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    Understanding How Much Funding to Pursue

    2 min read  When I ask entrepreneurs how much they are raising the automatic answer is $1M. It just seems like the thing to do. Moreover, when I ask what they are going to do with it, many seem unsure. Alternatively, they provide generalizations like:  “We need it for marketing, or hiring key personnel, or developing products.” The response from investors (myself included) is usually along the lines of, “No S!#t?” How Much Do You Need? Before pursuing investment, one needs to consider how much to raise and how it’s going to be used.  When you go to pitch to investors make sure you are prepared. It should be clear as to exactly how you’ve come up with these funding requirements. Be comfortable explaining these funding requirements and exactly how you plan to put that money to work. Of course, it’s still an educated guess. However, having these items researched and detailed in your business plan (and pitch presentation) will build a lot more credibility with the potential investor. Figuring out how much you need to raise starts with: How much do you need for equipment, inventory, contract services (such as legal costs, marketing, sales, and more.)? This financial model is a MUST before setting the fundraising amount. Start Small I often recommend raising as little money as possible before you have customer sales because the valuation (how much the investor considers your company worth) is going to be quite low. Any money you raise in the beginning will cost a more significant portion of the equity in your company than follow-on investments down the road. In other words, the higher the risk, the greater the equity the investor is going to require.  It’s also better to raise a lower amount (say $250K) to get the product up and running and sold to a few customers. You always raise a larger round of funding later, but at that point, it should be a much better valuation for the entrepreneur–with the product and customer risks mitigated you don’t have to give away as much equity. Also, for every $1M you are trying to raise you’ll spend one year raising it and NOT doing much of anything else on your business. Raising only $250K will reduce the amount of time spent fundraising allowing you to work on your product, marketing, sales, and team building. Read more on the TEN Capital Network education: Click Here 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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    Best Practices for Entrepreneurs Seeking Funding

    Next2 min read Have ready the executive summary, slide deck, and business plan with financials.  It helps to have the core three documents – executive summary (one-page only), slide deck, and business plan already developed and ready to go. As the entrepreneur meets prospective investors, he can use the relevant docs for each meeting.  Publish a periodical email newsletter for interested investors  In the fundraising process, I see some entrepreneurs sending out email updates to highlight the progress of the company. Some come as often as weekly to show growth in sales, product plans, and other milestones. This shows the company’s ability to execute.  Finding a Lead Angel Find a lead angel to develop a terms sheet and start the funding round By finding a lead angel and creating a terms sheet, the entrepreneur removes the most significant barrier to fundraising – the negotiation process. Numerous angel investors find the initial negotiation and due diligence process too time-consuming. By eliminating this hurdle, the entrepreneur opens up the deal to a more significant number of investors.  “Investor-friendly “ Make the deal terms “investor-friendly.” First, every deal must be negotiated. The harder the terms for the investor to accept the longer the time it will take to negotiate. By making the terms “investor-friendly” through reasonable pre-money valuations, preferences, and other terms, the faster the process goes.  Due Diligence Next, push all due diligence docs to password-protected therefore, interested angels can perform due diligence more easily. The due diligence phase can be sped up by having all the essential docs already available. I’ve seen some entrepreneurs put everything on a protected website and then give out the password to interested investors. This knocks down the hurdle of trying to send 600 MB worth of documents through the email system.  Continue the quarterly email newsletter after funding, so investors stay with you. It’s important to keep investors up to date even after the funds are raised since investors can help in other ways. Some investors bring a Rolodex of contacts while others bring experience and coaching. By keeping them informed of your progress and challenges, they may be able to help. This practice is also useful for when it comes time for follow-on fundraising.   Read more on the TEN Capital Network education: Click Here 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 Use Mailers to Assess Engagement

    2 min read You have a good list. Next, you need to introduce your deal to the investors and demonstrate why it’s a good deal. The operative word here is “DEMONSTRATE.”  Most startups tell the investor why it’s going to be a good deal – great product, great team, great market, great future, etc. The key is you have to SHOW them it’s a great deal by highlighting the traction with customers, the experience and ongoing work of the team, and the improvements on the product. Investors see dozens of deals every day.  You can stand out by remembering one thing: Everyone promises – only a few deliver. What is an Investor? Every startup has a great future. Every startup promises the moon.  So what does the investor do? The investor looks for evidence of meeting milestones, a sense of momentum behind the deal. Your outreach to the investor is a campaign – not a one-time contact. You must demonstrate that you have traction. The team must be doing great things. The product must be progressing. If you can’t do anything unless you have a $500K, then this is going to get tough. You have to show you can do things with little or no funding. Your campaign mailers need to tell your story. Over the next four mailers, you need to showcase your story and how it works. Investors are busy, and they don’t have time to read 5000-word emails. They’ll read a half-page, maybe a little more and that is it. It would be best if you told your story over a series of emails as we work our way into the busy lives of the investor. Break the story down into smaller pieces and schedule them out so the investor can see progress being made weekly.   Read more on the TEN Capital Network education: Click Here 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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    Recurring Funding for Recurring Revenue Businesses

    2 min read The rise of the recurring revenue business as a standard business model has implications for financiers. Just as it changed how customers made payments, so it changes the way funding providers are changing the way they fund startups. Recurring Revenue Recurring revenue businesses don’t necessarily need sizeable discrete funding rounds. Today we see funding ongoing throughout the life of the business. As specific business growth needs to arise funding steps in to provide the resources. The funding comes in small amounts and when needed.  In this model the fundraise round is never closed – it’s always open. Investors should continuously be monitoring businesses to see who is reaching an inflection point and for opportune moments to invest in the businesses. I started my company under the name Texas Entrepreneur Networks about ten years ago after launching three angel networks in Austin. I built a network of entrepreneurs and investors now throughout the country using a recurring revenue model instead of a broker model. Building out the business doesn’t require large fundraise all at one time.  It takes some funding to bring on new developers here and provide for a marketing push there. Funding Methods I see a new method of funding for recurring revenue companies in which the companies continually raise small amounts of funding from investors rather than large rounds periodically. This new model works for our entrepreneurs who find it a great way to increase funding. Rather than spend a tremendous amount of time raising funding for six to twelve months, we’ve turned it into an ongoing program in which the raise is always open but doesn’t take too much of the CEO’s time. There are some key things you need to do to enable this model: At heart, it’s an investor relations program. We use email, website, and social media to introduce the deal to the investor and then keep the investor informed of the progress. A campaign is how you tell your story and convince investors you are worthy of investment. Investors are looking for a strong team and consistent traction. Your campaign should demonstrate both. It would be best if you were consistent and persistent about it. The motto is the “Fundraise is always open.”   Read more on the TEN Capital Network education: Click Here 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

    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

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

    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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    Managing Startup Failure: Early-Exit Procedures

    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

    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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