FYE 45 | Angel Investors

 

If you’re building a startup, one thing angel investors look at is your business plan. You can’t barge into a room of 10 investors and just talk about your idea. You need to know how you’re going to sell it. Sell the product first, build it second. If you can’t sell it in the first place, then you don’t want to have to build it at all. Investors don’t want all the weight to be on them, they want to share the weight and be part of something great. So you have to learn how to do your part as an entrepreneur. Join Michelle Seiler Tucker as she talks to Hall T. Martin about investing in startups and what investors look for. Hall is the CEO and Founder of TEN Capital Network. He helps connect startups and investors for funding opportunities. Discover his journey into angel investing. Learn how to solve some of the mistakes entrepreneurs make when doing a startup. Find out why follow-up, finding your team, research, and valuation are important for startups. Start pleasing your investors today!

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Pleasing Your Angel Investors: Why You Need To “Sell It First” When Building A Startup With Hall T. Martin

I’m excited to have a very special guest on, Mr. Hall Martin. He is going to talk about investment capital, funding startups, and something that all of you have been asking me about. That’s why I decided to have him on the show. Mr. Hall Martin is the Founder and CEO of TEN Capital and host of the Investor Connect Podcast, which I’m going to be on. He launched a firm, Texas Entrepreneurs Network in 2009. TEN has over 15,000 investors. It was very successful, raised over $900 million.

Since 2009, we’ve helped people raise over $900 million and it continues to grow.

You also have a nonprofit.

It’s for entrepreneur and investor education about funding and investing.

Mr. Martin also serves as an adjunct professor for the University of Texas leading the idea of IT programs, which fall for startups from the Engineering program. There’s a lot to unpack there, Mr. Martin. What is your background? How did you get started doing this?

I moved to Austin in 1986 back when there were about 400,000 people in town. Now there are over 2 million. I have seen a tremendous amount of growth. I came here for graduate school and afterward went to work for a company that late when they went IPO in ‘95, I started doing Angel investing. We had an Angel network here in Austin called The Capital Network. It ran from ‘95 to 2002. I made an investment, lost all my money and I started to realize that this is harder than it looks, but it was very interesting to do anyway.

I’m not the only one who lost money, then.

Not by a long shot. This is part of the startup world. It’s a risky thing and you will lose money. That’s for sure. One thing about entrepreneurship is it is one of the only investments you’ll ever make that is truly unlimited on the upside. Real estate, oil, gas, and everything else have defined limits, but entrepreneurship does not. It can be very attractive. I was still very fascinated with it. I’m an early-stage guy.

When the company went public, I started doing Angel investing. When that network went away in 2002, I started investing by myself and saw the challenge of Angel investing by yourself. You spend all day finding the deals and all night doing the diligence. It’s tough. I wanted to work with a group. In 2006, the city did a restart of our Angel network and they called it The Central Texas Angel Network. I was the first member to sign up for it.

If you are the first member to sign up in an Angel network, you’re automatically on the board in charge of membership. It’s a great honor. I did that for about six months and I recruited about 50 members. We lost our director. I became the executive director. I ran it for about two years. We got about $5 million invested in about 20 deals. Ten years later we ended up with about a 40X return on that $5 million.

How significant is 40X? That’s huge.

FYE 45 | Angel Investors

Angel Investors: Entrepreneurship is one of the only investments you’ll ever make that is truly unlimited on the upside. Real estate, oil, gas, and everything else have defined limits, but entrepreneurship does not.

 

It’s 40X, not 40%. I have to tell people that sometimes. We had two home runs out of it at around 40 each. It completely dwarfed everything else that was in the fund. It had the usual returns, 25% of the deals had a positive return and 75% did not. There are a lot of deals that didn’t make it, but 2 of the 25% did. It made a big difference. That propelled the group onward then my undergraduate university, Baylor came to me and said, “We want an Angel network out of the alumni association for student education.” I helped him put that together and I’m still a member there. I had a county North of Austin called Williamson County wanting an Angel network. We called it the Wilco Angel Network. It was mostly sun city retirees that wanted to invest for some cashflow, but it was a lot of fun.

In 2009, I decided, “I’m tired of this big company living. I want to get back to the early stage.” I was having more fun doing the Angel work than working at the big company. I left and started what was called Texas Entrepreneurs Network. We saw the challenge that startups had in raising funding. They needed help with the documents, learning how to pitch and most importantly, they needed to learn how to follow up, to call the investor back. They’re not going to just write you a check on the first call.

We started helping companies around Texas up until about 2016, at which point we were getting calls from outside of Texas saying, “I’ve talked to everybody in Seattle. What do I go to now?” We had expanded our network nationally for investors before. We had about 5,000 investors at that point. We changed the name to TEN Capital and started working around the US instead of just around Texas. It’s just been growing ever since.

You have an incubator program.

I’ve helped start several incubator programs. In 2013, a local law firm came to me and said, “I want to do something for the city of Austin.” We looked around for the startup all the tech things seem to be well taken care of. There were lots of incubators and coworking spaces. I remember back from my days that half the investments in the first year were in consumer product goods. I looked around and nobody was doing anything for CPG. We said, “Let’s do something on CPG.” That turned out to be the right move. We’re here in the same city as Whole Foods’ headquarters.

Explain what CPG is.

Consumer Product Goods. It’s buying things at the grocery store. Here in town, we have Whole Foods and we had a lot of startups come to Austin because they wanted to get into Whole Foods and other distribution outlets. We started Accelerator called SKU. It was originally called Incubation Station, but we were mostly rebranding and repackaging the startups so that they could be successful on the shelf at the big brick-and-mortar stores.

We introduced them to the brokers and dealers that were specific to their sector, “If you want to be in Trader Joe’s on the West Coast, you have to talk to this guy. If you want to be in all these in the Northeast, you have to be talking to this other group over here.” We were helping them with that. We started an accelerator and it did very well. Now they’re in five cities around the country. They do 35 deals every year. It continues to grow and go from there. It was just timing. Being at the right place at the right time was a key part of it.

That’s the most important thing in business, being at the right place, right time and all the other ingredients. Are you familiar with the incubator that Perry Belcher has and Ryan Deiss who announced that?

Which incubator is that?

I don’t know. It’s a big incubator. They have a huge mastermind. It’s Ryan Deiss and Perry Belcher in Austin, Texas. I wondered if you had any association with them.

“We’re going to market in two months,” is the phrase of death. Investors have learned that two months could be two years.

There are many of them now. When I started in 2009, there were two accelerators in town. Now, there are 50.

They’ve been around forever. I used to speak with them on stage. Let’s move on to some questions I know our readers want to know information about. What percent of startups received funding from Angel or venture capitalists?

It’s about 15%. It’s not a big number. It’s a small number but, that’s Angels, VCs, family offices, family and friends. There’s a good number that received funding.

Why is the number small, because a lot of businesses go out of business because they’re under-capitalized? Why it’s just 15%, do you think?

One reason is people haven’t thought through their business plans. Half of the pitches I get are, “It’s just an idea. It’s not a business.” To raise money, you have to have a business. You had to put some of your own money in. Not everybody wants to put their own money in. You have to go prove it works. You have to be what’s called validation, market and product. When the product works and people will pay for it. It’s a lot of work. People start a business but then realize, “This is more work than I thought it was,” and they drop out very quickly.

That’s also why 80% of businesses on the market will never sell according to Steve Forbes because they don’t have a business to have a qualified job.

They didn’t build a business to sell. They built a business in a need, desire or passion of some time, but you have to think about selling a business. To sell it, it has to meet certain criteria. You have to look at it from an investor’s point of view, not the entrepreneur’s passion point of view. It has to have a return on invested capital. It has to have cashflow and if you have recurring revenue and other things that make that a lot easier to achieve.

You also got to have people in place and business has to be able to run without you. You have to be in a thriving industry, not a dying one. You got to have all your puzzles buttoned up. You have to have proprietary trademarks, databases, contracts, etc., patrons and profits. That’s a six-piece in my book, Exit Rich.

Not everybody starts a business to sell it. They start a business to keep it.

I don’t want to get into a debate here with you. I’ve been doing this for many years, but that’s a big mistake because here’s what happens. They start a business to keep it, then they die. They have a heart attack. I had a lady come into Dallas, Texas. Her husband died from a heart attack like that. Left them with a mountain of debt, “I want to know if I could sell the business.”

It was him and subcontractors. When he died, everything died. Everybody should go into business with the mindset of selling the business, so at least you have a more profitable business, sustainable or scalable business. If you are diagnosed with cancer or some catastrophic event occurs, you set your family up for success, not for failure.

FYE 45 | Angel Investors

Angel Investors: You want to be in the market, able to sell your product. You don’t need a lot of revenue at the very early stages, but you do need to look for validation. If your products, people will pay for them.

 

You see that a lot with generational transfers. Boomers are aging out. They want to pass it to their kids. The kids don’t want it. Now, what?

Kids don’t want it. They want to work on their masterpiece. First of all, they have seen how much work the business owners put into the business, Baby Boomers especially, and now they don’t take vacations. They don’t shop for themselves. The kids are like, “We don’t want this business.” Less than 15% are even transferred anymore.

A lot of them are not. We get into some revenue-based funding tools to help transfer it to someone else. Although, typically not a family member if the business has been around for 50 years and is not in a sexy growing industry anymore. It’s in something else so, but if it was somebody who’s passionate at one point, it was probably a good return for that person, but that’s all it was. It wasn’t anything more.

What do you require from startups? I assume you acquire a deck.

We looked for a pitch deck that tells their story. We want the company to be in the market and able to sell their product. You don’t have to have a lot of revenue, but you need to have some. You look for validation at the very early stages. The product works and people will pay for it. You look for evidence of that. Many people come to me without that evidence. I say, “This is going to be very hard. We should take the steps to go do that, put a little bit of your own money in and go sell it to somebody.”

You want them to at least be in the market and make some money. You don’t want it to just be an idea that hasn’t gone to market yet.

I want to avoid the phrase, “We’re going to market in two months.” That’s the phrase of death because investors have learned that 2 months could be 2 years. We don’t know when we’re going to get there. Go get in the market, sell something, and then say, “I am in the market. I can sell my product ” then you move on to the next level, which is where we want to work with people.

Do you ever invest in companies that are pre-market?

We have in the past, but it’s very hard. You should get out and test your product in a bigger way. I’m amazed how many people come to me saying, “We haven’t talked to any customers yet, but we’re halfway through building it.” I wonder how much you’re not building it right because you haven’t talked to any customers. I always coach people, “The first thing you should do is talk to a customer, not build a product.” My role is, “Sell it first. Build it second. If you can’t sell it in the first place, you don’t want to have to build it in the second place.”

You sound like Kevin Harrington.

Anybody that’s been out there long enough sees these roles. We’re not the only ones saying this. You see a lot of failed businesses and you go back and, “We should have talked to more customers.” When you go to raise funding from investors, what you take to the investor is what the customer is telling you, “We talked to IBM and they have this problem. They want us to put a pilot project together and gave us $150,000 to go do a pilot project.” This is the story you want to tell investors versus, “I had this idea. I’m going to build this product and I’m going to sell it to somebody someday. I don’t know how.” That’s not the story you want to tell to the investor.

Sell the product first, build it second. If you can’t sell it in the first place then you don’t want to have to build it in the second place.

I call it Field of Dreams mentality. Build it and they will come. It’s for the dreamers. I also say it’s not just the product before you start your widget, but also the processes. You should talk to your customers to find out what do they want to experience when they do business with your company? You should always base your processes on the customer’s experience, not on your own agenda. It’s like doctor’s offices. The whole medical industry needs to be revamped. They need to change their processes and hours with the patient’s experience in mind when we can show up. That’s good to know. Do you invest yourself or are you finding ambassadors?

I do both. I invest myself and then I also find investors for startups. My investment is done on what I call a 3X and 3. One of the challenges in early-stage funding is out of 10 deals, 1 will be a home run, 1 will go bankrupt, and then 2 or 3 will have a positive return. The rest are going to turn into lifestyle businesses, or 5 of them will turn into a nice business for them.

This is proven over the years, 1 out of 10 is going to be a home run. It’d be a big return. 1 out of 10 is going to go under and is going to be dead in a year or two, then 2 or 3 are going to be what I call singles and doubles, a little bit of return or nice return there. Five are going to turn into lifestyle businesses, which means we’re no longer on the equity path to selling to a venture buyer. We’re now on the payroll path, which means we’re going to cashflow this out and the three of us are just going to have a nice business here, “Sorry, you’re on the equity path, Mr. Investor. We’re now on the payroll path.”

I’ve done that enough times to know that when they go on the payroll path, I want to go on there with them. The 3X and 3 is basically convertible note with the redemption rate at year three that says, “I get three X my money, and you pay me out. It turns to a revenue share agreement and basically make room for me on the payroll with you where you are. We’ll just do it that way,” versus forgoing the redemption right and converting to equity placement, going on the cap table and going out. In year three, it starts to become clear which way this is going. We’re continuing to raise funding and grow the business, move up the curve, and valuations going up.

That’s where you want to be on the equity path or we’re not raising funding. We aren’t going to sell this like we thought we were in year five. We’re just going to keep it because it’s hard. What somebody found is that if they kept the business for seven years, we’ll make more money than if they sold it at year seven because they have investors and others. They just cashflow it out.

That’s why when I saw entrepreneurs moving onto the payroll track, I said, “I want to be on that plan. How do I get on that plan?” That’s how I came up with the redemption right in year three. There’s no personal guarantee. If the business goes under there, nothing back from anybody in that case. If the business is up, running and growing, and I think we’ll continue we’ll, then I sign up for a 3X and 3 with the option.

Are you on the board? Do you get involved with perhaps coaching the business owner or running the business? Are you ever involved in that standpoint or you are just involved in investing money?

Typically, if you’re involved at some level, the saying among Angel investors is, “If you want to do a little good, make a little money and have a little fun.” The do a little good is giving back to the startup and helping in some way, shape and form, whatever you’re doing. The make a little money is obvious there. Have a little fun means you’ve invested with a good group of people that you enjoy working with. Those are the three criteria you look forward to get into a deal.

How many deals have you invested in, and how long have you been doing this?

I started in 2001 with that first one that went under and then have been in about 20 or 30 deals ever since. I don’t invest a lot, but when I invest, we try to help and be a part of it and so forth. A number of companies we have helped raise funding is hundreds of companies have gone through here raising funding in the past.

The core competency is more raising the capital versus investing. That’s where your sweet spot is.

FYE 45 | Angel Investors

Angel Investors: The challenge in early-stage funding is that out of 10 deals, one will be a home run, one will go bankrupt, two or three will have a positive return, and the rest are going to turn into lifestyle businesses.

 

At heart, we’re not running a fund. I did that on purpose because I saw a lot of people go out, raise a fund, deploy it, have a good return, go raise another fund, and deploy it, “We didn’t have a good return. We’re done here. We’re not raising any more money. The market’s not good.” I wanted to get out of the boom and bust. I went into a model where I’m going to help start to raise funding, but we’re not going to get into the fundraising mode. We’re going to get into helping them find funding and coaching because I saw the need for that.

People needed help with their documents, where to go look, how to pitch, and most importantly, how to follow up. I just saw people coming and pitching to my room full of Angels. Ninety percent would pitch, go away and we would never hear from them again. They got little no money out of it. Ten percent of those guys came back, gave us updates, reminders, told us more about it and built a little bit of relationship. They raised most of the funding. That’s the key. You have to go back, follow up and build a relationship with the investor.

If anything, follow-up is key.

I always tell people, “Write this down. Whoever you pitched to, go back, give them updates, and so forth.” For the first five years I ran TEN Capital under the Texas Entrepreneurs Network, I could count on one hand the number of people that did that. I said, “I’m going to solve that problem. We’re going to run the investor relations campaign for you. We’re going to help you tell your story back to those investors and we help you raise funding.”

I found if I became a broker, I would have to get a FINRA license, then most of my Angel networks and all my VCs would no longer talk to me or use my deals because they can’t pay fees for the deal flow. I went to the non-broker route just because I wanted to keep the network that I built up in all those earlier years. That’s a nice plus as well, no compliance and all the other stuff that goes with that.

You’re not raising the capital. You have a coaching program to help startups build their pitch deck,, portfolio, follow-up, etc. You are coaching them. On the ones that you have invested in, do you have an access strategy for those?

I now had the 3X and 3 exit strategy, but back when I started, it was mostly just helping them find and find a path to a sale. You’re 7 to 10. We’re looking to help them sell the business. That’s when I discovered that a lot of these guys have figured out that they’re going to make more money not selling the business. Eventually, they would sell it, but, they did not build a business that sold for a big amount.

One of the things I learned early on is people make very major decisions very casually sometimes, “We’re not going to put recurring revenue into this. This is too much work.” That’s a 10X valuation. We threw it away. Are we sure we want to make that decision? That’s where we got a lot into the coaching side of it making sure they understand the implications of these decisions when they make them.

The sweet spot is to grow your EBITDA over $1 million because that’s where all the buyers are. There are pretty high multiples for high EBITDA producing businesses, especially if they run on all six-piece, especially if they have proprietary synergy assets. You had buyers out there, and other buyers for contracts, databases and celebrity endorsements. That’s where you get the biggest valuation. How do you find the investors?

I built a strong network of investors when I ran the Angel groups and kept doing things with TEN Capital that put us back in front of investors and education sessions. We did a lot with content marketing. In our podcast program, we have what’s called The Startup Funding Espresso. In the time it takes to drink an espresso, you can learn something about startup funding and raising. These are short two-minute podcasts. You can either read it or listen to it. I’ve done over 600 of those.

Does that one that coming on that talk about valuations?

As an angel investor, you want to do a little good, make a little money, and have a little fun.

No, that’s the full podcast where you have the full discussion. Here I was breaking it down into smaller discussions. I saw people’s attention continually shrinking down. I was trying to get something into a two-minute window because I felt like that was the window I had of opportunity for somebody to read something. If they saw the topic they were interested in, and they could get it in two minutes, they would prefer that over buying a book off of Amazon or what have you were, “I don’t have time for that, but I have time for the espresso.”

The goal was to cover every topic in the startup world. Most of them we have covered right now. We’re updating the website now, so you can see the full panorama of them. The idea was to break it down into a granular fashion. I was also trying to repurpose the content, to create 5 espressos turned into an article, 10 espressos turned into a long article, and 20 espressos are an E-guide. We’re up to about 34 E-guides on our website. You can reuse content if you have it in a granular fashion like that.

What are the most common mistakes that startups make when they start pitching to investors? We get people ready for Shark Tank. I belong to masterminds. I speak at a lot of stages. I’ve been on many Shark Tank panels where I’m an investor. I’ve heard all the mistakes I’ve seen, but what have you heard and seen?

The most common mistake and novice one is they treat the investor like a customer, “Let me tell you everything about this product. Let me tell you how it works and why you want to buy it.” The product is just one step. We need to know about the team, the business model and all this other stuff. You have to balance it out a little bit. That’s one thing, as to make sure that you’re treating the investor as an investor, which is, “I need to know the holistically about the business and the good decisions that we have,” and emphasize what the team is and so forth. Often they just show me a picture of five guys up there, but I have no idea who they are, or what they’ve done in the past, and, “Are they the right guys?” You want to make clear that you do have a rockstar team as the saying goes, “It’s the A-team working on a B project. They’re going to get this done.”

What if they don’t have that rockstar team or A-team? They have alluded to their solid idea. They have one to market, building that team and don’t quite have that team yet, especially in nowadays’ economy, what’s going on in the world, it’s so hard to get good talent these days. What if they don’t have that team? Can I still go pitch? Do you recommend them not to pitch until they build that team?

I recommend you get some advisors who will come in and stand in for a little bit of it. In the Series A level, you don’t need a team of fifteen people. That’s a problem in the other way. You only need 1, 2 or 3 people. At the very early stage, you need someone building it, somebody selling it. We’re all building it. Nobody is selling it. It’s not a huge headcount at the earliest stage.

As you get up into Series A, you need the designer hacker and hustler model. The designer is designing the product. The hacker is coding it, doing the heavy lifting behind it and the hustle is out selling it and raising funding. That model works very well in Series A. As you go up from there, there are different things you need to do, but I find that you don’t need huge numbers of people. What you need are a few good people, and then a lot of support beneath them to get their work done.

Do you coach all Texas startups, or is it just specifically at consumer goods?

We cover all venture startups. Half our deal flow is technology-enabled businesses, FinTech, health tech, etc., 25% of the consumer product goods, the food and beverage, health and wellness, and 25% are in the healthcare life, science, biotech space, mostly digital health. It’s a lot of that out there and then some biotech medical devices and diagnostics.

You don’t do the closing. You’re primarily coaching and bringing the ambassadors to the table. Is that correct?

That’s right. I come from the Angel world and a CEO goes out with a convertible note or safe note. They’re convincing investors to put money in, and with the convertible note, the investor signs the check and the CEO sign the note. The money goes into the business the next day. When you get to Series A, you have to have an equity agreement and you need a lead investor. We’re starting off building it with convertible notes. We find the lead investor and we negotiate the valuation, the terms and so forth, then all those notes convert over into the price round. You just don’t know when you’re going to find that lead investor. They can be the 1st, 5th or 25th.

FYE 45 | Angel Investors

Angel Investors: Don’t treat the investor as a customer. The product is just one step but investors want to know also about the team and the business model. So you have to balance it out a little bit.

 

We use convertible notes to pick up some money along the way because that helps close the lead investor. They show up, you’ve been raising for three months and nobody’s put money in because you were waiting for a lead investor. It doesn’t look good because there’s no money in it. What’s wrong with this deal? On the other hand, if there’s $300,000, $400,000 or $500,000 that you’ve already picked up, “That’s money I don’t have to raise. There’s support for this in other people are in the deal.” That’s why I always like to start with convertible notes to get it rolling until we find the lead investor, then now we move it to the next level and take the business up the curve.

What are the most unique ways of seeing someone connected with investors?

The thing I found most fascinating is when you’re going into a space, you should do some research on it. You should know the industry and what’s going on. I had a startup coming to me saying, “I think they’re in the FinTech space.” They said, “I’ve done an extensive exhaustive analysis of the FinTech space in the startup world. There are six major segments, payments and FINRA. I can share with you the results of my research and educate you on what’s going on.” Investors love to be educated. There’s no asking. They don’t ask me to coach or advise. I went out to the coffee shop and he walked me through. It was fascinating what the current state of the industry was.

Where the money was being raised, where it was growing, how fast it was growing, how big the markets were, what the new segments were coming up, what the care about are investors were, and the startups, all the customers and all that. To meet investors, what I coach startups is go do some research and then offer them that research either in a long Zoom call or a coffee, but there’s no other ask. You just go and build a relationship with that information. Later when they find out what you do, if there’s interest as appropriate, you can then start to ask. I thought the research was a great way to get into it because you should be doing research on your industry anyway, why not share that with other people to build your connections?

That’s great advice because I see too many people going in for the kill right away. I don’t want to kill a lot of different masterminds. Honestly, if somebody walks up to somebody right away and say, “We invest in my company.” No repairability. No, “Hi, how are you doing? What can I do for you?” I always tell them, “Get to know the person. Ask how you can help them first. You go ask them to invest money in your company.” These are just common sense things. Common sense is not so common anymore.

They go on and hurry to get there. They’ve got to slow down because you could have the best investor in front of you right down at a mastermind. You just killed the deal because of your approach. One of the other questions I had is who’s doing these valuations? When you all go to the investor, you do valuations, you know a lot of these are pre-revenue or they have very little revenue, maybe no net income to leave it up. Who’s doing valuations on these companies?

There are two answers to that question. One is one of the advantages of safe notes and convertible notes is that you’re technically not setting a valuation. You do set a valuation cap.

When are you going to Series A, you are.

When you go to Series A, at some point, you’re going to move from verbal notes to setting devaluation. I always tell people, “Valuation is not a formula. It’s a negotiation.” It’s a back and forth. No matter what number you put out there, the other side is going to push back and say, “How did you get to that?” What you need to do is come up with all the value propositions in the deal to make your deal work, so you could justify the valuations.

If you’ve got a rockstar team, you have to put that on the table and start assigning values. To that end, I came up with a 4X model there for how you do valuations, which means you give yourself a $1 million valuation for each of four things, the sales, team, product, and the IP, and go through and articulate all the values that are in there at that all four. That’s extensively how much your company is worth at the very earliest stage. Later, you get into other aspects, but you can start to put on the table what is in the deal because that’s about the only thing that convinces the investor.

Do you think Shark Tank went with that methodology?

When you’re going into a space, you really should do some research on it. Know your industry and what’s going on.

They have other valuations. They have seen other deals out there.

They would have $1 million for this and that. Most of the people get laughed off the stage at Shark Tank because why is drama? It’s because most people go way over valuating a company.

One thing you do with the Forex is you start to figure out what is in the deal today. The other mistake people make is they want tomorrow’s valuation today.

That’s not just startups. That’s existing businesses. They want their entire retirement fund to be the valuation. If they think it’s getting $20 million when retire, that’s the valuation they want.

They will say, “Another company in my field just raises money on a $25 million valuation, therefore I get $25 million too.” That other company is five years ahead of you. In five years, you can ask for $25 million if you’re at the same place, but you’re not at the same place. You’re back at the $5 million level. They want the evaluation that others have further along right now, and they don’t understand why you have to give up money. The investors are taking on risk. If you want the money today, then you have to take today’s valuation. If you want the money in five years, you can get the money then, but you want the money today. That’s why you have to have today’s valuation for what’s in the business today.

They don’t do that on Shark Tank. They go 3, 4 or 5 years out.

They’re all putting it on the growth curve and a lot of it is for dramatic TV effect as well.

I’m here to tell you, as somebody who’s been in this business for a very long time, most business owners overvalue their business. Most business owners who have been in business, not just startups, way overvalue. I have people coming to me and saying, “I want $20 million and the EBITDA is $200,000,” because that’s what they need to retire on. They need to send 5 girls to college and pay for 5 girls’ weddings or buy an island. Everybody seems to overvalue their business. Business owners think their baby is prettier than everybody else’s.

Everybody’s way over there, which is why investors are automatically trying to pull that back down to reality.

Who is successful in raising funding?

Those are the ones that convince the investor that what they’re saying is true and it will happen. I see that a lot with startups. They come in and never want to talk about the current revenue. The only one they talk about is the future revenue, but as an investor, I need to know where you are in order to draw a line from that to where you say you’re going to go and then see if that’s a realistic number. If you can never tell me your current revenue will, then my rule is at zero, and it’s not clear that you’re going to be able to make that giant curve you’re drawing there. The ones who raise money are the ones that convince the investor that what they’re saying is inevitable, “With or without you, it’s going to happen.”

FYE 45 | Angel Investors

Angel Investors: At the very early stages, you really don’t need huge numbers of people. What you need are a few good people and a lot of support beneath them to get their work done.

 

That’s the best way to approach it. I’ve had some startups go to investors and say, “Without you, we will fail.” No investor wants all the weight of the deal on their own shoulders. They want to share that. They’ll take a little bit. They’re not going to take all of it. You want to go to them and say, “With or without you, we’re going to raise this money and be successful,” in a nice way. The kind of deal investors want to jump on is they can be a part of something, but it’s not going to weigh them down getting there as well. You have to come up with where you are toda, show how you get to where you want to go and how that will be successful. If you can convince people that they buy into that idea, then you have a successful fundraise, but they’re not jumping into something they don’t think is going to work.

As an investor, I don’t think I would ever invest in somebody who says, “I really need you. Otherwise, this deal will fall apart.” I’ll be like, “I’m running.” How many startups that try to raise capital are successful at raising capital?

It varies over time. About 20% or 25% raised funding. People come back and realize, “I’m not ready yet. I need to go get more prepared. They’re asking me hard questions.” I ask them, “What did they ask you?” “They want to know how they can get their money back. That was a hard question.” They were used to talking to family and friends who put money in because of the relationship, not because of the business. As you draw the circle further away from family and friends, it’s more about proving this. They sometimes find that early they are not ready for that.

Some people realize, “My business is not ready for funding. It’s not going to have those returns and do the things that everybody wants.” They either changed the idea to a lifestyle business, they go on to do something or change it to a venture business that you can stand up for because it is a very strong filter they put startups through. It’s one of the things that not everybody raises funding. Everybody wants to raise funding, but they don’t realize how much work it is until they get there.

That’s a tremendous amount of work. It’s like building a business with sellers, a tremendous amount of work. If it was easy, everybody would be doing it. You have 15,000 investors.

We’ve been curating investors. These are venture capital funds, Angel groups, Angel investors, and syndicate funds. We’re getting a little bit more into crowdfunding. That’s a good option for some people as well. Although those are more retail investors, the average investment on a crowdfunding campaign is $500. It’s another crowd to go to. We put that at the end of our program, not at the beginning. A lot of people start with crowdfunding, but I don’t recommend that.

You should go out and raise money from Angels and VCs, and get a market rate, market reality valuation on your deal. If you go crowdfunding first, there’s a conception that well in the crowdfunding world, you can put anything you want to on it. You can. Most of those guys aren’t looking at the valuation. They’re putting in $500, but the moment you step out of that world and try to go to the Reg D or the Angel VC world, your dead. Nobody’s going to put money into a deal that goes $100 million valuations for $200,000 of revenue. You do that in the crowdfunding world, but that’s not going to work over here. Good luck selling the business at that rate.

What you had to think about is what are the exits going on in your space? Would people pay for a business like that? They have some fantastic spreadsheet curves they put on this forecast to get there, but there’s no way they can do that. Angels and VCs are onto that. They know the valuation has to be a market reality. They don’t sign the check until you come down to it. Later you’d go raise on the crowdfunding campaign, but with a market reality rate there as well.

I’m glad you brought that up because I was going to ask you about GoFundMe and all those ways to raise money. You don’t recommend doing that. A lot of people in startups are starting there and even larger companies feel like they need the capital influx to build their business or at the next phase of their company or starting there.

The mistake they make is they assume the portal is going to do the work for them. The portal is going to charge a fee, do the compliance work, put you up there and then say, “You go raise money. Not me.” When you get to a certain rate, we’ll then, “We’ll add on to it a little bit.” They’ll do a mailing and you’ll get some nice juice out of it. Most people vastly underestimate the amount of money it takes to do a crowdfunding raise. It’s 10% to 15% of the funds raised will have to go into social media marketing and other things to get it up there. Therefore, while the portals were generating maybe 5% of the fundraise and now they’re down to less than 1% because they got so many deals up there.

The investors hit three times a day from every which side on deals that they can’t help you as much as they used to in the past. The idea is that if you can go spend time raising money from people, you need $50,000 checks, not $500 checks because I had people come back to me saying, “I’ve spent a tremendous amount of time talking to all these people, and I got these $500 checks. If I had done with Angels, I could have gotten 25% and 50%. I would have gotten to my goal where I was because I had to go sell it individually.”

Valuation is not a formula, it’s a negotiation.

They used to have a referral fee, instead of a marketing fee.

There’s a fee that goes to the portal as well. The thing is if you go and raise money from Angels and VCs, you stand up the business and build your network, you can take your network at that point, your customers and start to see if they would help you generate additional. It’s just another group to go to that could raise some of it, but it’s not going to raise all of it for sure.

What about going to family and friends to raise money? What are your thoughts on that?

You should always go to family and friends. That’s a great way. They’ll support you, and then you return the favor at some point. You support them in whatever way they want. It’s proof of validation. I used to get people coming to me all the time saying, “I didn’t put any money in. My family didn’t put any money in. Nobody bought anything. Nobody back home would invest. How about you?” “No, nobody’s in this deal. I don’t want to be in it either because there’s no validation here. There’s no support.” On the other hand they say, “I, my family and my local Angel group put money in. We sold a little bit. How about you?” This is something to think about. Other people are in the deal and you’re proving it.

Whenever you go to another place to raise funding, you always want to be able to point back that, “We raised money back home. They believe in me.” You need to show that you have support from people that know you well. Especially in the Bay area, people have figured out that if they can’t raise money back home, they come to the Bay area.” “I’ll put money in if your network puts money and go get $500,000 from your local group.” I see that a lot. It’s a good idea. You should do that. You to try to demonstrate support locally.

Shark Tank works favorably upon that too because they always ask those questions. You specialize in coaching in what series? You do Series A. What was the first one?

We did C, C+, Series A and B mostly.

What’s your sweet spot with the ideal candidate? The client for you.

In the C, they’re raising $500,000 to $1 million. In Series A, they are raising $1 million to $3 million, and $1 million to $5 million. In there is where our investors are normally going to be. We do have people that want to be on the unicorn track and we just add a zero to all of those numbers that that’s a little bit of a challenge for most Angels and most VCs. We know there are some that can do that, but not a lot.

You do code some unicorns.

We offer that to them. We get people coming along the curve and it’s a rocket to the moon, and some of them actually are. Some of them do very well. Most don’t, but it’s the numbers game we always play.

FYE 45 | Angel Investors

Angel Investors: No investor wants all the weight of the deal on their own shoulders. They want to share that. They want to jump on and be a part of something, not something that’s going to weigh them down.

 

What sets you apart? What makes you so different than all the other investor coaching companies out there?

We’ve been doing it for many years. We can help people figure out what the issue is, the problem is, and how to work with it. In the very early stage, you shouldn’t be trying to tout your absolute revenue. You should be touting your unit economic story, “I’m making a profit here. I took $5,000. I invested it. I ran these ads. I got these signups and conversion rates and so forth.” You’d be playing that conversion unit economics story as opposed to, “I got $50,000 of annual revenue so far.”

It’s all about validation in the early stage. It’s not about revenue or traction. It’s about validating that this thing works and you should do specific tests that prove that, and then make hay with those numbers and say, “I’ve proven it works. If I punch in $50,000 on those ads, I would get ten times more revenue out of it. I’ve got what I called the repeatable predictable process.”

You want to have a funnel saying, “X number of leads turns into X number of qualified leads, turn to X number of customers. It turns into X number of repeat customers. I figured out those numbers and those rates.” That’s what investors are looking for. They are not looking for just big revenue in the earliest days, because most startups don’t have a big revenue in the early stage, but you want to put that model together as fast and as best you can.

Kevin Harrington is big on that. He says that everybody under the sun is coming to him asking him to invest in products. That’s one of the first things he does before he ever says yes. He says, “Let me take the product. Let me see what I can do with it.” He goes and puts it on Facebook. He creates ads, split tests and does all of that. He then comes back and says if it’s a viable product that he is willing to invest in.

You have to test it out. It is more than just one unit. There are many things and ways of testing and trying. You should statistically go through the 5 for 10 distribution channels that make sense and test them out at some point to see what’s going to perform and how well it performs.

You’re talking mostly about product companies. What about service companies and any type of service businesses, healthcare, manufacturing, any type of other industries? You mentioned SaaS and consumer products.

You should test those things out as well. You won’t have a big software system behind it, but you can build websites.

Do you coach those industries?

We do. We have all those coming through. We’re wearing assets to it. We were with all the different groups. We work with biotech companies. One of the things we get into now is most of our clients have a vision of selling the data. We coach them on how you package that up and present that to the investors, so you can justify a higher valuation because it’s a bigger can. It’s another product. It’s fungible. There are a lot of great things to like about it.

Put a roadmap slide in there that says, “I’m doing a service today, data tomorrow and AI in the future.” You start to get an attachment to growth sectors in the industry. That’s one of the key things. You have to attach to something that’s growing. If you’ve got those growth numbers in your current sales, that’s great. Most people don’t, then we need to attach to markets where those numbers exist and be a part of that world at some level. Give yourself credit for selling data and start thinking about that hard, because that is a great secondary sale that you can get out of your service that people are thinking about now, and tools are coming on the market to enable that.

In the very early stages, you shouldn’t be trying to tout your absolute revenue. You should be touting your unit economic story.

We do the same thing. We get companies that have big databases, like we’re selling an app company for way above market price. When they have a database with all that content and all that data on their customers, the first thing we do is up the multiple on that. Those are the most quite proprietary synergies that are going to drive the multiple. 

We coach people on, “Capture your data and clean well-structured sets from day one and put yourself on a path to do something with it, but you don’t do it today. Today we’re just going to get our service up and running. In two years, we should be in a place where we can start to take that data and do something meaningful with it. One of the issues with data is you need a fair amount of it, so it does take some time to build it up, but it’s naturally building up in the background as people use the system, then which is a real money maker. You can double your valuation with that.”

Those are the things we coach people on and about every industry, even the biotech industry. We coach people to gather their data and put it into an info system. For biotech, we were mostly trying to get validations. We want to sell it to partners in the industry, the big pharma, and pay $100,000 a year to get access to it then you take that to the investor saying, “They liked me so much. They’re buying my data.” That tells the investor, “You have something that the industry believes in. I’m going to be looking at this more closely.”

Do you have any last-minute thoughts for these startups, business owners and entrepreneurs trying to raise capital?

I think we covered it all. I enjoy being here and chatting with you about this. It seems like we have a lot of synergies here with your work and our work as well, but appreciate you having me on.

I love to follow our conversation in talking about how they can plan exit strategies for these Series As because the investors want to know what the exit strategy is. As an investor myself, as a partner with business owners, I don’t go into the partnership without knowing what my exit is going to be. I want to know my exit valuation because if I can get an exit for $15 million, $20 million, or $30 million, I’m not interested. If I can’t do it in five years, I’m not interested. The exit strategy is a big part of that for investors.

They should have a vision of where they’re going. They may not get there in the same way, but at least they are keeping in their mind what they’re planning to do.

How can our readers get in touch with you if they’re interested in your services and your coaching on how to raise capital? I truly believe that anyone trying to raise capital for startups needs a coach. Anybody trying to do anything of significance needs a mentor, not just any mentor, but a mentor that’s depending on the road you want to travel. Somebody who’s been highly successful, shortens the learning curve dramatically and get you on the path to success much more quickly. I believe in mentors, and that everyone should have a successful mentor in their life.

Our website is TenCapital.group. You can find me there. Hit us up and we’ll be glad to talk to you about your fundraise and how we can help.

Thank you so much for being on the program. You gave our readers a lot of golden nuggets, a lot of things that they can implement, and they can get in touch with you about how to start raising capital for their business. A big thank you to all of our readers. If you liked this show, which I know you love, you need to share this with your community, networks, your family and friends, etc. Subscribe to our show, and we’ll see you on another episode.

 

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About Hall T. Martin

FYE 45 | Angel InvestorsI help investors fund startups and entrepreneurs raise #funding.

$900M+ raised for entrepreneurs through the TEN Funding Program
10,000+ pitches in the First Look Forum & Funding Forums & Venture Growth Forums
40X return for Austin angel network
$32M+ raised through Accelerators
$13M+ #invested through university angel network
25+ year blogger on emerging technologies, angel investing, and business growth
125,000+ investors & startups educated on startup investing through non-profit
Grew international business unit from $100K to $50M+ for National Instruments
UT MBA
Baylor CS

Through TEN Capital, I help #startup and growth companies everywhere raise #funding from #angels, family offices, venture capital and high net worth individuals.

Through the Texas Entrepreneur Networks I established a funding program to match entrepreneurs with investors I also run the Wilco Funding Portal which has raised over $3M for companies based in Williamson County.

Through the Texas Open Angel Network I educate angel investors on how to make investments into startups and growing companies. As part of TOAN, I host the Investor Connect podcast series in which I interview venture capital, angel, and family offices investors on how they invest in startups and growth companies.

I assist in the formation and launch of startup investment groups, mentorship programs and accelerator programs which includes the First Look Forum, Idea to IP at UT, Incubation Station(SKU), AccelerateNFC, and others.

I formed the TEN Advisory program consisting of highly capable professionals to provide business services to startup and growth companies.

Specialties: Venture funding, angel networks, crowdfunding, pitching, fund raising strategies, growth strategies, go to market strategies, business model development and more.