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Challenges in Angel Investing

Challenges in Angel Investing

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    What is the Real Due Diligence Process?

    2 min read, I’m always surprised by how many investors say the team is the most important element of a startup, but how little the due diligence process focuses on the team. I can look back on successes and failures in my startup investing career, and almost all failures can be traced back to the “team wasn’t up to the task.” I recognize that I often underestimated the challenge at hand, but in all cases, failure was due to the team lacking skills or focused commitment. In running the due diligence process, it’s not about the product; it’s about the team. There are standard checklists, and the investor should verify the basics such as legal entities, tax filings, patent filings, etc., but the real due diligence comes when you go to the startup’s office and meet the team. I had a new angel investor ask me the other day how he should diligence a startup. I encouraged him to set up a meeting in the startups’ office and meet the team and interview each one. The first person you want to meet if you haven’t already is the CEO. You are assessing leadership, communication, strategy, and other key skills. If this interaction isn’t stellar, there’s no need to continue further with the potential investment. In reviewing the rest of the team, you want to check to see those on the team’s skill levels. If there are advisors or mentors, you want to meet with them to see how much time commitment they have for the project. In the end, time, skills, and focus will need to be applied, and you are looking to see if the team can do that. You can learn a great deal about a company when you go to their workplace. I had a friend who worked for IBM and considered investing in a startup by some of his former coworkers and set up a meeting at their office. When he followed the address, it led him to a skyscraper in the downtown area. There he found the team had rented out the entire 12th floor of the building. Needless to say, the startup ran out of cash in just 6 months. Walking through their office, you’ll get a much deeper sense of who they are and what they are doing. Products come and go, markets shift, and change, but the team is a constant. 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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    How to Move Your Angel Investor Network Online

    1 min read As businesses are becoming increasingly more virtual, you should consider moving your angel investor network online as well. In this COVID-19 world, making it challenging to meet in person, meeting online is now the standard. Moving your angel investor network online provides added benefits: More engagement from those who are busy or live/work too far from the meeting place Better fit for today’s angel investor whose primary work centers around a computer rather than in-person meetings Efficiency to the process as online meetings are typically half the time of physical ones Improved research as the investor can look up stats on Crunchbase, search online for competitors, and generally make use of online tools Expanded network range to include investors outside your geographic area Increased member participation through presentation availability anytime and from anywhere More contact with members through various online meetings, screenings, education, and diligence sessions Improved decision making as the investor can access online resources such as deal documents while seeing the pitches TEN Capital Can Help. Online meetings will augment your group rather than replace the physical sessions entirely. Social and networking events can continue for members to meet each other. Read more: https://staging.startupfundingespresso.com/ten-capital-network-for-angel-groups/ 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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    Yes, You Can Define an Early Exit

    2 min read At TEN Capital, we see several startups that are strong candidates for early exits. In looking at the history of angel groups and startup investing, a typical portfolio yields the following: the top 10% are big winners, 15% are medium winners, the bottom 10% go out of business, and the remaining 65% turn into lifestyle businesses that may be providing a nice income for the founders but will never provide a return for the investors. As an investor, I found it irksome to fund someone else’s lifestyle business. The startup often envisioned a high growth company but couldn’t find the growth rates or additional funding to achieve it. It was then that I decided to introduce the redemption right into the negotiations. It’s a convertible note structure that provides a 3X in 3 years (terms vary for some deals) redemption right at ‘investor sole discretion’, which means the investor has the right to ask for 3X the investment at the 3-year mark. So $100K investment would return $300K. These terms work well for startups with revenue and strong growth rates, but doesn’t make sense for pre-revenue startups or companies still looking for traction. If the startup is growing well at year 3, the investor can forego the redemption and stay for the equity exit. If the startup has turned into the “lifestyle” business discussed earlier, then the investor has an exit path. When I talk with startups about their exit plan (IPO, M&A, etc.), it’s frequently a vague and fuzzy conversation. When I put a 3X in 3 years on the table, it turns into a real and focused discussion. Those on the growth path can pursue it; those that aren’t typically won’t. Read more: https://staging.startupfundingespresso.com/3xin3/ 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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    Launching Your Own Podcast Program

    Podcasting is a continually growing medium through which to tell your story and build your brand in your own words. We at TEN Capital have been producing our successful podcast for over six years called Investor Connect, and are now opening up our expertise to other firms looking to begin their own series. But why produce your own podcast? Podcasting builds your brand. There are more than 850,000 podcasts active today. Podcasting continues to grow exponentially as it’s a great medium to tell your story and build your brand. People like it because they can hear the real you rather than just read about your company on a website or email. You can use podcasts to connect with your audience. Podcasts give you a channel through which to tell your story. Your podcast can reflect your personality and brand through the various show formats and styles. TEN can show you how to set up your podcast and position you for success. Podcasting tells your story. Everyone has a unique story. You can write it out on the website, but there’s nothing like hearing the story told in person. The podcast lets you tell your story in your own words. It communicates who you are and what is important to you. It takes the words on a website and gives them life. Consider using podcasts to get your message out to a greater audience. Podcasting attracts more startups to your fund. Podcasting takes your fund to the broader market and brings more deal-flow. Startups looking for funding also seek testimonials and references from other startups. In the podcast, you can showcase the deals you have done and the startups you have helped. You can bring startups you’ve helped onto the podcast to tell their story about working with you and your fund. Startups discussing their experience with your fund provides the best testimonials. You can repurpose the podcast into blog posts, youtube videos, and more to distribute through various channels, including social media. TEN Capital can help you set up your podcast program or even record a series of episodes you can use in a marketing campaign. Podcasting positions you as a thought leader to the Limited Partners Podcasting raises awareness for your fund with Limited Partners. LPs look for validation of your network and activities. Podcasting is an excellent way to capture your interaction with startups and other investors. You can showcase the deals you have done in the podcast and the startups you have helped. You can discuss your investment thesis and how it plays out as you predicted and discuss what changes came up. Discussing your experience with the fund provides the best testimonials. You can repurpose the podcast into blog posts, youtube videos, and more to send prospective LPs. TEN Capital can help you set up your podcast program or even record a series of episodes you can use in a marketing campaign. Read more: https://investorconnect.org/ 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 the Exit

    2 min read After investing in startups for twenty years and talking with thousands of angel, venture capital, and other startup investors, I’ve seen the biggest challenge is finding the exit. If you have invested as a startup investor, you know how easy it is to get into these deals and how hard it is to get out. If you are new to startup investing, you will soon learn how much it takes to grow a business. It’s not for the faint of heart. In funding startups, remember, not every startup should receive funding. If the company is not ready for funding, they will not only waste the money but also hurt their reputation in the community. Angel Investors look for a 44% IRR. IRR is the Internal Rate of Return and represents the return on investment concerning time, unlike ROI, which is return on investment without regard to time. The time value of money is important and should be part of your investment metrics. Also, there are many sources of funding for startups, of which angel investing is only one. There are venture capitalists, family offices, and more. Angel investors occupy a unique place in the startup funding ecosystem. It’s typically the first money in after family and friends funding is over. Angel funding is limited compared to venture capital or family office funding, which has deeper pockets. The longer you stay in the deal, the greater your risk for dilution by these follow on funders. Also, make sure you understand the value of your investment. While the absolute dollar amounts may not be as large as a venture capital fund, angel funding helps the startup cross the funding gap. To achieve an exit, you must define it yourself as the vast majority of startups will not do so. The key to a successful exit is a deal structure that gives you some control after signing the check. Equity only term sheets give investors little say in the future of the company or how to exit. You must have it in writing before you sign the check. Trying to come to an agreement after the signing is almost impossible as the gap between the startup and the investor is too significant to close. The deal structure is a Convertible Note with a redemption right for 3X your investment to be returned at year 3 of the investment at ‘Investor Sole Discretion.’ I call it the ‘3x in 3’ term sheet. On the third anniversary of signing the note, the investor has the option to convert the original investment to a three-times return ($100K in is $300K out) or to go on the cap table as an equity investor. In reality, there are many choices. In most cases, the startup is motivated to keep your funds in the deal and will negotiate terms to achieve it. As an investor, you must keep in mind what is suitable for the startup and yourself. In most cases, you will have ample opportunity to structure the 3X into a range of choices, including debt, equity, and cash. If you want to provide advisory services, then set it out up front with a clear definition of the work to be done and the compensation paid. At the very least, include a clause that gives you an advisory fee for work done with a stated hourly rate if the opportunity arises in the future. Read more: https://staging.startupfundingespresso.com/investor-landing/ 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 Due Diligence Process

    2 min read When embarking on a new investment, it’s essential to have a Due Diligence process in place to check the basics. This process will vary from deal to deal based on the risks associated with each one. Start by making a list of your concerns. In most cases, you’ll sign a terms sheet with funding contingent on due diligence. It helps to tell the company about your diligence process, such as what documents are required, what steps you take, and how long it will be, thereby eliminating the “how is it going” calls. There are three phases to diligence: Documentation Diligence, Team Diligence, and Domain Diligence. Documentation Diligence Ask the startup for a list of critical documents. If they are not all in one spot, ask the team to put them into a Google Drive folder, or create a more secure Box.com account. It’s common for startups to continually add to their diligence boxes and have many people view them simultaneously, so keeping everything in one place is very helpful. The primary documents should be: Entity filings and articles of incorporation Patent filings Income statement Balance sheet statement 3-5 year financial projections Cap table Other documents related to the business, such as lawsuits, product breakdowns, customer breakdowns, etc. should be requested. Read each document and check to see if it matches what you understood about the deal. Note any differences and ask for clarification. You must review the diligence documents so you understand the business. You may need to sign a Non Disclosure Agreement (NDA) for sensitive information. It’s standard practice to do so as the documentation should be kept confidential, even without an NDA in place. Team Diligence Thoroughly researching the startup’s team is the most critical part of the Due Diligence process. Meet with the team and assess their skills. In almost every startup failure, the investor can trace it back to the team not being up to the task. It may be the task was under-estimated by all upfront, but with the right team, the company can succeed. Gather references for the CEO and call them up to hear what they have to say about the founder, including management style, how they pivot, and their team dynamics. In most cases, you’ve heard the CEO pitch, but it’s essential to understand the CEO skills set, including what is there and what is not. The rest of the team needs to bring the necessary skills to succeed. Domain Diligence Let’s break this process down into steps: Research the competition to determine the company’s position in the marketplace Check the positioning of the company in the marketplace Identify the value proposition and how well it resonates with customers Look at their pricing compared to the competition Check the industry to see the conditions in which it will grow or decline Once you finish diligence and have your questions answered, ask for their wiring instructions Remember, break it down into baby steps Finally, use the model of “fast no’s and slow yes’s” in reviewing a deal, so the entrepreneur is not chasing you for a response. 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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    Tissue Culture and Cannabis

    2 min read Of the many emerging technologies in the cannabis market currently gaining steam in the North American market is called tissue culture. Tissue culture itself is not a new technology. Many fruits grown around the world use this same technology. Tissue culture means that growers are creating a seed that has known genetics. Using known genetics ensures that the apple or banana a customer buys at a grocery store in New York is the same as the apple or banana a customer would buy at a grocery store in LA. Tissue culture ensures that things like taste and ripening time remain consistent across the board. Most cannabis is grown using mother plants. At the end of each 4-month harvest, the growers clip the top of the plants. These clippings are planted as seedlings to produce the next crop, and so on. The problem with this is, you can’t determine whether the mother plant has consistent, stable genetics from one growth cycle to another. There has been so much genetic drift over thousands of years of growing cannabis. In turn, you can’t have an infused drink or chocolate bar without knowing that the genetics is stable. This is where tissue culture comes into play. Growers are looking to technology to ensure that the plant: Tastes the same every time Works the same every time Grows the same every time While the tissue culture trend is just starting to emerge in the cannabis space, and it will likely become a standard means of growing soon. Today, most consumers are no longer purchasing cannabis to smoke the flower. Instead, they are purchasing cannabis-infused products where consistency is critical. Due to this shift in the market, we are likely to see the cannabis industry turn more toward tissue culture so that suppliers can ensure that customers are receiving a consistent product. 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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    Deal-Flow is Crucial, but Where to Get it?

    1 min read When starting as an Angel investor, it’s essential to set up several sources to consistently find deals that fit your thesis and track those that meet your requirements; this is called “Deal-Flow”. It’s helpful to network with lead investors and build relationships with investors in general so you can share information about deals and provide/receive referrals.  Here are some sources to consider: Ping the members of the group regularly for deals they recommend. Avoid the ones in which they say, “I’m not interested but perhaps others are.” Look for the deals that members want to invest in. Identify investors outside the group who fund quality deals in the same sector and stage as your group and set up a relationship to share deal-flow. Follow up with your portfolio companies about deals they recommend. Consider other angel networks in the geographic area or sector area to provide deal-flow. Talk with service providers such as attorneys and accountants about deals they see needing capital. Join community groups that foster the sectors your group is interested in and have the members attend those group meetings. Review online portals for deals raising funding. Finally, establish a reputation for providing mentorship, feedback, and support to position the group as the go-to resource for startups. Find out how TEN Capital can help you source the right deals: https://staging.startupfundingespresso.com/investor-landing/ 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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    Building Your Investment Thesis

    2 min read For investing in a startup, consider the future and what will be needed then; don’t just look at the world as it is today. Map the trends and extrapolate out and consider what will be needed five years from now based on the direction of technology, the markets, and other factors. From this, you can build a view of the future and inform your investment thesis and begin your preparation for investing in startups. Creating Your Investment Thesis There are too many deals to look at all of them. You’ll want to narrow the field by building out your investment thesis. There are a few crucial steps to take if you haven’t done so already. Step One: View 50 deals, then write down what you like and what you don’t. TEN Capital is a great resource to help you field deals regularly, show you how to review them, and what to look for. Step Two:  Follow up one to three months later to see how each deal is working out. Checking-in regularly will inform your investment thesis as you will see some deals progressing forward, some stall out, and others pivoting to something else. Step Three: Write out your investment thesis in full, including: Your observation about a macro trend in an area you care about The position of the company in the trend Characterization of the company that gives it a competitive advantage Conditions for investing based on price and other factors Example investment thesis statements include: “Healthcare is moving to the home.” “Companies providing technology-enabled services will succeed.” “Companies with recurring revenue and a CAC:LTV ratio of 1:8 are preferred.” “Companies with revenue above $500K and pre-money valuation below $5M are preferred.” It’s essential to write out your investment thesis ahead of time, as you’ll often return to it. Allocating Funds In general, it’s best to keep your angel investing to 3-5% of your discretionary investment funds. These are funds you can lose and not impact your lifestyle or other investments. Determine in advance how much you plan to invest. Use a five-year window. Once you have that number, know how you’ll access those funds for when you need them. Keeping these funds separated from the rest of your investments will make managing the process easier. 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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