In this episode, Michael speaks with Hall Martin, the Founder of TEN Capital. Hall specializes in Angel Investing, and helping early-stage startups raise Seed and Series A funding. Throughout the conversation, Michael and Hall discuss why you should seek funding, how to do it, and the ins-and-outs of startup investing.
Hall launched TEN Capital as the Texas Entrepreneur Networks in 2009. Today, the firm has over 12,000 investors in its network, and has helped startups raise over $700M and counting. Hall serves as the Vice-Chair of the Baylor Angel Network. He previously led the Central Texas Angel Network (CTAN) as its first Executive Director, where he achieved over a 40X return for the investors. He is the founder and director of the Texas Open Angel Network, which is a 501(c)(3) non-profit dedicated to the education of angel investors. As a part of that program, he hosts the Investor Connect podcast series. He is also a Founder and initial Managing Director of SKU (Incubation Station), a consumer product goods accelerator based in Austin, Texas, and the former Managing Director of AccelerateNFC, an accelerator based in Dallas, Texas, focusing on Near Field Communication. Hall serves as an Adjunct Professor for the University of Texas, leading the Idea to IP program, which fosters startups from the engineering program.
SKIP TO THE GOOD PARTS:
- 05:00 — What is TEN Capital?
- 14:00 — What does Hall look for when investing in startups?
- 17:00 — How is Fundraising different for Established Companies vs. Startups?
- 24:40 — Why would you consider fundraising?
- 34:55 — What should you have before fundraising? What’s TEN’s process?
Hello, listeners. This episode is sponsored by domain magnate and check out our latest service, the business management service where we onboard and manage different online businesses including sales, content, and productized service businesses, with revenues between 100,000 and $1 million per year, where we can grow your business through SEO CRL. and improving all aspects of business improving slps employees team, making things more efficient and effective. And you can find out more by going in the link in this episode. And today we have Hall Martin, the founder of Ten Capital. Hi, Hall. I’m excited to talk to you about startups. I had a little bit of experience with that myself investing and start in some startups of the early stage. I’ll be honest, it did not work out. I lost a bit of money on that. And so that’s why I’m really excited to learn a little bit more about that to see how can you really predict whether a startup would well or not? Are there any tricks to that? Or is that just investing in all the things and hoping one of them will will will work out?
Yeah, only a small fraction of the startups ever make it to an exit? I think it’s about 16%. Even after the first round of funding, 40% of startups are no longer on the venture track. They’re now going sideways. So it there are a lot of startups out there. And the key is just to be in the right ones to invest in. And thing we look for is number one, the team do they really have a complete team and someone’s building it someone’s selling it? And they have the skills what they’re trying to do and to are they in a large market? Is it a growing market, you have to be in a growing market in order to make the startup really getting a attain altitude, so to speak. And then you look for the traction execution capability? Are they really making it on sales team product and fundraise? Are they able to execute on the plan? Everybody has an idea, but everybody has execution? So those are the three things we look for, just to know if we should continue the discussion with them.
Sounds good. So Hall, give us a quick introduction to your company. How big is it? How long have you been around? And what are the main services you provide?
Great, the name is Ten Capital. We started 12 years ago under the name Texas entrepreneurs network in 2009. Since then, we’ve grown our investor network to 12,000 investors. A third of them are Angel capital, angel investors. Third are venture capital and third are family offices. And we now have helped our companies over the last 12 years raise over $900 million in funding for their startup. Several 1000 startups have gone through our program, which had heart is Investor Relations and introductions, we’re helping the company get their documents Ready, go out engage investors and teach them how to close investors in their process.
And how long does does the process take for a startup owner? How long would it take them from the start of your program until they get some investments.
Most people are running campaigns with investors that take three to six months, my rule of thumb is for every one day in dollars you’re trying to raise at the early stage, it will take you one calendar year to raise it. And so we talked to a lot of people about who want to raise three or $4 million. We’ll start with 500k. And let’s raise that, and then we’ll raise more afterwards. Because if you raise too much at an early stage low valuation, you’ll be giving away too much equity. So it’s best to milestone or tranche after the fundraise and not trying to do it all in one go. That’s
Interesting. And when then people come to you and say they want to raise, Do you have some rules of thumb in terms of what the business should should have? Or not have? Like, do sometimes just look at it and say, you don’t really have a business? That’s not serious? Like what? How would you categorize it? How do you define it?
So in the very early stage, when you’re pre seed, you’re typically raising from family and friends, you don’t need us, you’re just going to your network. And at that point, you have an idea, you have a concept and you’re starting to build a product. When you come to us we look for you have actually built a product and you sold it to somebody, we look for product validation and market validation. That’s what you look at the seed level. When you get to series A raising, what you’re finding is you have a growth story, you’re able to grow revenue every month, month over month, you’re hiring team members, you’re expanding, you found product market fit at some level. So at each stage, there’s a different state of the product and a different state of the team. And a different state of traction in the very early stages is just talking to people and getting an idea of what to build. But then you’re mostly raising from your own network is when you go outside that network that you really To start demonstrating real execution and traction,
Okay, so you mentioned a couple of stages. So the Seed level is that the initial stage for any startup in terms of capital raising,
You’ll find companies are starting earlier and earlier to go out to raise funding. And they now have a category called pre seed. And this is before I’m getting my seed funding. And this is usually when it’s two people with an idea and they’ve got maybe some code developed, or they’ve got some initial product built, but they really don’t have much more than that. And like I say that that’s really the stage where you need to be raising from your network or family and friends. I do have startups coming to me saying, Well, nobody in my network would put money in how about you. And I can tell you that’s that’s not the way you want to start the discussion with an investor you want to demonstrate your network is in the deal, they are supporting you. And as you go along every step of the way, is building support for your idea. Customers are in it, investors are in it, partners are in it, suppliers are in it. Other people are validating this as a good deal because they’re supporting it at some level. And so on the pre seed your network supporting it is really a key factor. How much is different story but they need to be at at some level?
Yeah, I think that’s one lesson as an investor, I would I would always want to see that an enterpreneur has the family or themselves but putting their own capital and not just going and asking around for sure. And what would be the the amounts that you’re looking at terms of raising for pre seed and seed
Family and friends, you see people raise 100 250 200k, something like that, looking for put their own money in, that’s always a great story, I put 50k of my own money into the business directly, not just sweat equity, but actual dollars. That says a lot seed raising, the minimum you raise when you go to an angel is 250k. If you try to raise less than 250, it looks kind of funny, like will you have? are you raising enough that you’ll actually accomplish something there. And so 250 to 500, is what you see for seed raises. And then when you get to series A, you’re looking for one and a half to three, maybe $5 million dollars, depending upon how, how fast you’re growing and scaling. So those are the benchmarks we see out there.
And what should you already have before each stage like proceed? Do you do you need to have something built or just an idea enough potentially?
Well, for your family and friends, some family will want to see more than just an idea that want to see you actually have done something, my coaching is you should always have a customer in the process every step of the way. And even before you have a product, you should have a customer and having a customer saying they want what you’re building says a lot and also helps with investors too. If we’re having a dialogue, and it’s just about the product, and I never hear about a customer, I start to wonder if we’re building something that has any market reality to it. When you get to the seed stage, you have actually sold it to somebody and so you’ve proven that people will buy it and will use it. And that says a lot right there. And then now we’re going to start to build out the product and start to grow and scale it and now we’re on that track up to a million dollars. And most of our investors like to be in at the 500k to $1 million rate because at that rate, you’re seeing continued growth. But the valuation of the company hasn’t gone too high just yet. Once they get past a million dollars the equation jumps up. And so a lot investors try to get in before the valuation gets too far up there,
For series A, do you already need to have some substantial revenue?
I say you need to have 500k to a million dollars. But at that stage is less about the absolute value and more about the growth rate is adventure ventures should be growing a minimum 50% year over year better doubling year over year. So the growth rate is what a lot investors really look at.
What about if your growth rate like where it comes from what if your girlfriend is just from from buying as buying customers, to investors Look at that.
Well, the challenge in the early stages, there’s just not a lot of money. So typically, that’s not an issue. People aren’t throwing huge amounts of money at the very seed stage level. Now some have raised good money from family and friends 500k million dollars, and they they may have a luxury of doing that. But if you can actually go out and still generate that traction that that that counts to whether it’s organic or bought that makes no difference. The challenges you’ve you’re using precious money to buy ads when some of that money could be going into the product or are hiring more team members. So it’s a trade off for sure.
And let’s talk a bit about valuations. Do the revelations come into play starting from series A or instead level as well
At seed level yes it starts to come into it. We coach startups to start with a convertible note where it’s a debt instrument that converts to equity later there is a valuation cap the valuation will never be more than a certain number. But beyond that, we’re not setting valuation that business at the pre seed and seed level. It can be hard to set valuation or agree upon it, because there’s just not enough in the business yet, we get to series A, that’s when you have a price round and you’re you are really setting the valuation at that point. And so that’s that’s the key thing is to have enough in your business sales team and product traction to command the valuation that you want. We have many startups that want to go for a series A after their seed, but find they can’t get the valuation. So they do what’s called a seed plus, I’ll raise another 500k on the same terms as my last seed in order to get my metrics and my numbers in a place where I can really get the valuation that that I want out of it at the series A,
and how, how are businesses evaluated? Do you just take into account the revenue, the growth rate, some kind of formula?
It’s not usually a formula, it’s often for valuation? I always say it’s a negotiation. There are valuation metrics out there based on what other companies are raising on what exits are. Each industry has its certain metric, which is, you know, SAS is five to seven times revenue. I’ve seen other businesses that are 10 times Eva da. And so you have to figure out what is the metric for that sector of the business? And what’s the current rate is valuations are tied to the stock market, when the stock market goes up, valuations go up, when the market goes down, valuations go down, because exits are tied to those those numbers at a certain level as well. And then the team is going to look at the other characteristics, how strong is the team, how complete is the product, how big is the market, there are other factors that will adjust it a little bit as well.
So for a typical startup, that let’s say it’s a sauce business, and they’re building some product in the technology space, what would be a typical range for evaluating it based on a multiple of, of revenue or recurring revenue.
So at the seed level, if you have a recurring revenue business or SAS business, you’ll see five to $7 million is a good valuation for it. Again, we’re using convertible notes, and we’re not actually fixing it, but you do need to get know where you are on the curve, the big mistake is to set the valuation too high. And then when it comes time for the next raise, you’re not able to overcome it and come with a higher level, you should never go down, you never can have a down round, it destroys the investors and then their their confidence in you. So you have to always be able to go up on each round itself. When you get to the series A it’s not unusual to see in that 10 to 10 to $15 million, if they have a strong growth rate going.
And then I think about five, 7 million is that dependent on revenue or revenue should just be in that range that you mentioned from 500 to a million,
In the seed stage revenue is probably in the 500k range. And then to value the entire business times chain gives you five to $10 million, something of that range. When you get to a million dollars of revenue, you can start to command $10 million in valuation. So 10 10x times revenue is a valuation metric that we see out there a lot for SAS businesses, and they have to have very good metrics around them as well, customer stay in a long time. There’s healthy margins, there’s not too much competition. These are the things that will impact it as well.
And what are the most popular industries niches right now?
FinTech is very popular right now we see a great deal in blockchain coming up with decentralized finance. defi is very popular these days. Anything with AI and data analytics is a popular one. We find many companies coming in, they have a service for like educational technology. But they’re also collecting the data. So they’re actually positioned themselves to be a data analytics company in a few years after they build larger data sets. And then you can layer in on top of the data, ai algorithms. And so once you have good data sets, you can start to build an AI engine. And so you can have a company that is a service company, but at some point, we’ll be a data company and later we’ll be an AI company. And so AI companies are very popular right now as well.
So in terms of investors, what are some of the key things to look for? Or that you recommend new and aspiring investors to, to learn about?
Sure, so we always start with the team is the team really up to the challenge and I find this is the part that’s most important, but gets the least amount of attention from most investors. most investors jump straight to the product in the market that’s easily viewed, you can analyze that is right there in front of you. But with the team I find is best to not only talk to the CEO, but also talk to the other members on the team and spend some time with them to understand what do they really what are their skills, what do they really know how much time Are they Putting in on this many times these guys have other other jobs going on at the same time they have life events, they have other things that are happening. And that that can be a big impact on productivity. And so the team is the thing to look for first, then you look at the market, how big is that market is growing fast? Is it large? is a lot of activity going on in it? Or is it very small? Is it very staid? So the market needs to be big and growing fast as well. And then you look at the competitive advantage. What does this company have that others don’t, there’s a lot of me to companies out there, and you really don’t want to be one of those, you want to be something that stands out as unique and has a special expertise. And my definition of a competitive advantage is you can actually see a increase in the financials as far as 30% more revenue or 30%, less cost based on that financial advantage compared to others in the industry. So when someone says they have a competitive advantage, I pull up the financials and they say, well show me where that is in the numbers here. How is that coming out? And sometimes they can actually say that, you know, our margins are much higher, because we’re able to command a higher price. That’s a competitive advantage.
So you look for those as well. When you look at the team, what what are the things that you want to see? Is it experience? previous startups?
Yeah, so you look at the the challenge of the business they’re trying to grow, what skills they need, what network they need, what are the things you’re going to have to do? And then you work back to see are those skills in the team experiences great, but experienced in the industry in which we’re at is a key question to ask. Networking, if you need to build partners and others? Do you know how to build a network very quickly of partners that can help you in this space? Also, if you’re in FinTech, or healthcare, or do you have knowledge of the regulatory environment, we see many companies built in these spaces where they they have technology, but they don’t know the regulatory, and they spent a lot of time trying to figure out the regulatory issues. So understanding that space helps a lot. Understanding the industry dynamics, how the industry is structured, who the players are, who the partners are, who the competitors are, knowing that up front really helps a lot. And the team needs to have a good grasp on their industry as well.
And how different is it for established companies to raise capital versus like new companies and startups? Is it different for a company that’s been around for a decade or more, and they are profitable, versus just a new startup, which which one would be easier or more attractive to investors.
So if you if you’re an established company, there’s plenty of funding sources, there’s private equity, there’s bank loans, and so forth. As you go up the curve from seed to series A, Series B, at some point, you start switching from equity funding to debt funding, after a series A, you start looking harder at the debt options, because the equity is worth a lot more, and you have enough revenue, and in many cases, net profit that you can actually raise debt funding. So you’ll see it switching. So I would say they just have a lot more choices at the later stages that are out there. If a later stage company does want to go after venture funding, then the question is, well, show me your how are you going to grow from where you are, you’re at 5 million now how you can get to 50,000,003 to four years. And so you have Kava quite often that means you have to have a different business plan than what you’ve run before. And so that can be a challenge for for later stage companies is to switch into growth mode from slow growth to fast growth can be hard. And there are some debt financing options, besides the banks, specifically for foreign owned US companies, for example, like like as the main magnet. So some of the choices out there for the early stage, we see a lot of groups doing revenue based funding, and basically they’re pledging piece of their future revenue to pay back the investors. And these are for businesses that you know, probably won’t be sold for a big exit, but it’s a good cash flowing business. So you’ll take two to 3% of top line revenue, pay back investors at the rate of revenue until a certain payback is received. So that’s a very popular one. Now, the other one is venture debt, you can go actually raise money from banks, if you are raising venture capital. They know you have enough revenue from the business and then enough working capital from the VC that you can actually cover the payback of the venture loan, then they always take a little bit of equity in there. But mostly it’s a payback rake on the debt itself.
So those are the two we see a lot of as well, what would be the typical interest rate on this kind of loans?
Interest rate varies based on the interest rate that’s in the marketplace with revenue based funding, there’s actually no interest rate, you’re just paying back at the rate of revenue. But if you were to raise the rule is in revenue based funding, you can raise up to 25% of your annual revenues. So if I have a million dollars, I can get 250k. And then what investors want to see is I’m going to pay that back the rate of return revenue to 3% until I get two and a half times my money. This is over a three to four year period. So the interest rate, if you calculate, it comes out to be somewhere between 15 and 25%. It just depends on how fast you’re able to pay it back in that case.
Alright, so that’s pretty high. And what are some low interest rate options, besides of banks,
family and friends is one SBA loans is another, most people go get an SBA loan, because if you have two years worth of operating history, you can go get a loan, very easy to pick up challenges, the loans are personally guaranteed, you have to pay it back. If you’re raising equity money or revenue based funding and the business goes under, there’s no personal guarantee on those and you’re not on the hook for that the SBA loan or a bank loan, you’re personally on the hook for that. And it must be paid back at some point, I always remind people who collects for the SBA, and that’s basically the IRS, then I asked when is the IRS going away, they’re never going away, they will always be there. So loans can be forever if you’re not careful with it. And so at the early stage, you, you should take on debt, when you have the ability to pay the debt back, if you’re not able to pay it back yet out of revenue, then it’s probably too soon for the debt, which is why they’re giving up pieces of equity of the company, in most cases.
And in terms of pieces of equity, what would be the typical percentage of the company with that you would look at raising capital before selling for, then you want to raise capital.
So typically, you’re giving away 20 25% on every round of funding. So if I go out raise 500k, I’ve given away 20 25% of the business by go raise a one and a half million on a series A I’ve given 20% of the business away in most cases. So you have to think about that, how many of those Can you take, because you’re you’re being diluted down, I’ve been at the exit table with many of founder and found that they many cases, they have 10 to 20% of ownership left at the end of five, seven years, given all the rounds of dilution. Now, if a company has very, very large revenue is very large exit wire million dollars, that’s still a good number. So you have to keep in mind after series, a dilution really starts to impact you in a very negative way. So unless you’re growing dramatically, but most businesses are not. So you have to think hard about giving away more equity, which is why you see more of a shift into the debt at that point.
Right. So you have to balance the equity, and to make sure that you that you still keep a good amount of it left, right. Right. Now it’s very interesting. And and so for an established company that already has some profits and good revenue, how would the valuation work in that case, so if
you already have a profitable business, then evaluation can be fairly, fairly high. At the same time, you have to think about, you know, later stage companies are looking to make a good return. So now they start looking at exit values of companies, you’re now close enough to the exit space that you can actually see what your companies like yours are being sold for. And then you start mapping. Okay, what does it take to get myself from here to there? I’m at 10, I need to be at 50? How can I get to 50? And then what is the company need to look like? And then the valuations on exits are pretty clear. So now it’s becomes a very straightforward mathematical decision in some cases.
So you look at that when you want to raise equity for a storage company, you first look at some similar companies, what they sell for to map out your, your road map to see where you can get to, and then kind of based on that you you erase based on that relation.
You know, so comparables they call it is that looking at similar companies what’s comparable, and basing your valuation on what they’re getting to show that’s what’s market rate today, you can look at discounted cash flows and book values and so forth. But that typically under represents what you have, especially in a market like now, which is growing very fast, you can actually get more than you would get if you just did a discounted cash flow calculation, which is what several people try to do. But in the venture world that can be a little hard to do.
So what you’re saying now is a good time to go raise capital,
let’s say now is one of the best times ever to raise capital. The stock market’s at an all time high interest rates are zero, the we just came out of the COVID pandemic. So the world has a whole new set of care about South there is a whole new set of disruptions and changes going on that startups can make use of to enter the market and start to grow their business. So it’s a tremendously good time to start a business and to raise money because there’s quite a bit of money out there looking for a place to go.
And raising money can be quite a length of time. process you mentioned could take a year. So how would How would a business owner now whether or not it’s worthwhile to, to pursue for someone specifically who doesn’t necessarily need the money? What are some criteria to consider to see if it’s worth for them or not.
But the key is to look at what your growth plan is always say, take a point from where you are now and go out five years and say, I’m here today. And in five years, I want to be at this revenue level and this size of a company. And then what falls out of that is your fundraising plan and your hiring plan, you’ll need to hire people, and you’ll need to raise money to fund the hiring of people as well as product developments and so forth. So make make a strategic decision about where you want to be five years, even three years, and then draw a line from one to the other and then see what it takes to get there. And if fundraising is required, well, then so be it. If you can cash flow it or give your bank loans, well, then you can do that, as well. And you don’t have to go through dilution. If you can do bank loans, can you have to be able to pay it back, it doesn’t go away. And so you have to have a plan for that. And then in most cases, you’re hiring people. And so that that’s where a lot of the, the funding comes from, is to put people into place, there is an expenses, but it’s usually personnel.
But if you’re already profitable, and you map it out where you want to be in five years, and and the funds, you can probably get the faster bout without you, you’ll probably be fine, too. What are some other questions to ask yourself to make a decision on on that?
So the the question you always want to ask is, what’s my exit strategy? What do I as a founder want to get out of this business? And when I asked that, to them, people sitting across the table wanting to raise funding? The answer is they want a business that they can keep for the rest of their lives. Well, then equity funding is not for you, you we investors who are putting in money for equity are expecting you to sell the business in five to 10 years. And they’re looking for 10 extra return. And so if that’s your game plan, then they’re they’re the right people, if you don’t plan to sell it, and these are often family, businesses and other businesses that you people don’t think it’s going to be a big exit, well, then you’re looking at revenue base funding and some of these other debt alternatives as well. So getting clear with what you want out of the business and where you want the business to be, is that the first question to ask. And then now that you have the strategic idea in mind, now you can go figure out what tools are going to help you get there. And those who want to build a business and sell it in five to seven years for $100 million. Okay, well, for you, you’re going to need equity funding. And let’s talk about the pre seed seed series A, and map out the path going forward and start to see how do we get there, what investors will help us get there, and then go and start talking to them to a few investors to say I’m thinking about raising funding, or we’re going to do this this and start to get a read as to where they see the risks in the business where they what is the challenge they perceive you have? That’s not always the challenge you think you have sometimes you think you see industry specific things, but investors are seeing other things. But you have to address those those issues if
you decide to go forward with a fundraise. And as so many startup owners don’t know whether or not their startup would be interesting for investors. Are there some general criteria that would help them understand that? Or would you just suggest to anyone that that has a reasonable plan on how to grow? They should look into into getting some capital? Sure. Well, we
actually have a calculator on our website at 10 Capital Group. So how investable is your business? How to VCs? Look at your deal? Do you have a platform based business they look for? Do you have recurring revenue? Do you have growth rates over 50% year over year? Are you in a large target market that’s growing very fast, these are some of the core things that make for a very attractive investment by investors. And then of course, we get the opposite of that where it’s a very small market. You know, we don’t have any growth at all been doing this for three years, but we’ve never grown. And we don’t have a complete team. And we don’t have recurring revenue. And we’re doing your thing on a customized consulting style basis. This is kind of the antithesis of the startup that’s raising funding. And so the more you are to the former, unless you are to the ladder, the more investors are going to be interested in your business because they do want scalability. And they do want to see it grow and grow fast because it has to get up to a very large revenue and in short order, you can’t take 20 years otherwise that’s really not a VC business.
Okay? They’re good. So you have to be in a big industry, our recurring revenue rapidly growing and the platform potentially,
right. There’s some technology enablement really helps a lot in these cases. And so if you have evidence that I’ve got technology and that’s a platform that’s for recurring revenue, like a it SAS deal or marketplace or another AI business, you will these are the kinds of things that enable outsize valuations at the end of the day, because you’ve got something that it’s growing fast. And it’s got some tech enablement to it, which usually gives you scalability,
what are some current statistics, what what percentage of startups that get funding eventually fail, or which which of them get to a point that we’re profitable, or they sell for a profit for investors?
Sure. So if you took 100 companies, and they all raised a series, a seed round today, 40% of those companies will never raise another round. Again, they won’t raise a series A and they’re what I call, now going sideways, they’re walking dead company, safety percent keeps going up the curve. And ultimately, only 16% of that original 100 will ever sell their business for return. There, there are asset sales where I just sell the database and the team gets bought out and so forth. But that’s just don’t get paid back. And we don’t count those, we’re counting the ones where we sold it, and there was something of a profit or a gain back to the investors.
So the profit to investors is in 16 out of 100.
That’s right 16 out of 100, companies will sell for, again to the investors, the other 84 will not they will go up a ways and then they tend to go sideways. Because the market wasn’t as big as we thought that team didn’t execute the way we had hoped. technology wasn’t as compelling as it needed to be. Competition is always a big factor at scale. Because you have to win the bigger size of the market later, front. In the early stage, everybody’s small, it’s easy to win a piece of the market. But as you grow up, you have to win bigger and bigger sections in order to continue to grow out of this,
what would you say is the main reason why startups fail or not, not not growing up,
I think it’s the team is usually the center of it. There are issues where the market changed, many companies that were on a growth path, were no longer on the growth path after COVID because the market changed on them. And or they were not able to transact their business because they were in a place where COVID did not allow them to. So there are events outside your control. There are a lot of exogenous factors that come into startup funding in investing as well. But I usually goes back to the team and their ability to execute on a plan. And their strategy is at the right strategy for the market. And markets are always changing. So this can be a little, this can be a challenge for people as well. So those are the main reasons I see they don’t always go up the curve all the way.
So those 16 startups that sell for for profit out of 100, what will be the typical profit and timeline for sale?
Well, in the angel world, what I witnessed is, is that other 16, four will be very, very high margins and profit and so forth on it, very big exits, the other 12 will be fairly small, you’ll get one and a half to two times your your money back in most cases. So it’s very much skewed to a small number will be a very high return. And the rest will be small to medium returns, you get something back in baseball parlance, we call the first one the big return the homerun, we call the other ones, singles, doubles and triples, which is I got 1x my money to x my money, two 3x my money in most cases, those are single doubles and triples, but then when I get 25x my money that’s that’s the home run. But that’s usually at 16 I think maybe three or four getting the home run, and the rest are getting singles, doubles and triples.
So I’ve heard people often recommend that you have to be able to invest in at least about 10 startups in order to make it viable to make it profitable. Would you agree with that? Or can you just invest in a couple if you feel very strongly about them?
I think diversification is important. I think it can be very hard to pick out the winners always go back and look and I’m always surprised at who I thought was going to be a unicorn turned out to be an OK company but not really great. The one that didn’t look so great, didn’t have a great pitch turned out to be the the the big winner. And so it can be very hard to pick them out at the very early stage. And so everyone I know is just putting their money across as many deals that she’s used to walk into the angel room with 100k check in hand it to one, one startup today they walk in with 100k and it’s 10 for you, Tim for you, Tim they spread it across 10 companies at 10k each. So we see the math You’re putting in per deal going down, the total amount they’re putting in is going up. But they’re spreading it across more deals and they want to get a diversified portfolio. And they can do that with a smaller foreign investments.
Excellent. And could you walk me through the the initial steps for someone for a startup or an established company looking to get investment, what would be initially Of course, we need to have some finances. Some details set up, but what would be the next steps as in pitching to investors or preparing signing documents or things like that?
Sure, you know, so step one is always coach the startup, make sure your team and everyone is on board with the fundraise. We all agree we’re going to do this and we’re all going to support it. Then step to build the documents, you need a pitch deck and you need some core documents such as a three to five year financial forecast, need to, if you’re going to be using more than a convertible note, you need to bring your attorney in to help you with the proposed term, sheet and so forth. In the very early stage, we use convertible notes and safe notes, those are standardized documents, have your attorney review those, see if there’s anything you need for it. So your documents are ready and you have your story put together, you know how you’re going to raise. And the key is to have one raise the in the pitch deck, you want to talk about the core product core team core, go to market strategy, core, fundraise, and the core outcome. And some people get caught up in the multiple scenarios that they could run. And they’re always entertaining those that find entertain them, just don’t play all those out in front of the investor because they will be confused. And then once you have those documents, well, now you’re ready to go and engage with your network and make sure that they’re on board and they’re supporting it. And then you just start drawing the circle out wider to friends of friends, networks of networks. And then today, you go on funding portals, you go on crowdfunding platforms you go on, there’s a lot of online tools that are out there, there are Angel groups, many of those are went online during the COVID pandemic. And so you start to reach out to the different type of investors, angels are different from VCs, which are different from family office, and you start to figure out which type of investor is the best one for you who who resonates best with what you’re doing. And you start working your way through the process. And fundraising is very much like cells is a you have to generate leads, you have to work them to the pipeline, you have to close them at the end. And it’s got a very steady process that you have to go through be very consistent about it and very rigorous my goal is every week, I’m talking to 10 more investors, either email or in person or on the phone, I’m talking to them, and I’m putting them on the list. And then I next thing is you want to give them updates, startup camp, monthly mailer to everybody on the list saying, here’s what’s happening with sales team product and fundraising my business, because what investors want to know after they hear the first pitch is How are you doing, they don’t care about the size of the market anymore the competition, they want to know what you’re doing to move the ball forward. So focus on metrics and activities that are in those areas and demonstrate in a consistent fashion that we are meeting our goals, and we’re staying on track. And then you just go to you get the funds raised, which is the amount of time we talked about from raising 500k as the minimum of six months of raising funding in that case, some people raise a little faster because they have a very, very strong deal or a very strong investor network. But by and large, the the averages hold
and after the initial pitch to the investor, how how long would you say it usually takes until the investor is ready to invest? And how many interactions
it takes seven touches to close the sale. So I think it takes seven touches to close an investor. And part of it is building a relationship. They want to get to know who you were. So I ran Angel networks. What I witnessed is entrepreneurs coming in pitching to my roomful of investors 90% with pitch wants go away, we would never hear from them again. They got little or no money out of it. 10%, though, came back and gave us updates miter saw is more about it. On the back and forth that date out came the checkbooks. And so it’s in the four to seven range of sitting down and talking to the ambassador explaining what’s going on building that relationship. And when they feel like they they get it they pulled back enough layers on the onion that they really understand it. That’s not after the first pitch that’s after the fourth in most cases, and they really have a good grasp on it. Well then they’ll make a decision. Yep, a man or no not. And so it’s seven touches is the rule. And you have to that most groups that takes the two that two months to go from start to finish on that people are busy, they have other things going on. And so the idea is you have to call and email and do things to give them updates, remind them how it’s going and then you have to start moving him into a closing which is so how much are you thinking about investing, forget a number and then Hear the documents just just in case you want to review them. And then if they decide to go forward, well, then you DocuSign and you get the paper signed and the money wired and, but it takes a bit of a process to go through because this is people’s hard earned money, they know they’re going to be in the deal for a long time. So they want to know that they’re in a deal with people, they, they want to be in their weapon. So that’s what investors are trying to figure out.
So those 16 startups that sell for for profit, out of 100, what would be the typical profit and timeline for sale?
Well, in the angel world, what I witnessed is, is that other 16, four will be very, very high margins and profit and so forth on it, very big exits, the other 12 will be fairly small, you’ll get one and a half to two times your your money back in most cases. So it’s very much skewed to a small number will be a very high return. And the rest will be small to medium returns, you get something back in baseball parlance, we call the first one the big return the home run, we call the other ones, singles, doubles, and triples, which is I got 1x my money to x my money, two 3x my money in most cases, those are single doubles and triples, but then when I get 25x, my money, that’s that’s the home run. But that’s usually at 16, I think maybe three or four are getting the home run, and the rest are getting singles, doubles and triples.
So I’ve heard people often recommend that you have to be able to invest in at least about 10 startups in order to make it viable to make it profitable. Would you agree with that? Or can you just invest in a couple if you feel very strongly about them?
I think diversification is important, I think it can be very hard to pick out the winners always go back and look. And I’m always surprised at who I thought was going to be a unicorn turned out to be an OK company, but not really great. And the one that didn’t look so great, didn’t have a great pitch turned out to be the the big winner. And so it can be very hard to pick them out at the very early stage. And so everyone I know is just putting their money across as many deals, investors used to walk into the angel room with 100k, check in hand it to one, one startup today, they walk in with 100k. And it’s 10. For you, Tim for you, Tim, they spread it across 10 companies at 10k each. So we see the the amount they’re putting in per deal going down, the total amount they’re putting in is going up, but they’re spreading it across more deals and they want to get a diversified portfolio. And they can do that with a smaller font investments.
Excellent. And could you walk me through the the initial steps for someone for a startup or an established company looking to get investment, what would be initially Of course, we need to have some finances. Some details set up. But what would be the next steps as in pitching to investors. So preparing signing documents or things like that?
Sure, you know, step one is always coach the startup, make sure your team and everyone is on board with the fundraise. We all agree we’re going to do this and we’re all going to support it. Instead, to build the documents you need a pitch deck and you need some core documents such as a three to five year financial forecast, you need to if you’re going to be using more than a convertible note, you need to bring your attorney in to help you with the proposed term, sheet and so forth. In the very early stage. We use convertible notes and safe notes. Those are standardized documents, have your attorney review those, see if there’s anything you need for it. So your documents are ready and you have your story put together, you know how you’re going to raise and the key is to have one raise the in the pitch deck, you want to talk about the core product core team core, go to market strategy, core fundraise and the core outcome. Some people get caught up in the multiple scenarios that they could run. And they’re always entertaining those that find entertain them. Just don’t play all those out in front of the ambassador because they will be confused. And then once you have those documents, well now you’re ready to go and engage with your network and make sure that they’re on board and they’re supporting it. And then you just start drawing the circle out wider to friends of friends, networks of networks. And then today you go on funding portals, you go on crowdfunding platforms you go on. There’s a lot of online tools that are out there. There are Angel groups, many of those are went online during the COVID pandemic. And so you start to reach out to the different types of investors. Angels are different from VCs which are different from family office and you start To figure out which type of investor is the best one for you who who resonates best with what you’re doing, and you start working your way through the process and fundraising is very much like sales is a you have to generate leads, you have to work them through the pipeline, you have to close them at the end. And it’s got a very steady process that you have to go through be very consistent about it and very rigorous. My goal is every week, I’m talking to 10 more investors, either email or in person or on the phone, I’m talking to them, and I’m putting them on the list. And then I next thing is you want to give them updates, start a camp, a monthly mailer to everybody on the list saying, here’s what’s happening with sales team product, and fundraising my business, because what investors want to know after they hear the first pitch is, how are you doing, they don’t care about the size of the market anymore than the competition, they want to know what you’re doing to move the ball forward. So focus on metrics and activities that are in those areas and demonstrate in a consistent fashion that we are meeting our goals, and we’re staying on track. And then you just go to you get the funds raised, which is the amount of time we talked about from raising 500k as the minimum of six months of raising funding in that case, some people raise a little faster because they have a very strong deal or a very strong investor network. But by and large, the the averages hold.
And after the initial pitch to the investor, how how long would you say it usually takes until the investor is ready to invest? And how many interactions
it takes seven touches to close the sale. So I think it takes seven touches to close an investor. And part of it is building a relationship. They want to get to know who you were. So I ran Angel networks, what I witnessed is entrepreneurs coming in pitching to my roomful of investors 90% with pitch wants go away, we would never hear from them again. They got little or no money out of it. 10%, though, came back and gave us updates minor. So it’s more about it. On the back and forth that date out came the checkbooks and so is sin the four to seven range of sitting down and talking to the investor explaining what’s going on building that relationship. And when they feel like they they get it they pull back enough layers on the onion that they really understand it. That’s not after the first pitch that’s after the fourth in most cases, and they really have a good grasp on it, well, then they’ll make a decision. Yep, a man or no not. And so seven touches is the rule. And you have to that most groups that takes the two that two months to go from start to finish on. The people are busy, they have other things going on. And so the idea is you have to call and email and do things to give them updates, remind them how it’s going. And then you have to start moving them into a closing which is so how much are you thinking about investing for get a number. And then here are the documents just just in case you want to review them. And then if they decide to go forward, well, then you DocuSign and you get the paper signed and the money wired and but it takes a bit of a process to go through because this is people’s hard earned money, they know they’re going to be in the deal for a long time. So they want to know that they’re in a deal with people, they, they want to be in their weapon. So that’s what investors are trying to figure out.
So it’s quite a lengthy process for the for the founder to go through then and quite quite time consuming, right?
It is it’s not like debt, where you just put it on there. Because you know, if if the business goes away, the investor loses all their money, the business goes sideways and turns into a lifestyle business, they will most likely be losing their money. Only 16% make their money back. And so their investors are choosing very carefully for sure.
And if you’re raising half a million or a million, how many investors would put you typically look for
the average Angel check today is 25k. So 25 into that will tell you how many investors you need to get. If you’re able to get with venture capital, then those are 150 to 250. And so you would need fewer of those two come in. So it just depends on which type of investor we’re, we’re talking to course, the angels much easier to close at 25 than the VC at 150. They have a very rigorous diligence process they will go through before they actually put the money in. So there’s always a trade off between time and money here as well.
Right. Well, sounds good Hall. So thanks. A little advice. Do you have any any other questions I haven’t asked you about anything else you’d like to add for for the startup founder? So the investors to keep in mind?
Yes, fundraising is hard, but it is worth it. One of the benefits of raising funding as you build a network of people, those who could be mentors, coaches, referrals and so forth. And that’s the value of of credit investors like angels and venture capital as they bring a lot of expertise. You’ll learn a lot along the way people who will poke holes in your business plan we’ll be pointing out things that will save you time and money later. People that will invest will a be able to help you find partners and so forth. So in many cases is more than just money. His expertise, strategy and network that they’re bringing to the table, which can be valuable. And that’s why I started to look at it. I’m not just raising money, I’m building my, my network. I’m building my business as I do this. And every time I talk to an ambassador and get a feedback, that’s helping me build my business. And so that’s that’s the value of it. Some groups go on crowdfunding portals, they raise money from, you know, just in users buying the product, and there’s some value there, but you’re typically not getting that strategy or network or expertise that you get from the angels and the VCs.
Oh, thanks. That’s a lot of relevant information. How can people find out more about you and book your services or join your group?
Sure, our website Ken Capital Group dot Grl up. There’s no comm on it. The comms are taken up years ago. So think Capital Group is the best way to reach me just go there. Hit the Contact Us page, go to our company page and see what services we offer and sign up there and we’ll be glad to set up a call and talk with you.
Okay, thank you, Hall. Have a good day.
Thank you so much, Michael. Joy being on
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