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Understanding Financial Fraud

Understanding Financial Fraud

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    What is a Startup Advisor?

    March 14, 2022

    2 min read What is a startup advisor? Startup organizations often require guidance from those with more experience and connections in their prospective field. Many startups are experts at their products or service but lack the business know-how needed to thrive. Startup advisors can help bridge these gaps, helping the startup to launch, develop, grow, and ultimately succeed. Let’s take a closer look at what a startup advisor is and what they specifically do Types of Advisors There are several types of startup advisors. Some of the most common include:: The Brand Name: This type of advisor offers their name to your company. This can be helpful to attract investors, employees, and customers. They typically bring some value in the form of advice, but it’s primarily their name. The Domain Expert: This type of advisor knows the industry well, both in technology and business. They can be helpful if you are moving into a new domain or the industry is changing rapidly. The Networker: The networker knows everyone in the industry or region. Those with a Rolodex and the ability to make connections can be very helpful, especially in fundraising and growing sales. The Business Modeler: This type of advisor may come from other industries, but they know business models and can bring new monetization tools to your business. The Confidant: The confidant can coach on the emotional side of running a startup. Startups have highs and lows that take the founder through the full range of emotions. This advisor can help the founder navigate through the ups and downs. Consider which role you best fill, and market to your appropriate niche. Advisor Roles In addition to there being many types of advisors, advisors also take many roles in their work with startups. For example, some advisors’ role is simply to fill gaps in the early stage of the startup. Advisors can be signed on as formal advisors, or some may provide support as informal advisors. In this scenario, there are no set goals, meetings, or formal advisor agreements. This is the most common way startups work with advisors. Some advisors take the role of a mentor in providing guidance. These mentors tend to focus their efforts on the founder. Some advisors take the role of consultant in performing very specific tasks for the company while others take on general responsibilities. Others may take on the role of a board of directors. This can be helpful in early-stage companies that are not yet ready to form aboard. Advisors here can provide oversight to the company and help the founder keep the broader picture in mind. Regardless of the role, you choose to fill, as an advisor, you will aim to bring experience, contacts, and networking to the startups you work with. Purpose of an Advisory Board An advisory board is a group of three to five people who provide advice on how to grow your startup. They bring experience, contacts, and domain expertise. Advisory boards help the company grow and succeed. In recruiting for your advisory board, startups typically try to consider the following: Advisory board members should contribute a diversity of skills, networks, and experiences. The advisors should fill in the gaps of the startup team which is most often a skeletal group. The board members should raise the profile of the startup with their reputations. They can additionally give the startup branding to help position the company with clients. Advisory board members should make a strong face for the company. Startups can use these members’ influence for recruiting the team, investors, and customers.  Advisory boards are different from a board of directors in that they don’t have any fiduciary roles and work informally with startups to grow the business.   Read more on the TEN Capital eGuide: Advising a Startup 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

    Best Practices for Startup Advisors

    March 4, 2022

    2 min read Being an advisor to startup organizations can be rewarding in many ways. Advisors can make a significant difference in a startup’s likelihood of success with the right insight, connections, and resources. For those who are beginning their career path as a startup advisor, it is important to understand the industry best practices to ensure they are providing the best help possible to the startups they engage with. In this article, we discuss these best practices and provide advice on how to be the best advisor. Characteristics of a Good Advisor The following are characteristics of a good advisor and great goals to aim for as you develop yourself professionally: The advisor has first-hand experience in the industry, running a business, closing sales, and more. They listen and can relate startups’ problems to actionable solutions. The advisor has been through the same challenges and experiences as the startup is going through. They ask meaningful questions and probe to get to the bottom of things. Understand the startups’ point of view and can motivate them. They have opinions and share them even if those opinions are not popular. Advisory work is an important part of their time. They are effective communicators. They are articulate and can persuade. Provide actionable steps to help accomplish goals. They bring a network of investors, other advisors, and collaborators. Understanding of others’ opinions. Their work is their passion. How to Be a Good Advisor In choosing a startup to advise, it’s important to find the right fit. Here are some key points to make sure you are a good advisor to the startup you are aiming to collaborate with: Spend time with the startup to really understand if you can add value and if they are ready for an advisor. Make sure you communicate well with each other and ensure the personal style fits. Spend as much time on selecting a startup as you would an investment. If they have other advisors, check with them about their experience. Find out where they need the help the most.   Ask what’s slowing them down and where they avoid engaging. That’s an indication they need help. Avoid the day-to-day minutiae and focus on strategic objectives. For the day-to-day work, make introductions to people who can solve those issues. Make clear you will play the role of devil’s advocate and that you will ask a lot of difficult questions as part of your job. Spend the majority of your time with the startup listening and only talking when you have something important to say. Get to know the founder and others in the startup outside of work.  Come to an agreement about the time commitment for your work with the startup. Give the founder the hard answers as in the end, they will appreciate that more than the kudos. If the founder seems to be scattered, help them focus on a few key priorities. If it turns out not to be a good fit, then help the founder close it out. Finding a Startup to Advise Here are some key points to consider when finding a startup to advise: Choose startups that you can help. Make clear the work you plan to do such as introductions, networking, advising on the domain, or just sharing business experience. Define the duration of the advisor work- one to two years is a common timeframe. Determine the frequency and type of meetings, for example by phone, in person, or in a group meeting. Set aside time to do the work.  Negotiate compensation based on the work to be done. Compensation consists of a half percent to one percent of equity vested over time.  Be prepared to sign a non-disclosure and non-compete agreement. Have informal reviews with the company throughout the process to make sure you are meeting expectations. Add your name to the team as an advisor to help with fundraising activities. Join sales meetings where you can add value. Keep in mind, advising can be rewarding but it always comes at a cost: time and effort.   Read more on the TEN Capital Guide: Advising a Startup 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

    Raising Funding for Startups

    March 3, 2022

    2 min read Most startup organizations are running on limited resources, a vital one being funding. Successfully raising rounds of funding for your organization can make or break the business, therefore it is important you know how to do it well. Part of successful fundraising includes knowing how much capital to aim for and when to begin your raise. In this article, we provide some insight to help your organization better decide on these two factors. How Much Funding Should You Raise? Every day I ask entrepreneurs how much they are raising. Most begin with the big number; the full and complete raise they anticipate running. This ranges usually between $1M and $10M. It’s good to have the big picture in mind, but some entrepreneurs are anticipating to raise this big number all at once because “they want to get the fundraising out of the way.” I remind them that raising too much money around will cost you the equity you don’t have to give up. Your valuation is low at the beginning. It’s best to raise only the funding you need to reach the next milestone and no more. As you grow the business, your valuation will go up and you’ll give away less equity. With this in mind, it can be helpful to consider breaking your fundraise into tranches.  This approach will save you time as well as make each fundraise easier. When Should You Raise Funding? When considering how much funding to raise, consider your funding requirements. To start, calculate your cash burn and estimate the need for new cash. Next, consider the preparation and timing issues. Start your preparation six months in front of the launch. Launch you’re fundraise six months before you need the funding. Use this six-month preparation time to introduce the deal to the investors and educate them on your current status. Finally, there are seasonal issues to consider. I wouldn’t start in early June, but rather wait until late August to kick off a campaign.   Read more on the TEN Capital Guide: How to Prepare for a Fundraise 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

    The Structure of Angel Groups

    February 27, 2022

    2 min read Angel investor groups require diligent administrative attention. There is a lot of required structure and organization. If you are managing or considering starting an angel investor group, it is important to keep the following structural considerations in mind. Investment Structure In setting up an angel network, you need to choose an investment structure. Here are some structures to consider:  Individual investments: The members can each decide if they want to invest and how much to invest in each deal. This allows for maximum flexibility for the members to invest in the deals they want. The drawback is the administration is high, as you must work with each investor in determining their amount of investment and signing of the documents. Group investments: The members invest as a group. In this structure, the investors can create a pledge fund to allow the group to decide which deals to pursue. Members have some decision-making control over the investment decisions. This reduces the administrative overhead. The group can choose to create a fund in which a screening committee or manager determines which investments are made. This requires the least amount of administration as the manager or committee makes the decisions on their own. Lastly, the group can choose to create a sidecar fund that invests from a fund into deals the members have funded individually. The sidecar fund provides members diversification on top of their individual investments. This is also a low-cost administrative structure as the sidecar investment is typically a calculation based on the members’ investment and does not require a manager to run it. Legal Structure There are several legal structures to use when setting up your angel network. Most angel networks form a Limited Liability Company (LLC). This gives the angel network a legal entity with which it can conduct business. The members often pay an annual fee to fund the operational activities of the company. Angel networks form in association with a university. Since the university is a non-profit organization, the angel group can work inside the university for its mentoring, networking, and other non-financial activities. For running a fund or making investments, the angel network inside the university must set up an entity outside the university, since non-profit organizations cannot engage in investment activities. Some angel networks form a not-for-profit LLC and then apply for non-profit status 501(c)3 with the IRS. Again, mentoring, education and other non-financial aspects can be done within the organization, but the financial aspects such as investing must be done outside. Finally, there are angel networks that form a not-for-profit LLC and then apply for trade organization status or 501(c)6. This structure allows the organization to engage in political activities. Those angel networks choosing a non-profit or trade organization structure must set up a separate legal entity for any funds they want to raise and deploy. Organization Structure There are two ways to organize your angel network: member-led or manager-led. Member-led groups let the member’s source deals, lead the investments, and recruit the members. They hire staff members to handle the administrative tasks. Alternatively, manager-led groups hire experienced professionals to perform key functions such as determining which startups to fund.   Managers work on screening the deals so only the fundable ones go through to the members. They prepare the founders to ensure that their documents and presentations are ready. They maintain communication with the startup throughout the process. They lead the diligence process and produce the diligence report.  Some angel groups partner with incubators, accelerators, universities, and other groups. The partner provides meeting space and shares the operational cost of the group. Some partners provide administrative support. The choice of member-led versus manager-led often comes down to the availability of someone to take the role of the manager.  Meeting Structure In setting up your angel network you’ll need to set up the meetings. Here are some key points to consider: How many deal flow cycles are you planning? Are you online, in person, or conducting both at the same time? How will you set up the screening meeting, the presentation meeting, and the diligence follow-up? Will there be time between the meetings? Do you include a meal, appetizers, or drinks? Where will you meet? How much time will the meeting take? What is the number of companies that will be pitching? How much time is set aside for networking? What are the duties to be done before, during, and after the meetings? How often will the board meet and when? Where do sponsors fit into the meeting agenda? Will there be education sessions? What are the needs of the members and how best to facilitate the education? Who is the best to provide the training? Consider these points in setting up the meetings as it’s a key decision set for the group. Read more on the TEN Capital eGuide: Leading an Angel Group Hall T. Martin is the founder and CEO of the TEN Capital Network. TEN Capital has been connecting startups with investors for over ten years. You can connect with Hall about fundraising, business growth, and emerging technologies via LinkedIn or email: hallmartin@tencapital.group

    Educate the Investor About Your Deal

    February 23, 2022

    2 min read They say it takes seven touches to close a sale – so it takes seven touches to close an investor. Some startups pitch to a group of investors and if they don’t see checkbooks coming out at the end, then in their mind it’s a failed meeting. I tell the startup, the investor doesn’t yet know if they are interested or not – they’re still trying to figure out what the deal is about. It takes four updates before the investor gets a sense of the deal and can start to form a decision. In the end, the investor makes a decision based on team and traction. The Introduction In the introduction, you can talk about the market size, growth rates of the industry, and the promise of a great outcome.  After that first mailer, the investor doesn’t care to hear any more about the market or growth rates. They only care about one thing – what are you doing to achieve the promise? Revenue Numbers I’m amazed at how many startups don’t know their revenue numbers. Come prepared to share those details with the investors in mailers and follow-up conference calls. One tactic I’ve seen used to good effect is to go to your investor prospects six months before launching the campaign. Tell them you will start your raise in six months and then ask if you can keep them informed of your progress. This gives you six months to educate the investor about your deal and demonstrate progress so when you are ready to launch your fundraise; you have a group of educated investors prepared to go. 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

    The New Normal for Fundraising (It’s All Online)

    February 23, 2022

    2 min read Fundraising like everything else has moved online, almost all of it. Traditionally, those who wanted to raise funding would meet everyone in their local area. You would pitch to the local angel network or investment group, meet with the local venture capitalist, and of course canvas all your family and friends. It was something the CEO had to do because investors wanted to meet with the CEO of the company. It was time-consuming. You had to get introductions to investors you didn’t know and you had to keep the investors up to date with your progress. It was not uncommon to hear about 50+ pitch sessions before receiving the first investment. The investor side was equally difficult. I ran an angel network in the 2000s, and I had many startups pitch to my investors in a dinner club setting. Ninety percent of the startups would go away, and we would never hear from them again. We had no idea what happened to them. Only about ten percent would come back and give us updates, reminders, and show some semblance of progress. Those are the startups we funded. Those CEOs built a relationship with the investor and provided enough information to the investor that one could see momentum and traction in play. The Present Today, there is a better way. You can use online tools to help raise funding for your business. The key to fundraising is to build an investor prospect list and update them on your progress.  It takes seven touches to close a sale – so it takes seven touches to close an investor. Tools to Raise Funding To raise funding, you need to: Access a large number of investors. You need to think worldwide-not just citywide. Use analytics to find the right investor. Understand the different investor types – angels, VCs, family offices, etc. Engage and maintain contact with investors.  You have to demonstrate progress not just state forecasts and make promises. Prepare investor documents— you need to come prepared with your pitch deck, due diligence box, and other key documents for investors. Prepare the campaign– know what are you are going to tell the investor about your deal. The rule of pitching is: if you don’t articulate it – it doesn’t exist.  If you have revenue but don’t mention it, you get no credit for it with the investors.   Read more on the TEN Capital Network education: 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

    Angel Investing: The Deal Process

    February 20, 2022

    2 min read The aim of every angel investor is to profit, and this is done by closing successful deals. In this article, we take a closer look at the deal process discussing topics such as stages of the deal, performing due diligence, and how to effectively lead the deal as an angel investor. Stages of the Deal Process A startup investment goes through a series of stages. It starts with the pitch presentation in which the startup introduces the deal to the investors. Then there’s the first follow-up meeting in which the investors dig into the deal to learn the details. Investors want to think about it and also want to see the startup continue to make progress. Then comes the Due Diligence phase in which the investors perform a more rigid review of the startup’s documents, team, and market. If the terms sheet has been established by other investors, then the investors review those documents. If not, the investor must negotiate the terms including valuation. Investors then check with their network to see who else may want to invest or put it out to other investors for syndication. Finally, there’s the closing of the round with the signing of documents. Not every startup makes it all the way through the process. Here are some key challenges: When the investors come together to dig into the deal, it must have enough traction and value propositions to maintain the investors’ interest before the investors commit significant time to it.  Deals may stall because the diligence process didn’t continue because the investors were distracted. Some deals stall because the startup and the investors cannot agree on valuation. Deals can stall out or come up with a lower investment amount because investors fell out at the closing stage.  It’s important to keep the momentum going throughout the process both on the investor side and the startup side. Deal Diligence Below are some tips on how an investor group can make the diligence process manageable: standardize the diligence process break it down into subtasks and define the process for each task assign the tasks to team members set target dates for completion and have periodic check-ins with each team member  focus on the key risks and not every aspect of the deal make clear to the startup how the diligence process works keep the startup apprised of the progress and status of their deal In most cases, the startup will find the process manageable if they understand how it works and if they see consistent progress to the goal. A good diligence process often provides new information and insight to the startup. Reducing time, making it efficient, and helping the startup, are the signs of a good diligence process. Leading the Deal In early-stage investing, someone needs to take the lead and screen the deals, diligence selected ones, and negotiate the valuation with the chosen ones. In most cases, the lead investor doesn’t want to be the only one in the deal and promotes other investors to join. This promotion process is called syndication. Most investors are looking for someone else to take the lead and actively follow the deal as it progresses. As a deal lead, make sure you do the following: Setup a strong process for diligence and bring legal, accounting, and other resources that can help in the process. Know the deal economics such as valuation, investor rights, control terms, and the path to an exit.  Keep other investors informed to attract them to the deal. Invest enough of your own funds to show commitment to the startup. Coach the startup on fundraising, especially for first-time founders. Move the funding process forward consistently without stalling out. Set aside time to join the board of directors. Add value to the startup where you can. Move to Close After the diligence is complete and the open questions answered, the team must decide whether or not to invest. It’s important to identify the risks and write them out in the report. The team should articulate an investment thesis that includes the opportunity in the deal such as how big it could become. The team should include the potential exit value and how long it will take to reach it. The team should also clarify their assumptions around the deal and write it out as well. To decide to go forward, take the temperature of the team. It’s either heating up or cooling off. Monitor the company’s progress to see if it continues to demonstrate a growth story. If enough investors want to move forward, then the investors should pursue it. If not enough investors want to move forward, then it’s a pass. It’s important to make a timely decision as the entrepreneur needs to know the group’s position.   Read more on the TEN Capital eGuide: Leading an Angel Group Hall T. Martin is the founder and CEO of the TEN Capital Network. TEN Capital has been connecting startups with investors for over ten years. You can connect with Hall about fundraising, business growth, and emerging technologies via LinkedIn or email: hallmartin@tencapital.group

    Understanding How Much Funding to Pursue

    February 17, 2022

    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

    Best Practices for Entrepreneurs Seeking Funding

    February 17, 2022

    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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