How to Raise Money from Angel Investors with Hall Martin CEO of TEN Capital | Ep. 94 | Business Podcast
Summary
At some point in building your business you’ll likely want and need to raise money to scale revenue.
Hall Martin is CEO of TEN Capital that has a network of over 12,000 investors.
We talk about how angel investor networks work, what they look for in a company to invest in and terms they generally expect.
Hall also drops one of the best formulas I’ve ever heard on how to figure out a valuation for an early stage company. You’ll want know this.
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Brandon:
Hello, friends. Welcome to the show today. We’re talking about how to raise money from angel investors and what terms you can expect them to ask for, for them to invest in your business. And I’ve got a special guest today. Hall Martin, who is CEO of 10 Capital and he’s got an entrepreneur journey of his own in many ways.
He started it as the Texas entrepreneur networks in 2000 and nine and has grown it to over 12,000 investors, and he now calls it 10 Capital, and he’s going to lay out how to raise money from angel investors and what terms you can expect.
He and I had a great conversation about this. You’re gonna love this episode and you’re not gonna want to miss it, because at some point in your business, you may need to raise money, especially if you’re growing your business really fast. Let’s not waste another second. Hall Martin, CEO of 10 Capital, how to raise money from Angel investors and what terms to expect?
Narrator:
Welcome to build a business success Secrets. The only podcast that provides straight talk for entrepreneurs. Whether you’re an entrepreneur, starting with an idea or growing your business. This show is for you. We’ll teach you how to build a strong mindset, powerful body and profitable business so you can achieve success. And here’s your host, Brandon C. White.
Brandon:
And everything is opening up in California. So, Howard excess, I think in Texas you guys have been open. Right?
Hall:
Uh, they opened last week, you know, almost full. I think we are in full, uh, mode in most restaurants, and you don’t have to wear a mask, but most people do. Anyway, I’m actually getting my vaccine tomorrow. So looking forward to that Yeah.
Brandon:
Okay. Exciting.
Hall:
Yeah. I can’t wait.
Brandon:
I heard that in. Are you in Austin?
Hall:
Yes. We’re in Austin, Texas.
Brandon:
Yeah. I got a friend of mine who has a company there.
Hall:
And he said that there was an excess of vaccines there, I guess, because it’s rural area.
Hall:
Maybe he lives right outside of Austin.
Hall:
Well, it’s a challenge, because the, you know, half of Texas is concentrated in three big cities Austin, Dallas, Houston and the other half is spread over a huge swath and getting it out to the rural areas takes some time.
Brandon:
So there’s lots of vaccines but, you know, just distribution and setting up. It just just takes more time because of the logistics.
Brandon:
But in the big cities are going through it in in great, great order. You know, just going down. We’re down to the 50 and above. And then very soon, I think would be a couple of weeks down to 40 about 30 bucks. You know, it’s just going very fast at this point.
Brandon:
Well, that’s awesome for you guys. Well, hey, I know we’re going to talk about how to successfully raise money for your startup, but I wanted to ask you how did you get started?
Hall:
You I mean, you have an incredible network.
Hall:
I think of over 12,000 investors.
Hall:
I want to hear more about that. But how do you even get into this gig?
Hall:
So I worked for a company that when I p o in 95 I started doing start up investing in Austin back then and we had an angel network called the Capital Network. They ran from 95 to 2000 to get tied at dot com world, and when that went away, they went away with it. I started doing Angel investing at that time frame, made a few investments, lost money.
Brandon:
And then in 2000 and six, the city did a restart, and they called it the Central Texas Angel Network. So I was the first member to sign up for it.
Brandon:
And when you’re the first member to sign up for an angel group, you’re automatically on the board in charge of a membership. It’s a great honour with no pay. And then two months into it, we lost our director. So I became the director, and I put the program together, got it up and running, and we got a 40 x return out of one of our deals. So that propelled the group on word and thin. My undergraduate Baylor came to me and said they wanted an angel network. So I helped put that together. Still a member there 10 years on. And then I, uh, put another one together for a city called Round Rock, which is just north of Austin, in a place called Williamson County. And we called it the Wilco funding.
Brandon:
Uh, it will go Angel Network, And so I started. The three Angel networks had a lot of fun with it and a year later decided to retire from my day job. You know, it’s time to go into my second career. And so I started what was called Texas Entrepreneurs Network, and I built up in that 1st 10 years a lot of connections with the Angels and so forth. And then I started helping Texas startups raise money from angels, and then I needed more funding than what was here.
Brandon:
So I went to the Bay Area in New York from 2010 to 15, fly up there every month and meet with VCs because I needed more venture capital money for the later stage deals.
Brandon:
And then in 2016, I started got a whole bunch of people coming into my Texas Entrepreneurs Network program wanting to do deals to direct and in 2017 and these are across the country. They were just investing in Texas.
Brandon:
But in 2017, I started getting calls from outside of Texas saying, We want access to your investors. How do we do this?
Brandon:
At that point, we rebranded attend capital. That’s what 10 stands for and started doing a program around the country, and so we just kept building the network over the years.
Brandon:
I looked at becoming a broker dealer, but found that, you know, back in 2009, when I did Texas on Careers Network, that Angel groups and VC funds don’t allow brokers to be in the deal. So I used a retainer model and a heart. We’re running investor relations and introductions. That’s what we’re doing. We’re just connecting startups and investors for funding, helping with the pitches do all those great things.
Brandon:
And we saw early on that things were going to go online. When I sat in those angel groups back in 2006, 7 and eight, I looked around and said, Well, you know, half of what we’re doing can be done online. Why are we sitting here in the dinner club?
Brandon:
Well, yeah, It was an open wine bar, and it was this nice social network and so forth.
Brandon:
But Saul very, very quickly. It was going to move online when it got to scale. And so we actually had a funding portal for a couple of years as Texas Entrepreneurs Network, we had a Texas interest state license, did a whole bunch of breweries, wineries and consumer product goods, and that was a lot of fun. But it didn’t really do much for the tech deals or the healthcare deals, and I wanted to get back to it.
Brandon:
And so in 2016, we hung up the portal and went on to just work with the credit investors and do regular, you know, standard angel level raises is what we were doing.
Brandon:
And so I just had a lot of fun with it all these years.
Brandon:
That sounds like quite a journey. I know the angel networks.
Hall:
Uh, originally, um, I was in part of a program out in northern Virginia, and then Baltimore actually founded uh, an angel network.
Brandon:
But as you experienced, I think, um, all of these areas that have tried in many ways to support entrepreneurs the biggest, um, challenge has been I think that you need the air around the B round the sea around and the exit people all in the same place, and ultimately it falls down.
Hall:
Even if you have these angel investors or you even have an a round, you have a few BC firms with the A round if you can’t, if they’ve already signed up for that, you know, And they can’t get a B in a C.
Hall:
Then everybody’s sort of left, I don’t know, holding the money bag, trying to get money.
Hall:
So it sounds like you put that together.
Hall:
So is the network now across the country?
Hall:
Or is it, um, are are your 12,000 investors all in Texas or they across or how does it work now?
Hall:
So they’re across the country, You know, the Angels are still somewhat concentrated in Texas because I did a lot of work there.
Hall:
But, you know, I work with all kinds. There’s 200 angel networks in my, uh, syndicate, so to speak. And, you know, they’re loosely affiliated. Uh, and so we work with a wide range of angel groups.
Brandon:
But the venture capital is heavily concentrated on West Coast East Coast, and you know, there’s every city now has VC funds, and even Austin now has quite a bit of a VC network.
Brandon:
But for many years that it wasn’t extensively, uh, across the country, it was concentrated in the family offices are all in the major cities across the country as well, so it’s evenly distributed across the U.
Brandon:
S. overall now and the start as we get across in the U. S. As well I get as many from the Bay area in New York as I do from Texas and, you know, Chicago, Seattle L A.
Brandon:
And everywhere in between. Everybody is, uh, you know, going, getting into, um you know, the tech world and, you know, starting up the business. And, uh, that’s what I get. Mostly as people come to me saying, I’ve talked to everybody in my city, I just need access to more investors and they want to do it online. And when we did the crowdfunding, we we kind of learned, How do you deal with people you know, virtually in through email and so forth, But we didn’t want to get into the regulatory side of it.
Brandon:
I think today there’s 50 title, three crowdfunding platforms out there. Three or four have the majority of the business, but we and it has its place. And it’s of course growing. It’s getting bigger is kind of coming into the angels space. We had a meeting with the Iraqis Venture Club today, and we were talking about that.
Brandon:
What happens when crowdfunding continues to grow. What do angels do? I saw some angel groups positioned themselves as syndicate platforms. Some are trying to go online and just connect with other groups outside of their community. Back when I ran him in 6 2007 and eight, they were very much geographically focused. And they want to work on that. As you go online, you start to realize what we’re really no longer tied to this geography. Why do we want just the best local deal and get the best deal anywhere?
Brandon:
And so that’s That’s one of the things they struggle with. When I started at the Dinner Club model, you go and have a nice wine and order band, had a social, uh, effect to it, and you were helping the local community and so forth that was all great. But as you get into it, you start to develop a more specific investment thesis. You want to, you know, go after, say, fintech or medical device, and you don’t want just the best locals fintech deal.
Brandon:
You want the best fintech deal across the country, and so you start to scan more nationwide, and I think that’s the impact we’re seeing now is in this digitization of everything.
Brandon:
Everything is going online. Angel groups are doing the same thing, and you have to pick up and move to the next stage. You have to have portals. You have to have tools. You have to have connections across the country. Guild flow sources that are not just three local accelerators. You have to have a much more robust network. And you’ll see.
Brandon:
I think we’ll see a lot of syndication going among angel groups themselves because they know each other from the conferences and form history. And so we’ll see what forms from that.
Brandon:
Well, yeah, I think you bring up a good point that that’s interesting. I actually invested in a deal called the Night Scope, which is, uh, you know, automated Robot based out of Mountain View. And, um, yeah, I was actually impressed on how easy it was.
Hall:
I mean, it was a lot easier than it used to be.
Hall:
Um, you know, I mean, they literally took my credit card, which I don’t understand the economics, how they eat, how they ate that 2.5%. But somebody ate it, you know, somewhere.
Hall:
Um but it was really easy. And so, you know, another interesting thing I’d love to hear your thoughts on is not only in those regulations that they are now filing for the crowd sourcing, they don’t even have to be accredited investors.
Hall:
Now that that can cause could cause.
Hall:
But it sounds like the SEC sort of sorted this out back in the day that you’re talking about.
Hall:
That’s what I remember.
Hall:
Even when I had to come when I was an angel investor, that’s what we did, right? We had ordered herbs, I didn’t drink. But the rest of them drink wine and hung out. And you know, as much as social event as it was trying to do something good for the community.
Hall:
And it was sort of was a thing.
Hall:
And and now it’s just, um in many ways, I sort of like it, but it’s certainly not personal, like I can do it from this computer. It’s really about IR are at that point. There’s, um they’re getting an enormous amount of people in there. So how do you think?
Hall:
You know, back in the days that you’re describing, you really could only have in credit. I mean, accredited investor was the thing. Otherwise, you’re going to screw up your company if you are going to try to go public or get some sort of exit. So what?
Hall:
It’s almost like the I hate to say it because But it’s like this game stop right All of a sudden, you have these, uh, not professional quote unquote investors coming in and basically disrupting the market.
Hall:
Well, it is a force to be reckoned with because you’re online.
Brandon:
And what I think the one of the innovations of crowdfunding is when you’re an angel investor, the minimum people would invest was like 25 k.
Brandon:
When I ran the groups, they would walk in the room with a 50 k check and look around the room and then pick one person and say, Okay, you get the check. Well, today, what they want to do is walk in the room with $50,000 and say, Okay, five for you, five for you, five for you and then spread it across more deals to get a hit, and crowdfunding allows you to do that. You can go in. And for many Title three crowdfunding campaigns, the average investments of $500. And so, if you have, you know you’re going to put $500 in Well, how much diligence are you really going to do? How much are you really going to help that company as well?
Brandon:
And then I say, Go, for example, did a reggae. You may have been on one of those reggae’s that they’ve done. We’ve worked with them before. They’re a great group of people.
Brandon:
And but, you know, they got a fairly capital intensive product there that needs more funding, and they’re able to go out and raise it from the community, so to speak, because they can now get raise it from anybody. Because both crowdfund both the reggae and WREG CF, which is that Title three we talked about, Uh, you’re basically going public and you have to go get audited financials, and you have to turn the reports every years to the SEC.
Brandon:
But you can now raise from anybody. And at $500 anybody can put 500 in back. When you asked for 25 or 50 k, not not everybody could put that in. Credit in vegetables were originally written in 1968 and the only changes at once since then. And that was the Bernie Madoff years. They said. Well, you can no longer count the house you live in, but for the most part, many more people are accredited, but it’s now going down and out to the masses.
Brandon:
The one thing I’ll say about Crowdfunding is typically does well with things that are consumer facing.
Brandon:
If you can look at it, understand it. Well, then you could probably fund it, and you’re only putting a small mountain. We get to tech and healthcare and other things.
Brandon:
Those things don’t always do so well on those crowdfunding corals because you can’t look at it and understand it when in 15 seconds or less.
Brandon:
And so and the second thing is, I find Angel. Investors often went in and to help the company that they invested in, and they were fulfilling that need. Crowdfunding. I really don’t see a lot of that going on. Maybe some people do, but I really don’t see them getting in there, helping you build out your team and give guidance and find customers and so forth.
Brandon:
So there is a different place that angels took at that time, and I think most will probably just move upstream to do go to a later stage in the financial world.
Brandon:
That’s what happens if you want a bigger paycheck. You have to do bigger deals, which means you’re having to do later stage deals. So everybody is moving up and going to the right to get bigger deals and bigger fees and bigger payouts and so forth.
Brandon:
So that may be where angels end up.
Brandon:
We’ll see.
Brandon:
Yeah, and I want to caution everybody who who’s listening who are are obviously a lot of entrepreneurs out there that, um, you know, you want to be careful and going into a crowd funding.
Hall:
It does look appealing. I mean, I’ve read all the information and and certainly you can raise, I think, 100 up to 107 or something unaudited. Having said that, you are going to have a group of investors that you’re gonna have to answer to. It’s not like the money comes in and just goes away and you need to manage manage that process.
Hall:
But one thing that you did say that I think, um, I found interesting is the other day, I whatever that network is that that night scope was on, they sent me an email, and now you can and you could always trade, at least here in the valley.
Hall:
Uh, you know, there was a secondary market for shares.
Hall:
Um, out there on the private market, they’re generally always was. And but now it’s almost like they’ve created their own exchange, like you’re saying. I mean, they’ve created a stock market without it being a stock market.
Hall:
Um, so it’s gonna be interesting how that plays out.
Hall:
Yeah, there’s because companies stay private so much longer, you know, Used to be when you went I p o you had arrived, and you were there. I think in today’s world, when you reach I p. O, you’re pretty much mature company and you’re no longer creating creative or innovative or whatever in some cases, and so they stay private so much longer that they’ve actually created these secondary markets that you can go up and you can sell.
Brandon:
And if you’re a good sized company with, uh, you know, you’re not at risk for startup failure, well, you can sell your shares to somebody else, and that’s what they’re doing. now is creating, uh, an exchange, you know, before they get to the NASDAQ. And remember, 15 years ago I was taking a training course and they said, You know, very soon we’re going to have 24 by seven trading hours, and we’re gonna be able to trade anything anywhere in the world.
Brandon:
And none of that happened NASDAQ and New York Stock Exchange or the same today as they were back then, with maybe a few slight changes in the time we started 8 30 instead of nine.
Brandon:
And you know, they really didn’t innovate. And so the world is just kind of moved on.
Brandon:
Without them to innovate in ways that people want, they want to be able to log on 24 7. They want to be able to exchange shares. They want to be able to get in and out of deals on a regular basis. You see little bit that with a Bitcoin and the digital currency’s world, uh, that’s that’s really a lot of innovation going on there with what they’re doing with it.
Brandon:
But I think the traditional exchanges just never kept up for probably regulatory reasons, and maybe, maybe otherwise, We’ll see?
Brandon:
Yeah. So let’s talk about, uh, for the entrepreneurs listening out there, how they would get.
Hall:
We’ve talked about a little bit about crowdfunding, but like I said, I cautioned that it’s a great way to start. Uh, you know, and it can. And like you said, if people can understand that it can happen. My friend. Actually, that I mentioned you got a shot named Tony, right? And he had a I think he set the record for crowd funding on Kickstarter. They did, like 1.7 million in a month or something.
Hall:
Uh, something insane or or Or maybe it was more 14. I don’t know. I did a podcast. He’s an old friend, actually from college. But, um, you know, those things have their challenges.
Hall:
So let’s talk about angel investing in what you do and the advice you give. One thing I’d love to hear you talk about, um is the terms. One thing that that I think entrepreneurs catches them off guard is there’s this, um, here’s what I say and I get to say this because I live in Silicon Valley, is is that I always say Silicon Valley’s like Las Vegas everybody says, Come here.
Hall:
Come here. Come here. You’re gonna have a great time. You’re gonna make a billion dollars. Um, not everybody makes a billion dollars, but and a lot of people do leave.
Hall:
But everybody says they had a good time.
Hall:
Uh, you know, there’s not always a little bit less money in their pocket, but definitely some more experience. But I think one of the things that people don’t realize is the terms.
Hall:
And, you know, I know that I get your newsletter and you’ve written about that, and I have explained that a lot. So I’d like you to touch on that. But maybe you can go from the beginning on how how you accept people into your network and how how they how they get into it.
Hall:
And then, just as a question, do you take a Is your model? Are you helping entrepreneurs and collecting a fee for the placement? Or are you doing a mini fund on the backside and collecting a fee for that?
Hall:
So how do you get paid?
Hall:
Basically your your company that helps entrepreneurs raise money.
Hall:
Sure. So because I had a large network of angels and venture capital, I looked at the broker model where you can take a success fee and found that, uh, angels and VC funds don’t allow those guys into the deal.
Brandon:
They just don’t want to see the money going out for the transaction like that.
Brandon:
And so I went what was called the retainer model? I would charge the company a monthly retainer to go out and help them put documents together, meet investors, closed deals, whatever. But there was no back and successfully in that case. And the advantage of that is it gets you out of the world of compliance, and you don’t have to worry about that anymore.
Brandon:
And what I was trying to do is come up with a recurring revenue model that wasn’t contingent upon success fees and also upon raising a fund. That’s the other model you got. Raise a fund and I saw many groups come in and raise a fund.
Brandon:
Deploy it successful, raise another fun, deploy it. Oh, not successful. Can’t raise another fun. You’re now out of business.
Brandon:
And so I just try to stay out of that world as well because I saw the boom and bust cycle that went with that even if the people were successful, they sometimes moved on to other things and you couldn’t raise another fun. And so I I noticed that you know, there’s this time when honors need to go out and meet investors, that it’s a it’s a it’s a challenging time.
Brandon:
You have to get introductions.
Brandon:
I can make the pitch and you have to close. And so we decided to solve that problem to help match them, and that’s what we’re doing. When companies come to us as we’re signing them up, they pay a monthly retainer and we’re matching them to investors that are the right revenue sector and stage and getting an introduction.
Brandon:
There’s plenty of people that will give you a list, but good luck getting an introduction to them because they don’t know you well, they know us.
Brandon:
And if we say they’re a good deal, well, then you know they can get the introduction and go forward and discuss their deal. And if they have a good deal growth story, we call it, uh, sales team product fundraiser moving up into the right. Well, then they have a shot at raising some funding from them.
Brandon:
We also have to help them with their diligence documents to make sure they’re put together and so forth. But that’s usually not very hard.
Brandon:
So at heart, we’re running investor relations and introduction service, and it’s an evergreen model every every day, someone signing up, wanting to come in to meet investors. And then investors on their sides signed up to come in as well.
Brandon:
Most them signed up for the premium. On the investor side, they just wanna look at all the deals, and then some sign up for the premium where we give them special deals.
Brandon:
And as far as terms go, uh, we coach startups on how to set the terms for the deal because sometimes they don’t have realistic or market related expectations. Evaluation. Being the big one if you’re raising equity evaluation, is the number that every investor is going to push back on, and we coach them on how to set that and how to defend that as well.
Brandon:
Uh, valuation says this is how much my business is worth before the investment goes in, and no matter whatever you put on it, the investor is going to push back and asked, Well, how did you arrive at that?
Brandon:
And the reality is about half the honors out there arrived at it by saying, Well, I figured out how much I wanted to own at the end of this process. Worked back so therefore, that must be how much my company is worth, and that’s really not how it works. It’s really what values have you put into the business already, and the secret is to be able to articulate and identify those values.
Brandon:
If you can figure out what kind of team you built and why that’s important.
Brandon:
You can use that to talk to the investor about convincing why your deal is worth what you say it is and then doing a little bit about the current market rates out there and seeing what others are doing, and that that helps as well. The stock market is at an all time high right now, and so evaluations are also going to be very high. Lots of cash is coming off of the stock market, people looking for a place to go, then they like to put it into the start up world.
Brandon:
We were in a recession. The stock market would not be throwing off a lot of cash. People would not have a lot to go out there. Evaluations would be, uh, much lower because of that. So we have to look at that and understand what market we’re in. And we coach people on that as well. And then there’s other terms that come into it, like liquidation preferences and investing founder shares and so forth.
Brandon:
And we help them understand that. And what those might be.
Brandon:
Yes, so, um, one of the things as I’m listening to you that I think is true. Um well, most entrepreneurs out there who are new to money raising, actually, they definitely need help modeling their cap table. And and And it’s not as easy as just whipping out a spreadsheet because you have to understand all the terms and liquidation preferences like you said. So I always recommend that someone could help with that. And the other thing I’m interested in, your thoughts on it is this valuation question, because I get asked a lot and, uh, after through all my companies, of course, as an entrepreneur, your first inclination is I want the highest valuation that I can get, and, um it’s It’s through a good friend, Tig Savage, who is, uh, managing partner at Revolution Health or he’s actually a Revolution Ventures Now, Um, he always had this thing.
Hall:
He’s like, Brandon, that’s that’s not it.
Hall:
And and Tiger and I knew each other from the a o L days back. Um, that was a long time ago, but and he would always say, You know, you don’t want the highest valuation, and as an entrepreneur you’re sitting on the other side of the table and you’re thinking to yourself, Well, I want the highest valuation because I want to give away the least amount to do that.
Hall:
But I’m interested in your thoughts because once once you set the price and you take investment money, you are now going down a different path, then bootstrapping your company, borrowing money and going down, you know, on a cash flow or, uh, taking debt yourself to do it.
Hall:
So do you have advice for entrepreneurs out there about this whole strategy?
Hall:
And and it sounds like that’s what you you would you help entrepreneurs understand that there’s a strategy to this.
Hall:
It’s just not how much am I gonna own?
Hall:
It’s there’s there’s these pieces of How much are you going to be able to raise?
Hall:
And are you going to be able to meet your milestones?
Hall:
Sure, so the key with starts don’t always understand is they think that they have one business model, and the V.
Hall:
C has a different business model.
Hall:
But the moment you take VC money, you now have a V C business model, and you must be on that track and understand.
Brandon:
That’s how that’s going to go down.
Brandon:
You’re not separate. You’re part of it at this point.
Brandon:
And the key question I always ask people is not. Can you raise this round of money at this valuation? But if you do, can you raise at the next round at the next valuation point that investors would expect? And if you can’t, well, then you you set this one too high.
Brandon:
Sometimes people come in and they they’re excited. They talked an investor into, say, $100 million valuation at the C level, and they’re just really excited.
Brandon:
And this is all great until you go out to raise your series a or the next round. And, uh, you haven’t built a business that’s worth more than $100 million and the last thing you can do is what’s called a down round where you go below what you did previously because it destroys the investors, and that can really hurt your company and your reputation for a long, long time.
Brandon:
You always have to be able to go to the next level up as you go forward, and so you want to give yourself some room. If I’m going to raise a C now and then a two years raise a series a between here and there. I’ve got to build revenue and team and product in order to justify that next level evaluation.
Brandon:
And if I can’t do that, well, then I’ve overshot it at that point.
Brandon:
And that’s one reason why companies end up going sideways as they’ve overvalued. They’ve raised money to high in one round and they just can’t get there on the next round. And so they just go sideways on you because they can’t raise money and so organically. And so now you’re in the deal for a long, long time.
Brandon:
That generally doesn’t work out well because there’s a thing called ratchets right and the investors will effectively start to own.
Hall:
It’s not linear.
Hall:
It becomes exponential in many ways, depending on how you set it up, that the investors start to own most of the company.
Hall:
That’s right. You want to take it at, you know, careful stair steps up that you can actually achieve those valuations. Because if you can well, then you can raise more money. You can’t. Well, then you’re in a difficult spot, and this is one of the challenges we face as angel investors. We put money into a deal, and when they come in the door, it looks like a rocket to the moon.
Brandon:
But it doesn’t go all the way up. It goes up a ways, and then it goes sideways for evaluation reasons and other reasons. You know, the market wasn’t as big as we thought. We didn’t execute as well as we thought. And so we’re just gonna go sideways from here. And so I think half the deals that we see in the Angel World end up just going sideways. They don’t turn out to be the rocket you thought it was. And some call it the walking dead or the zombies or whatever and found that that was the biggest challenge in angel investing.
Brandon:
It was not that the deal went under in any, uh, 10 deals.
Brandon:
Uh, in the Angel world, one is going to be a home run. Two or three are going to have a 23 x return, one is going to go bankrupt, and the rest are going to just go sideways and found that that was a real challenge. Was deals that went sideways not because they couldn’t raise more money. They just didn’t want to.
Brandon:
It turned out that they found figured out. Well, I can, uh I just keep running this business for the next 789 years.
Brandon:
I’ll make more money than if I sell it. And it turned out they weren’t building a business that was going to be sold for a lot of money. And they were just moving from the what I call the equity exit to the payroll exit.
Brandon:
Unfortunately, as an investor, your left on the equity exit somewhat stranded because you can’t get over to the payroll except that they were.
Brandon:
And so I looked at that one day and said, Well, how do we solve that problem. In fact, I was in a deal and put money in. Three years later, the team comes back to me and says, I think we should take all of our employees to market rates salaries And remember that day because I had this huge cognitive dissonance going. Now what’s wrong with that? Sounds right. But it’s wrong. And then I took a step back and I realized, Oh, we as an investor are not taking dividends or revenue shares because we’re trying to make that equity exit as big as possible and the entrepreneurs living on ramen noodles and below market rate salaries to do the same The moment they go to market rate salaries, they are signaling that we are no longer on the equity exit we’re now on.
Brandon:
The payroll exit is what that means, and that’s the challenge you face is if they go on the payroll exit, what do you do?
Brandon:
So I came up with my own term street.
Brandon:
That said, At your three, I get the right to convert to debt or you can convert to equity and go on the cab table.
Brandon:
It’s basically a convertible note with a three x redemption right at your three, and it matures at Year three. So you have to make a decision which way you’re going to go. And so if the entrepreneurs on the equity exit there still raising funding, they’re still growing there. So moving Go on the cab table. If they’re now going sideways and they’re not going up and they’re now what was below 30% market rate salaries is now 150% above market rates, salaries, and that’s that’s That’s always a sign.
Brandon:
Just look at the salaries and you kind of know what? Let’s go where they’re going. I just convert to debt and, uh, revenue share basis where my way out of the business, off the cap table or out of that business because there is not going to be a big deal.
Brandon:
And that deal, I think I got a 4%. I are are 10 years later.
Brandon:
And what what what always gives me is I went back and I looked and that, you know, the first three years we were all working hard the last seven years, you know, they were just having a good time, and that seven year period, I estimate they took $3 million out of that business. But I got a I got a 5% I r r and that.
Brandon:
Well, there’s something wrong with this picture. Why? Why am I getting so little?
Brandon:
And I’ve come to conclude that angels are not investing in the wrong deals. They’re just using the wrong deal structure. And you need to give yourself an out in case it’s not going to go all the way up. For whatever reason.
Brandon:
Yeah, doesn’t, uh, that sounds, I guess that’s a version of the Series C documents.
Hall:
Is that what you’re you guys use for your what?
Hall:
We use a convertible note with a redemption. Right? And traditionally, redemption rights were used at year five just to get your basic money back, and they haven’t been popularized in the last 10 years or so.
Brandon:
They used to do that back in the day, but I decided to bring that back up and say, Well, let’s put a redemption right back on the table. So if we’re really not continuing on up the equity path, we get to go out because I always remember looking at these guys pay themselves way above market rates salaries, and I asked myself, I don’t want to be on my plan.
Brandon:
I want to be on their plan.
Brandon:
How do I get on their plan? And the redemption right gives me on their plan. And it’s It’s a revenue share agreement is what it is. Just revenue based funding at that point, you know, as you. So we’ll just take a piece of revenue as we go forward. Make crimped down the salaries a little bit, but they were well above market rate in most cases, anyway, and they can figure a way to get out.
Brandon:
If you ever try to negotiate an exit afterwards, you know we’re in this deal for a long time.
Brandon:
There’s no way out. You’ll find that’s very hard to do as an investor and a start up because they’re very far apart. The startups thinking, Oh, I’ll give them 20% their return 30% 40% and the investors on the other side of the table and their mind thinking I should get two x three x four x and they’re off by an order of magnitude, and it can be hard to close that gap and the beauty of this, this note is that it it defines what that that exit is going to be.
Brandon:
And that’s my mantra. If you don’t if the answer is not defining the exit, the investors should be defining the exit.
Brandon:
That way you have a solid way to get out of the deals, because again, it’s not the one out of 10. It can be a home run. What do you do about the other nine and in the other venture capital world? They really don’t care too much about that. You know, if it’s not 10 X, it’s not going to move the needle on their fund. It’s not going to help them in any way. They just don’t care.
Brandon:
But I found with an angel investor, you know, it’s my money, and I really do care what happens. I’m not just going to write off nine deals. So won. The 10th deal is going to carry me all the way through. I really want to get something out of each deal, and so I kind of redefine the landscape to say, instead of trying to find the one out of 10, I’m just trying to find the nine out of 10 that are going to work and avoid the one out of 10 that goes bankrupt. That’s the challenge there because if, uh they’re up and running and generating revenue at some point, they can pay you off.
Brandon:
They may take some time, but you can get every turn back out of the deal.
Brandon:
Yeah, I think that’s I’ve been on both sides of the table.
Brandon:
I think that’s a fair deal. Um, I will iterate your point that it’s hard for an investor to get out, but and it’s also just as hard to get for an entrepreneur to get an investor out that doesn’t want to get out.
Hall:
And and I’ve experienced that myself, and it is highly disruptive to the business, and I think what you’re proposing.
Hall:
Uh, I haven’t seen the exact deal terms, but what I’ll say is that at least everybody’s expectations are on the table.
Hall:
And if the entrepreneur doesn’t want it, that’s fine.
Hall:
Um, you know they can.
Hall:
They can walk away and if they have a better choice of capital, But, um, I like the model and in Canada leave for some entrepreneurs, I think it allows them, um to not have to burn it to the ground.
Hall:
Um, which is if you’re going to take venture capital, you’re gonna burn it to the ground.
Hall:
I mean, well, I mean, that’s the gig, right?
Hall:
Where it and I I want to talk about one other term, but, um, I think it’s important.
Hall:
I’m interested in your thought here. So with venture capital, you are lighting the rockets like you said, like the VCs are gonna dump it. And now, more than ever, like, uh, angel round seems to be a $3 million round. Um, and I have a bunch of friends have done angel rounds for three or four. I’ve seen even a $7 million round, and a rounds tend to be in general, right?
Hall:
I mean, much larger, mainly because these funds have so much money they need to put the work.
Hall:
Um, but once you hit that rocket, you’re off.
Hall:
Often going are are the entrepreneurs that you invest in?
Hall:
Are you still looking for that?
Hall:
Or is the expectation that hey, if you know, we want you to do well, but we don’t have this unrealistic expectation that you’re gonna do a 200 X which is what you know.
Hall:
A lot of the VCs are actually are are shooting for You’re looking for a deal.
Hall:
That’s venture class. You know it’s going to grow very fast and you have a strong team. Its platform based business got recurring revenue. It’s got all the characteristics of what can scale up as a business. So you’re looking for that. It’s just that not everybody makes that they come in and sometimes I see deals and the team is not as strong as you.
Brandon:
I think it is. Then the revenue model is not as strong as you think it is, and so you know.
Brandon:
But it’s still a good business, and angels go into it because they can help the business and they can be a part of that. But angels don’t have deep pockets like the VCs, and that’s that’s one issue is when they come and ask for 500 K and you help them out. That’s great. And then a year later, they come back and ask for $5 million. We don’t have that. What do we do then? And then we go talk to the BCS and it’s not quite at the level they needed to be in order for it to be a rocket for all kinds of reasons, may not be enough room left on the cap table to give them the shares they needed for the Series. A. They want 20%. They can’t get that. They’re not going to do it.
Brandon:
It may be that the team is not strong enough is good for a C two series A. But it’s not good for a series A Series B. Uh, the market may have changed. These things come and go a lot. What’s hot today? Three years from now, I guarantee you will not be at the top of the list. Will be somewhere in the middle or at the bottom because there’s always new things churning and so forth.
Brandon:
And just there’s just a lot of reasons why things don’t go all the way up in that case.
Hall:
And that’s why is an angel investor.
Brandon:
I always caution them. You know, Angel economics are different from venture capital economics, and you have to if you’re gonna play the V C game, realize you’re a big risk reward, and I think the Angels will do better playing an angel game, which is more of the You can get three extra money every 3 to 4 years.
Brandon:
You’re probably going to do pretty well. But if you want to go and swing for the fences and everything has got to be a 10 x home run and it’s either 10 X or nothing, there’s going to be a lot of nothing’s on your on your portfolio list for sure.
Brandon:
What’s the typical deal size for your angel groups that you usually are looking to target for for an entrepreneur group?
Brandon:
So you know Angels on the seed side or, you know, these deals coming in there looking for 507 50 k and then, you know, an angel group doesn’t do the whole deal anymore.
Hall:
They do, you know, to 5300 of its something like that.
Hall:
And then they syndicated on and get other angel groups to put money in as well. There’s a series A It’s 1.52 $3 million.
Brandon:
Sometimes it’s four or five.
Brandon:
Uh, and so again, you know, angel groups coming in with about a quarter to a third of it, and you have to go to several groups and family offices and VCs are going to be maybe being there as well. There’s a lot of micro VCs now some $100 million funds that are out there that play well with angels and do a lot with that.
Brandon:
Also, the major VCs usually come in afterwards, and they want to own the deal, and at that point it goes off into an institutional mode, so to speak. But those are the deals deal structures we see a lot of and we’re talking about, uh, primarily tech enterprise, that type of thing.
Brandon:
Health care Health check is the same, but you get into medical devices.
Brandon:
The money can be much higher in that case, and then you have to go through validation, so it’s a little bit of a different number there.
Brandon:
So I want to go back to terms, mainly because how entrepreneurs always get shocked when I tell them that they’re going to have to, for instance, give back some of their shares and they’re going to have to vest those shares over generally four years, and they look at me like I’m crazy and I explained to them a few things that I would love to get your thoughts on, uh, how that works and why investors do that.
Hall:
Sure.
Hall:
So when a startup comes in and you’re raising money and you’re putting in investor, you’re investing in the business to achieve a certain goal.
Hall:
Usually it’s three years out.
Hall:
We’re gonna put 500 k n.
Hall:
You’re going to take the business from point A to point B over five years or over three years to get to the next level, and then we’re going to have the next round at that point.
Brandon:
And so you’re basically telling the founding team okay, you’re the leadership here.
Brandon:
We want you to go do this. We’re not trying to change you out. We want you to be there. But if you decide you need to leave before you get to the end of the three years, what are we going to pay? The the one that takes your place? And so that’s why the invest some portion of the founders shares usually about half, and then they have to earn them back because we need to make sure that we don’t let somebody just walk out the door with 30 40% of the entire cap table because they decided they wanted to live somewhere else for a while and just got tired of the business.
Brandon:
And so it’s just, you know, make sure that you have somebody and compensation set aside to get the job done is what that’s all about.
Brandon:
And so is this price of many, many startups that they would ever have to invest it.
Brandon:
They seem like they’ve already vested it.
Brandon:
The problem is, when you take funding, you now have new players at the table. You typically have new objectives at the table to, and so you have to make sure that money is set aside for the company to get there, because it’s more about the company now than it is about the founders.
Brandon:
What’s a term other than we’ve talked about so far?
Brandon:
That sometimes in your experience with all the entrepreneurs that you work with, that always seems to make them take a step back and and say, Oh, I didn’t realize that’s how it worked.
Hall:
Well, liquidation preferences come up a lot, and people are sometimes surprised that the investor can say I want a one x or two X liquidation preference, which says.
Hall:
I get 1 to 2 x, my investment first on a liquidation.
Hall:
And then what’s left goes pro rata to everybody as how much do they own of their business?
Hall:
And that comes up when we really can’t agree upon valuation.
Hall:
I think the evaluation as investors should be five.
Brandon:
But you’re at nine and you’re not coming down.
Brandon:
Okay, well, give me a one X liquidation preference and I’ll get comfortable with the nine X because I know I’ll get something out of this in a with my liquidation preference rather than getting very little once the evaluation is, L added up.
Brandon:
And so liquidation preferences are simply a reaction to evaluation that may be considered high.
Brandon:
And that’s the challenge.
Brandon:
You know, we faced with startups is that you know, they see another company raised a large money, large round at a very high valuation, and they think they should get the same thing. Unfortunately, what they’re doing is they’re they’re doing what I call taking tomorrow’s valuation today. You know, one day I’ll be worth $100 million so therefore I’m worth $100 million today. We’ll know today you’re worth five because that’s what you have tomorrow when you have $50 million of revenue, then you’ll be worth $100 million.
Brandon:
So today’s valuation is for today’s business.
Brandon:
Tomorrow’s valuation will be for tomorrow’s business, and and sometimes they just have a they tied into evaluation number that they don’t want to let go.
Brandon:
And instead of killing the deal, people start to put other terms in there to balance that out and about liquidation Preference is a fairly common one.
Brandon:
And just, um, for people out there who don’t know, can you explain just a simple example how that would technically work in real numbers?
Hall:
Sure.
Hall:
So I put in $100,000 in a deal, and I have one X liquidation preference. And then the business grows up and five years later sells for, uh, $30 million. I would get my $100,000 back first, and then everyone else would share pro rata the remaining amount.
Brandon:
Therefore, I’ve kind of caught up, so to speak, on the ownership I thought I should have, because I got $100,000 1st before everybody else.
Brandon:
And then I got my pro rata share based on what they had, and so that that kind of balances out the fact that I thought it should have been a $5 million evaluation and not a $9 million evaluation.
Brandon:
It’s not uncommon to see two or three X liquidation preferences.
Brandon:
So if I had a three X liquidation preference and I put 100 K and I get $300,000 back first and then what’s left of the profits would be distributed around to everyone based on how much ownership they have.
Brandon:
And so that’s that’s how they work. Is is simply a early.
Brandon:
You get paid first, and then you get the rest with the other investors because you came in at a place where the evaluation probably wasn’t was probably little bit overvalued. And so you’re getting compensated for that.
Brandon:
Yeah, I find that some entrepreneurs find that shocking because they want to take that percentage and divided by the number. But that number at the end, if you have a liquidation preference and each round can have a liquidation preference, and if you set the liquidation preference early, uh, lesson learned on my first one, then it will continue and possibly increase as time goes on, uh, it becomes very hard to say. No, you’re not gonna get a liquidation preference. So, uh, running that spreadsheets really important? Can you walk someone through exactly how how the process works with you from I assume they apply online. Do you reach out to companies? How does that sort of work?
Hall:
So we get a lot of referrals from our investor network.
Hall:
We also get people that just sign up online, and we set up a call and we talked to them. We want to make sure that the company is in a place where they can be successful at the fund, raise itself. And we look, you know, we really look for revenue. Do you have some revenue in the business? Doesn’t have to feel a lot. But what we want to do is avoid the I’m going to market in two months message because investors have learned that that could be two months or two years, and so they get concerned with it.
Brandon:
You go sell something and you can actually sell your product. Well, then you’re in the market and or past that. And then we talk to about their growth story.
Brandon:
when I ran Angel Networks. What eye witnesses honors coming in and pitch into my room full of investors, 90% would go away and we would never hear from them again.
Brandon:
I have no idea what happened to them. They just disappeared on us. 10% though, came back and gave us updates and reminders and told us more about it. And they built a relationship and they demonstrated that they were growing and they were getting their milestones.
Brandon:
And after about the fourth update, out came the checkbooks. It just ran like clockwork. And that was the real secret.
Brandon:
Sauce is is not pitching. It’s following up to the pitch and working through the process of building that relationship and answering the questions and, most importantly, is demonstrating the growth story that 1st 90% would always forecast the growth story.
Brandon:
And if they that wasn’t enough, they would just forecast higher numbers.
Brandon:
But that really wasn’t the issue. The issue is, you know, can you execute? Can you generate revenue? Can you grow revenue? Can you know? Do you have a team? Are they actually effective? And that’s what you have to show the investor. Is that it’s going, and so that’s what we do online is we actually show the growth story to the investors. We show an update, sales team, product and fundraise. Those are the core things you’re responsible for, that people consider part of execution, and investors are looking at that watching that they see the growth story well, then they get excited about the deal, the challenges that some auditors want to talk about, the size of the market or how competitive fell down and that that’s not what you’re doing.
Brandon:
That’s just what’s going on in the marketplace.
Brandon:
So there you have to demonstrate the growth story and then get to know the investor a little bit, and then you can raise money from them. And so when they come to us, we actually sign them up. They come in and bring us a pitch deck. We put a warm introduction. Together, we go out to our network, and then we share with them all the responses through a spreadsheet, name emails.
Brandon:
They are in metrics.
Brandon:
Here’s what they’re doing here is who’s interested. Those who want to call. We set up a call with the investor. They don’t have to go through us anymore. They can just carry that forward. In fact, we want them to go close that investor, answer their questions, go through diligence and do what you need to do on that.
Brandon:
And then we go get more investors for them to work on.
Brandon:
And it works well for people that know how to raise funding and know what this game is all about. You have to, uh, the selling process. You have to go out and sell your business to the investor.
Brandon:
Uh, you know, sell just like you have a sales funnel. So you have an investor funnel. You have to work them through the process, and you have to have your documents together. And if you ever get a note from the investor, there’s three things you can do. You can change the product, you change the price, you can change the promotion, and it’s just like in sales.
Brandon:
And if the product is not good enough, maybe we need more revenue traction. Maybe.
Brandon:
Maybe we need a better team. Well, then you need to go do that. Yet the price is not fitting. Well, then, maybe that $10 million valuation should come down to seven million, and then you’ll find people buying into it and then promotion.
Brandon:
I find you can take a startup in position. In many ways. I want took an education company, and I positioned it as an edtech deal to those who wanted to invest in the tech sector. And then I went to my social impact contacts, and I emphasize the social impact nature of it and positioned it there.
Brandon:
And then we have many investors who want just recurring revenue. It doesn’t matter what they’re selling. And so I went and took it to them, then showed it.
Brandon:
And, you know, just emphasize the financial metrics that were behind it. You know, the calculate TV ratios, the growth rates and so forth to realize you can position your deal differently. And you should, based on the investor you’re talking to, to show, you know, how you’re aligning with what they want to invest in.
Brandon:
So that’s what we do is we help connect them to investors. We help them position it, and we helped him to promote it. We do arm them with the diligence box or a data room. They call it 10 12 documents investors are expecting in the diligence process. So this is not going to be a paper chase. It’s all put together and they look like they got it together in that place and and it’s a month, a month.
Brandon:
We have people bringing us in at the beginning of the race, Um, brings in at the middle and some bring us in at the end.
Brandon:
So it’s simply an investor relations process that just runs 24 73 65 days a year. Going out. They’re always helping people get ready to go out, meet investors and start that process to go through.
Brandon:
So that’s how we work.
Brandon:
And how long can someone, you know, you you made a really good point and I tried to emphasize that to people Is Is that, you know, very it does happen, but very rarely do you go pitch an investor.
Hall:
I think angel investors, my experience has been they’re willing to make more of on the spot, uh, decision, mainly because it’s discretionary money.
Hall:
You know, they in many ways, if you’re an angel investor and you don’t expect to lose it, and you probably shouldn’t be playing that game, um uh, you shouldn’t be betting your retirement on it for sure, but, um, you know, you’re going to get a few you’re going to get for you.
Brandon:
You’re gonna get a lot of nose before you get get to Yes.
Hall:
So in your process and what you help people with, is it in general?
Brandon:
Because everybody is different.
Hall:
If you got a hot deal, that’s growing 35% a year, you know, throwing off 30% EBITDA.
Hall:
You, you know, to be candid, you probably If you do a little bit of press, you’re probably gonna have people calling you.
Hall:
Um, but if you you know, you’re you’re chugging along there with the normal rate.
Hall:
Is this a one month or three month?
Hall:
A six month and nine month?
Hall:
What sort of process?
Hall:
It is a little bit about the size of money that someone wants to put in that some of you know, the angel investors.
Hall:
He’s a great deal. They just may throw 50 k on it. Just want to be in the deal. And that takes one month. If you’re a venture capital fund, you have a diligence process. It’s minimum four weeks, and you have to have these documents, you have to go through this process, and by the way, he has to sell it to the rest of his team. That may be an easy process that may be a harder process, but that’s usually a month’s process.
Brandon:
So I always tell people, is a three month process to go and close, Uh, some checks with an investor. And if you know and we’re getting investors all the way along the process, from the first mailer to the 2nd and 3rd, there’s always new people signing up. So therefore, it’s a continual process that goes forward.
Brandon:
And so 3 to 6 months for a campaign is what we always coach people on. When I was in the Angel World back in the Angel Group days, my my guidance to start ups is for every $1 million you need to raise. It will take you one calendar year to raise it. I think things may have speed sped up a little bit since then, but it’s still in that ballpark for the very early seed.
Brandon:
Precede guys, you’re not going to raise a million dollars unless the last three companies you ran had nine figure exits each.
Brandon:
And I’ve had those come in, you know, they came in nine figure exits. Okay, we put it up there. They raised their 7. 50 and about 27 days.
Brandon:
And that’s just because people had to physically write checks and so forth, so that that can’t happen. But that’s no 99.5% of the people don’t have that. And so you have to not consider that to be your your case, and you’re going to have to go out and build a list of investors, reach out to them, update them, show them the progress and then close them with the diligence and so forth.
Brandon:
And it will take you a three month window for a cohort to go through that process so that that’s my coaching on it. I have had people come in and use our service for their seat, and when that finished, they next day they look.
Brandon:
They opened a series A and they use this for that for about a year. And then when that finished, they turned around and started a Series B and we were going to different people along the way, and they were in the program 2.5 years during that process. So it’s, uh, you know, people do stay in longer because they’re doing bigger things and more things.
Brandon:
But it’s not too much, you know, if because people start at different levels, some start bringing us in at the beginning, some at the middle and some at the end, where they just need 200 K left out of a $2 million raise.
Brandon:
You probably don’t need the full cycle for that. At that point, it’s pretty well done. Deal. It’s going to happen. And so it’s not hard to get people to sign up, but it can be hard at the front end because it’s new.
Brandon:
No one else is in there. We’re all trying to figure out what this is, and so you have to realize you have to warm people up and educate them, and that takes a little bit of time.
Brandon:
Mhm.
Brandon:
Um, I was thinking of a story when I did my first million dollar raise, and there’s a guy, Harry Glaser.
Hall:
He worked for Greenberg Traurig in northern Virginia and the first time I’d ever been in the office.
Hall:
How walked in and he said, uh, I got one piece of advice for you, kid.
Hall:
Don’t ever run out of money.
Hall:
And And as you’re saying, like you know, you almost as an entrepreneur, entrepreneur, if you’re listening out there, all the entrepreneurs you need If you’re going to go down this path, what house is really important?
Hall:
You better be prepared that you could close a seed round and basically turn around a week later and start raising your around because it could take that long and the pipeline to get through just as a customer pipeline.
Brandon:
Um, if you’re not in the consumer space and enterprise sale, it’s going to take a long time.
Hall:
So, um, I think that’s really important.
Hall:
What, uh, wrapping up here, What last piece of advice do you have for entrepreneurs out there who who believe that their company is funding worthy?
Hall:
My advice is to figure out how to articulate that, because this is where we got into evaluation is when they started put out their number and the investor pushed back.
Hall:
They really didn’t have an answer for it in many cases, and the way I always say is you you have to demonstrate what values you have in the business.
Hall:
And I came up with what I call the rule of four back in the day, and I don’t know if it still applies all the time.
Hall:
Here is people would ask me about valuation and I say, Okay, well, give yourself $1 million.
Hall:
A pre money valuation for each of the four things sells team product and intellectual property.
Hall:
So if you have 10 Fortune 500 companies that have baked you in and you have recurring revenue from all of them and it’s going great, give yourself a million dollars.
Hall:
If you’ve got to beta customers and they paid you a little bit of money, we’ll give yourself maybe 100 50 k for it.
Hall:
So it’s not a sliding scale, and then you do the same thing for team.
Brandon:
If you have everybody hired in place working great, give yourself a million dollars.
Brandon:
If you have half the team hired well, let’s give ourselves maybe 400 for that and then the same thing for intellectual property.
Brandon:
If everything has been submitted and signed and approved and awarded, give yourself a million dollars.
Brandon:
You have three provisional patents submitted give yourself 100 k and then the same thing for the product.
Brandon:
If it’s working great, you know it’s all working fine and, uh, fully featured.
Brandon:
Version one.
Brandon:
Give yourself a million dollars if you have a beta that can kind of work but crashes from here to there, we’ll give yourself 100 and 50 and then you add up all four, and that’s your pre money valuation. But I do. I do that because not because I want a number is because I want them to think through what are the value props in their business. What do they have so far?
Brandon:
And when they push back, articulate those value propositions, explain why you have a great team and what value they bring? Explain what you’ve done so far with the product to show there’s value in the business today and then explain what you have with customers so far and then explain what you have with intellectual property.
Brandon:
Half the value of IP is with the investor, so get some provisional patents to give you something to hang your hat on for that.
Brandon:
But don’t show up to the investor empty handed.
Brandon:
That’s what I get A lot of people have an idea for a business. They come in, but they have no cells, no team, no product, no high P. There’s nothing developed so far, and this is a tough sell because investors know that how much work is in front of them when it should be behind. Some of that should be behind you already, and that demonstrates the execution that you can put this stuff together. Even if you don’t have a lot of money, you should be able to demonstrate, demonstrate some traction on those things to show you’ve got some something there for people to get excited about.
Brandon:
My last one is always never go to an investor unless you have new information from a customer. And I used to get people coming into me saying, Well, I’m pre revenue Well, before you even built that product, you should have gone out and talked to a customer, and even when you’re building a beta, you should be talking to that customer.
Brandon:
And when you’re rolling out that product, you should be talking to a customer.
Brandon:
You should never go at this alone because those who raise money are the ones that can come in and say, Yeah, we went to IBM and they had this problem and we said We think we can solve it They told us more about it and we came to the Beta and they liked it and they tried it.
Brandon:
And now they’re paying 250 k to build it out for them. And these are the guys that are going to get funded because they they’re connected to the market. They have market reality. The guys who said I had this great idea I built something in my basement and now going out to see who wants it. That’s a risky proposition. We all know how that goes.
Brandon:
My favorite quote is, I think it came from Eisenhower, who said No battle plan survives first contact with the enemy. So in my case, no business plan ever survives. First contact with the customer, so you have to have market reality before you go too far down the path. But if you have that, you’ll find investors much more engaged because you you’re getting real world feedback and there’s somebody in the picture that can actually buy the product, and this is starting to look like a real business versus I’m building a product.
Brandon:
I’m here by myself and we don’t know who will ever buy it if anybody.
Brandon:
So it gives them confidence. So those are the key issues I bring up is no the value props in the business. And make sure you have customer reality with you before you hit the investor pitch pitch circuit.
Brandon:
Well, I love that. And I’ve I’ve never heard I’m not that old, but I feel like I’m old enough, uh, to know I’ve never heard the rule for So that was absolutely great how I want to thank you for joining me this afternoon.
Hall:
What is the best way for entrepreneurs who are out there listening who believe they’ve matched all the criteria or at least most of it that we’ve talked about today and are worthy of funding?
Hall:
Well, they should contact me on my website 10 capital dot group grou P.
Hall:
There’s no dot com on that. The dot coms were taken up many, many years ago for 10 capital, so 10 capital dot group will reach me and you can see how we work. You can see more about what we do and uh, if you like to set up a time to talk with me, Love to talk with you about your startup to see if it’s a good fit for the venture funding and how we might be able to help.
Brandon:
That’s awesome, and we’ll put everything in the show notes for you as a listener.
Brandon:
Check the show notes.
Brandon:
We’ve got all house information. How Thanks again. Enjoy your weekend.
Hall:
Um, appreciate it.
Hall:
Thanks so much, Brandon. Enjoy being here to take care.
Brandon:
Thanks so much.
Hall:
Have a good one.
Brandon:
Thanks for being generous with your time and joining us for this episode of Build a business success Secrets.
Hall:
Before we go, let me ask you a quick question.
Hall:
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Brandon:
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Brandon:
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Hall:
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Brandon:
Yeah, yeah
