue so far this year”, or “We have $10K of monthly recurring revenue”. Be careful with answering every question with a story, as this takes time and often misses the critical information. The investor usually has a list of questions to go through and a limited amount of time, and not responding with direct and to-the-point answers lengthens the process. Some investors may also interpret the long and winding response as avoiding the solution, which raises a red flag. It’s best to be straight up. How to Pitch the Deal to the Investor In pitching your deal to an investor, it helps to know your investor first. What type of investor are they- angel, family office, high net worth, or venture capital? What is their investment thesis- are they swinging for the fences, or do they want to make a series of doubles and triples? How much do they know about your market or application? What angle would be best for this investor? Should you focus on the market, the traction, or some other factor? In your pitch, emphasize the appropriate return for that investor and explain how your deal compares to other deals they have had. Spend time describing the market and how your product fits into the landscape. The best way to pitch an investor is to know something about them and adjust your pitch accordingly. Raising Funding Is Hard Lastly, raising a fund is hard. A Few Points to Remember: Build relationships first and find investors second. Divide your raise into tranches and give yourself a reasonable timeline for each. Investors will critique the business. Consider your business as an operational machine. Perform as much diligence on the investor as they are performing on you. Get a sense of which way it is going with your deal and adjust your approach. Just as you tailor the sale to the customer, tailor your pitch to the investor. Adjust accordingly. Start meetings with those you know and give you real feedback. Use analogies to help investors understand your deal’s value. Securing Investor Funding is a process; for every ten prospects, you’ll get 8 “Nos,” 1 maybe, and eventually 1 “Yes.” Keep going ‘til the money is in the bank. Read more in the TEN Capital eGuide: https://staging.startupfundingespresso.com/running-a-fundraise-campaign/ 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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    Startup Pitch Exercises

    2 min read What are some startup pitch exercises to practice before approaching investors? Entrepreneurs know the importance of the pitch to investors. There are many blog posts explaining tips and techniques on how to communicate your vision, passion, and story to the investor. Keep in mind the best practices. As an exercise in building your pitch, try the following: Give your pitch in numbers. Use only 10 words or less. Present your deal from your customer’s point of view. How would your customer describe your business? What value do you offer the customer? Also, try a pitch from the investor’s point of view. How would the investor describe your pitch? How your business makes money? And don’t forget your employees’ point of view. How would your employee describe your business? What your company does on a day-to-day basis? Lastly, give your pitch from your competitor’s perspective. How would your competitor describe your business? What is unique about your business? Most pitches tell a story Some entrepreneurs use their entrepreneurial journey as the format which goes something like this: I had a problem I couldn’t find a solution So I created my own solution Others started asking me for it So I started a business Walk Through the Executive Summary Another approach is the “Walk through the Executive Summary” which takes the audience through the sections of your one-pager. Here’s the problem and how much it’s costing the world This is my solution to the problem This is the product I came up with for the first version Here’s the advantage of it Here’s how the business model works Etc. As the saying goes, practice makes perfect. Read more in the TEN Capital eGuide: https://staging.startupfundingespresso.com/the-art-of-pitching/ 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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    Finding Funding

    2 min read Finding Funding: When and How Your Startup Should Look for Investors. If your startup is beginning to gain traction in your market, yet you feel held back by lack of capital, you may be wondering if it is time to start your first fundraise campaign. In today’s article, we will talk about how to gauge whether or not you are ready to source funding for your organization, and if so, where to look for it. Are You Fundable Yet? I talk with entrepreneurs every day about their fundraise. The most common question I am asked from those running early-stage startups is: “Am I fundable?”. My initial response is always to find out whether or not they have a growth story. For starters, are things clicking forward on sales, team, and product development? If you can answer those questions with substance, then you are in the game to consider funding. It doesn’t matter where you are on the journey; you just need to show you are making consistent and meaningful progress. What’s Your Trigger? When launching your startup, look for a trigger that indicates when to start your fundraise campaign. Common triggers include: Closing a lighthouse customer account or achieving a revenue target Signing up a new team member or advisor Finishing a beta version of your software or an MVP version of your product Closing funding from a lead investor In short, investors look at sales, team, product, and fundraise as the four core areas for progress. When you achieve a milestone in one or more of these areas, it can be considered a trigger to consider launching a fundraise campaign. Remember that when approaching an investor, you should have a milestone completed AND a milestone to accomplish. Where to Look for Funding I’m often asked where startups should look for funding. Luckily, there are many sources. First, start with your family and friends. These are the people who already know you and believe in you. Second, expand the circle to include current and previous coworkers. If accelerators are appropriate for your deal, then consider those not only in your geographical area but also in your sector. Most accelerators take companies from across the country. Many are now offering funding of $150K or more. Third, look for a local network of angel investors or family office investors in your area. These are high-net-worth individuals who have organized their startup investments into a formal process. Finally, you can approach venture capital. This option is only applicable if you have a deal that fits the VC funding model, which looks for a 10X return, scalable business model, healthy growth, and an experienced team. It’s best to start with those you know and use their funding to show support and momentum to those further out in your network. There are tens of thousands of investors in the startup world today. The key is to gain an introduction, make a pitch, and then follow up to close. How Long Will It Take to Raise Funding? I’m often asked how long it will take to raise a round of funding. It will generally take you one calendar year for every million dollars you are raising if you are working on it full-time. If you are only working towards your fundraising goals part-time, then it will take you longer. You’ll need approximately two months to prepare for the raise. This preparation phase includes preparing the company, the investor documents, and the initial investor list. It takes another 2-3 months to engage investors and bring them up to speed on your deal. They’ll want to monitor the startup for a few months to see the traction in motion. Finally, it takes about a month to close. After you close those investors, you’ll need to find another round of investors and repeat the process. For a million-dollar raise, you’ll need to do repeat this process three times on average. Some companies don’t need all of their funding in one go. Companies based on recurring revenue have the option of growing incrementally and can raise funding incrementally as well. Read more in the TEN Capital eGuide: https://staging.startupfundingespresso.com/running-a-fundraise-campaign/ 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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    SAFE Notes vs. Convertible Debt

    1 min read Many startups use SAFE Notes and Convertible Notes for their early-stage investments. So what’s the difference? A Convertible Note is a debt instrument that converts into equity later upon an event such as raising an equity round or reaching a maturity date. A SAFE Note is a Simple Agreement for Future Equity, a warrant to purchase stock in a future priced round. The SAFE can convert when you raise any equity investment amount and does not give the entrepreneur control of when. You can consider Convertible Notes to be legal debt while SAFEs are warrants. Neither a SAFE or a Convertible Note set the valuation but instead takes the equity round valuation. Convertible Notes include an interest rate while SAFE’s do not. Most Convertible Notes have a maturity date while SAFEs do not. Convertible Notes contain a discount rate that provides additional shares to the investor for investing early. SAFEs have no discount rate. SAFEs are often considered the more straightforward option than a Convertible Note, but as you can see, the Convertible Note provides more opportunities. Take our Convertible Notes vs. SAFE Notes Calculator here: https://staging.startupfundingespresso.com/note-calculator/ 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 Convertible Note: How Does it Work?

    1 min read A commonly used investment tool for funding startups is the Convertible Note. What is a Convertible Note? A short-term debt instrument that converts into equity later. If the issuer wants a debt instrument without conversion to equity, a promissory note would be a better option. With a convertible note, the investor receives accruing interest while holding the note. Why Use a Convertible Note? It works well for seed-stage startups as it removes the burden of a complex equity-based terms sheet which requires details on control and boards, and avoids issues of dilution and taxes. It’s easy to set up compared to most equity terms sheets which can be quite costly to develop since valuation must be negotiated and set at the time of signing. The convertible note also works well for investors who want to invest relatively small amounts. Investors seeking to make large investments typically want valuation set, board seats determined, and control provisions set which often requires an equity terms sheet. The convertible note is a useful tool for early-stage startups where there are still many unknowns about the deal. The Three Components: A Convertible Note has three components: the interest rate, discount rate, and cap rate. The interest rate determines the annual interest that will accrue. The interest is not meant to be paid out monthly or quarterly like a bank loan but will convert to equity later along with the principle. The discount rate is the amount of additional equity the investor will receive when the note converts to equity as compensation for investing early. The cap rate determines how much equity the investor will receive upon conversion. How Does it Work? The conversion from debt to equity is usually based on a future financing round. If there is no follow-on financing round, then the note often sets a time limit (say 5 years) at which point it will convert at the cap rate. The interest rate is typically a simple interest rate. If the price per share is $4 and the interest rate is 10%, then the investor receives $4*.10= $0.40/share in the form of interest. The discount rate gives a reduced price to the convertible note holder. If the price per share is $4 and the discount is 15%, then the note holder receives their share at a price of ($4 * (1-.15)) = $3.40. The cap rate sets a maximum limit at which the convertible note can convert to equity. For example, if the cap rate is $3M and the next round of financing comes in at $5M, and the share price is $4.  Then the price per share to the convertible note holder is $2.40. (3/5=.6; $4*.6=$2.4). Read more about Convertible Notes and take our Note Calculator here: https://staging.startupfundingespresso.com/note-calculator/ 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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    Avoiding Common Pitch Deck Mistakes

    2 min read Avoiding Common Pitch Deck Mistakes. Mistakes to Avoid Putting the right pitch deck together takes time and practice. It’s not something individuals often get correct on the first try. In developing a pitch deck, there are several mistakes that you can avoid. One of the most common mistakes is explaining how the product or technology works in great detail, but this isn’t necessary. Instead, use the pitch deck to focus on its benefits and what the product does for customers. Save the detailed explanations for later on in the process when you are in diligence. Some other common mistakes to watch out for are as follows: Not identifying the competition or claims there is no competition. Utilizing a font so small that no one beyond the first row can read it. Using too many words; overuse of words can distract the reader. The flow of the slides does not follow a logical story form. Displaying market sizing to distract the audience from the fact that you have no traction. Not having an “investment ask” at the end of the presentation, leaving investors wondering what you want from them. The pitch deck should focus on your: Core product Team Customer Fundraise You can flesh out the more extensive details later. Finally, the biggest mistake you can make with your pitch is not asking questions and not listening. Most startups spend their time talking when they should be listening for objections and concerns. Pay attention and welcome questions from your potential investors. What Your Pitch Deck Should Do A pitch deck is a brief presentation that provides your audience with an overview of your business. Ideally, the deck should answer any questions an investor might have. The primary goal of the pitch deck is to introduce your deal to an investor. Additionally, the pitch deck should serve as a way to show what is essential to an investor who may be considering an investment in your startup. A pitch deck is not is a means to explain the full history of your company. It is also not a means to explain how your product works. Tips for Pitch Deck Success After you’ve made your pitch, be sure to schedule a follow-up meeting with the investor. Good pitch decks show: What you are doing differently within your given sector. How you can grow more with funding. An ideal pitch deck showcases that the business’s proposed outcome will happen with or without the investor. In other words, your pitch deck should show that your future is inevitable. Ideally, you want to use your pitch deck to show potential investors that the results are there. Put those results up for everyone to see and show them what you have accomplished so far. The slides of your deck serve as the presenter, not the other way around. When pitching, avoid discussing multiple scenarios. Investors will find it challenging to keep track of what you’re trying to accomplish. Most importantly, focus on the core message: Product Team Market Fundraise Outcome Remember: You are the presentation; the slides are the presenter. Read more: https://staging.startupfundingespresso.com/the-art-of-pitching 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 Show Traction When You Are Pre-Revenue

    2 min read: We know that investors are looking for traction, but how to show traction when you are pre-revenue? Contrary to popular belief, even if you are pre-revenue, you can still show traction with your startup. Traction can be represented by any activity with customers, even without revenue. You can show customer engagement at all phases, even before you have a product. You should have customers coaching you on what product to build. First, when communicating with investors, always include customers in your discussions. Never engage an investor meeting, email, or conference call without new info about your customer and always mention it. If you are pre-revenue, you can still talk about the prospective customers you are working with to build your product and what they are saying. The customer problem is the most important thing because it shows you are close to the revenue source, and you are working towards obtaining it. Be able to name the customers, both the company and your contact. Never talk about the customers as a general group with vague and fuzzy references. Talk specifically about the problem they want to solve and how much it costs them. Next, show how you’re building your product to solve the customer’s problem. Discuss pilots, beta tests, MVP usage, and how the customers are engaging. Once you have a few customers closed, you have enough information to start building the Unit Economics story. Show the cost of acquiring those customers, qualifying them, closing them, and how it’s a profitable business. Place those customers in a sales funnel to show prospects moving through the funnel. Place upcoming prospects at the top of the funnel to show more are on their way. You now have a repeatable, predictable process. The secret here is that most investors don’t look for big revenue; they look for repeatable revenue. In your investor updates, show additional customers coming into the funnel and moving through it. Highlight that the cost and timeframes are the same, emphasizing it’s a repeatable process, and you’re just “turning the crank.” If you’ve decided you’re not going to talk with customers until the product is complete, then you may want to rethink that strategy. Involve customers from the start and get their help on it, and ALWAYS be talking about those interactions with your investors. Read more: 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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