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Understanding Financial Fraud

Understanding Financial Fraud

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Fundraising, Investing

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    Fundraise Challenges

    June 13, 2021

    1 min read When beginning your fundraise, you will quickly find that there are fundraise challenges at every stage. That said, the challenge for each round of the raise can be very different. Seed At the seed round, the challenge is to convince the investor you can sell the product. At this stage, investors look for evidence that you can build and sell the product to customers. Customer interactions are important because it demonstrates to investors you are already in discussions learning about the customer’s needs. It’s helpful to have a list of twenty such customers and highlight your interactions with them and show your plan to build the product and close them. Series A At the Series A round, you must convince the investor you can grow the business. At this stage, investors look for evidence that you have systems in place for growing sales and building products. They look for processes that create a repeatable, predictable outcome. For example, your customer acquisition process shows a consistent conversion rate. Series B At the Series B round, you must convince the investor you can scale the business. At this stage, investors look to see you are now working on programs and processes that take your customer acquisition, sales, and product building to a new level. Read more from TEN Capital: https://staging.startupfundingespresso.com/education/ Hall T. Martin is the founder and CEO of the TEN Capital Network. TEN Capital has been connecting startups with investors for over ten years. You can connect with Hall about fundraising, business growth, and emerging technologies via LinkedIn or email: hallmartin@tencapital.group

    Market Valuation Methods

    June 6, 2021

    3 min read There are many different Market Valuation Methods, but which one is right for you? As a startup, you must determine your target valuation. Several methods can be used to accomplish this, and different ways work better for various companies. We have described each market valuation method below so that you can decide which is best for you. Market Comp Look at similar companies to yours that have recently raised funding to guide your valuation selection. Start with Crunchbase. Look up companies in your industry and sector to find out their fundraiser. Take the funding amount and divide by 0.2 or 0.3 to get the post-money valuation. Using 0.2 yields the high end of the range, while 0.3 yields the low end of the spectrum. Subtract the funding amount from the post-money to get the pre-money valuation. Step Up This method uses ten factors. Each factor adds $250K to the valuation. You may give partial credit for items that have some progress made. Factors include: The total market size is over $500M. The business model scales well. Founders have significant experience. More than one founder is committed full-time. MVP is developed, and customer development is underway. The business model is validated by paying customers. Significant industry partnerships have been signed. Execution roadmap has been developed and is being achieved. IP has been issued, or technology is protected. The competitive environment is favorable. Risk Mitigation This method assigns dollar values to the startup’s accomplishments in four categories: Technology, Market, Execution, and Capital. Technology Risk Mitigation Prototype developed 3rd party validation IP filed Market Risk Mitigation Market research Early adopter program in place Channel partners established Execution Risk Mitigation Experienced founders Prior exit Detailed execution roadmap in place Capital Risk Mitigation Early funding Angel Rounds Needed Add up all the values to get your pre-money valuation. VC Quick This method assumes the exit value your startup is being acquired for and works backward to calculate what your startup must be worth now. Estimate your exit value using industry trends or by using Price/ Earnings multiples. Calculate the post-money valuation. Calculate the pre-money valuation. Calculate the equity percentage owned by the investors. Venture Capital The Venture Capital method of valuation uses a discounted cash flow combined with a multiples-based valuation. The valuation takes into account cash flows in a best case, medium case, and worst-case scenario and then uses an industry multiple to set the anticipated sell price. The cash flows and exit price are discounted, giving three valuations – one for each scenario. Each is assigned a probability giving the final value with a probability-weighted sum of the three. Liquidation In this valuation method, the exit value is set to the value of the business at liquidation- the value of all assets minus liabilities, which values the business primarily for physical assets and branding. When you sell the business for assets only, it’s often about 10% of what you could have sold it for if it were an ongoing business. 5X Your Raise Most investors want to see the valuation for their money coming in at 20%-25% of the post-money valuation giving a 4-5X valuation based on the investment. For example, using 4X raising $500K, a $500K investment plus $1.5M pre-money yields a $2M post-money valuation. Using this method gives you a ballpark estimate for setting the valuation of your raise. Which Works Best? Does one of the valuation tools listed above stand out as the one for your business? Let us know which one and why in the comments below. Read more in the TEN Capital eGuide: https://staging.startupfundingespresso.com/negotiations-and-valuations/ Hall T. Martin is the founder and CEO of the TEN Capital Network. TEN Capital has been connecting startups with investors for over ten years. You can connect with Hall about fundraising, business growth, and emerging technologies via LinkedIn or email: hallmartin@tencapital.group

    Startups in Trouble

    May 30, 2021

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

    Are you Ready for a Series A Fundraise?

    May 30, 2021

    1 min read Are you considering launching a Series A fundraise? For startups not requiring FDA, you will need the following before starting a Series A: A product with revenue preferably above $500K/year A growth plan to reach $10M annual revenue A strong team with growth company experience A credible funding plan to maintain growth with reasonable burn rates Updated financial proforma showing growth plan and use of funds Pitch deck showing your growth plan You May Have to Run a Seed + First If you are aiming for a target valuation, you may have to raise a Seed+ round of $500K to position the company with the proper KPIs and growth rates before pursuing the Series A. Read more from TEN Capital: https://staging.startupfundingespresso.com/education/ Hall T. Martin is the founder and CEO of the TEN Capital Network. TEN Capital has been connecting startups with investors for over ten years. You can connect with Hall about fundraising, business growth, and emerging technologies via LinkedIn or email: hallmartin@tencapital.group

    It’s About Execution and Momentum

    May 3, 2021

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

    To Raise Funding

    April 12, 2021

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

    The Most Common Reason Why Startups Fail to Raise Funding

    April 6, 2021

    1 min read What is the Most Common Reason Why Startups Fail to Raise Funding? I work with entrepreneurs every day on starting and growing their businesses. In addition to building a product/service that the market wants, recruiting a team that is effective, and finding customers, they must also raise funding. A select few have the funding to start and grow the company but the vast majority of today’s startups do not. They have to raise funding from outside sources and they know it. The most common reason why startups fail to raise funding is that they don’t budget the time or financial resources to do it. When they ask me for help in fundraising, I ask for their business plan. In reviewing it I find they have a time and financial budget for building the product. They also have resources set aside for marketing and selling it. When I ask for their time and financial budget for raising funding, I often receive a blank stare. The four components of a startup are product, team, customers, and funding. They budget time and dollars for the first three but many miss the fourth one: funding. Fundraising typically doesn’t require a great deal of financial resources upfront but it does take some. Pitching to angel groups requires application fees. Putting investor docs in order requires some cost as well. The cost is not great but a budget of zero dollars makes it harder. The primary cost in raising funding is time. It’s a near full-time job for three to six months in most cases. Who on your team is dedicated to the process? Closing investors is not unlike closing a customer. You must have several interactions. For a new company with a new product is almost never one visit and you’re done. You have to go back and show how the product is improving. Getting the first customer is the hardest and as you gain more users it does get easier. The same is true with investing from investors. So if you’re starting to raise funding, I recommend you review your time and financial budget and make sure you are prepared for it. Read more in the TEN Capital eGuide: https://staging.startupfundingespresso.com/due-diligence-and-leading-the-deal/ Hall T. Martin is the founder and CEO of the TEN Capital Network. TEN Capital has been connecting startups with investors for over ten years. You can connect with Hall about fundraising, business growth, and emerging technologies via LinkedIn or email: hallmartin@tencapital.group

    The Due Diligence Box

    March 30, 2021

    2 min read The Due Diligence Box: What Is It and How to Prepare One. After an investor expresses interest in funding your deal, the first question to ask is: “What is your diligence process?” Having a due diligence box with the standard documents helps a great deal. It shows you are prepared and typically only requires minor additions for each investor. The Due Diligence Process While most diligence processes follow the same format of document review and analysis with a round of follow-up questions, each investor has their own start time, timeframe of work, and specific documents they look for. It’s best to ask for their process, and then follow along with it. If the investor does not have a specific process, then presenting the due diligence box should be enough. For new investors who are not sure what to do, you can offer to walk them through the diligence document by showing them all the relevant information. It can be helpful to contact the associate or analyst who will be doing the detailed work and open a direct line of communication with them. By building a rapport you may gain the option of contacting them directly for progress status and updates. You can also position your calls as opportunities to answer questions and to help the associate find specific pieces of information. Investors are busy and can get drawn away by other deals, so it’s important to be timely with your follow-up. Having a due diligence box with the standard documents helps a great deal with this. It shows you are prepared, and typically only requires minor additions for each investor. The Due Diligence Box In preparing a due diligence box, also called a data room, there are basic documents to include. These documents consist of: Income Statement and Balance Sheet 3-5-year Financial Forecast Cap Table- including shares outstanding Entity Filings including Articles of Incorporation Intellectual Property Filings- including patents, trademarks, etc. C-level Team Resumes There may be other documents you may need to add based on your situation. Reps and Warranties Contract One document that is helpful but not required to include in the due diligence box is a reps and warranties contract. Information taken in by investors about a startup’s product, team, financials, revenue and more can change rapidly during the startup phase of the business. One method of assuring the investor the information provided is true and accurate is for the startup to sign a Reps and Warranties contract. This is often tied to the diligence provided. This contract states that everything provided in the diligence is true and accurate and that no material has been omitted. If it later turns out that there’s a material difference between the business and the diligence, then the Reps and Warranties contract provides legal recourse to the investor for recovering any damages. For example, if the financial statements indicate there’s no debt in the business, then the investor assumes the business is debt-free. If the startup does in fact have debt, then the investor can take legal action against them. Some investors demand such a contract to be signed to ensure they have the full picture of the business. Signing a Reps and Warranties Contract can strengthen a startup’s case on the diligence provided. Read more in the TEN Capital eGuide: https://staging.startupfundingespresso.com/due-diligence-and-leading-the-deal/ Hall T. Martin is the founder and CEO of the TEN Capital Network. TEN Capital has been connecting startups with investors for over ten years. You can connect with Hall about fundraising, business growth, and emerging technologies via LinkedIn or email: hallmartin@tencapital.group

    How to Secure Investor Funding

    March 8, 2021

    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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