Connecting Investors With Startups With Hall T. Martin

Posted by John Livesay in podcast0 comments

 

Startup businesses must gather all the support it can in order to thrive, especially on the financial side. That’s why fundraising projects such as crowdfunding are an incredible venture every entrepreneur must try. However, without pitching to the right investors, all of these strategies would have been for naught. John Livesay sits down with Hall T. Martin, CEO and Founder of TEN Capital, to share how they guide startups in building their brand and finding the right investors for them. He explains what makes up an enticing pitch as well as the most engaging way to deliver it. Hall also discusses the power of convertible notes and how to build a good growth story.

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Connecting Investors With Startups With Hall T. Martin

This episode’s guest is Hall Martin, who’s an expert at connecting investors to startup founders. He’s all about looking at the next thing and not the last thing. He said, “It’s important that you’re solving a big problem that people are willing to pay for.” There’s a growth story he’s looking for when he decides he’s going to help a startup. What are their sales like? What’s the team like? What’s the product like, and where are they in the fundraising process? The biggest mistake he sees people making is not following up and not executing properly. Enjoy the episode.

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Our guest on The Successful Pitches is Hall Martin, who is the Founder and CEO of TEN Capital and the host of Investor Connect podcast program. He launched the firm as the Texas Entrepreneur Networks in 2009. In 2021, TEN Capital has over 12,000 investors in its network and has helped startups raise over $900 million. Mr. Martin serves as the Vice-Chair of the Baylor Angel Network and he previously led the Central Texas Angel Network as its first Executive Director.

Martin is also the host of the Investor Connect podcast and the Founder and Director of Investor Connect, which is a 501(c)(3) nonprofit dedicated to the education of startup investors. Hall is also a Founder and initial Managing Director of SKU, which is an incubation station and a consumer products good accelerator based in Austin, Texas. He also is the Adjunct Professor for the University of Texas, leading the Idea to IP program, which fosters startups.

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Hall, welcome to the show.

John, thank you for having me. I’m looking forward to this.

Yes, me as well. As we were saying, having moved here to Austin is exciting to get to speak to someone who’s been here for so long and made such an impact in the city and in the community. I know that you got your MBA here at the University of Texas. Before that, you were a Major in Computer Science. I remember those days in the ‘80s where it was all on cards, and you had to have punch cards and make them spit out. If you had one hole in the wrong place, it didn’t work. I would love to hear your own personal story. You can start anywhere you want. You can talk about childhood or when you started college. How did you get interested in the world of startups?

I went to undergraduate at Baylor from ‘80 to ‘84. That’s when the PC came out. I looked at the PC, and I said, “That’s going to be big.” Indeed, it was. I switched my career from being a Journalism major to being a Computer Science major because I wanted to be a part of that world. I always had an affinity for emerging technologies. I was always looking at the next thing, not the last thing. That’s the way I worked. When I graduated, I came to Austin to go to UT graduate school. I got an MBA there. I thought that was a great time to do it because the market wasn’t so hot just yet and I decided I’d get that done. That’s how I got to Austin back 30 plus years ago. I graduated and didn’t quite have a job yet, so I went backpacking in Europe for a month. I got a call from my family saying some company in Austin found your resume in a book and they want to hire you.

When I got back, I went and talk to them. They were a small company that was growing fast. It was entrepreneurial, and so I said, “This is what I want to be a part of.” I signed up, I joined them, and I was there for 25 years. It was a tech company that later went IPO in 1995. It had a big blowout and it’s great, and I kept working with that. Because the company went IPO and I was employee number 93, I started doing angel investing after that.

We had an angel group in Austin called the Capital Network that ran from ‘95 to 2002. They were tied to the dot-com world. When that went away, they went away with it. I made one investment through the group, I lost all my money and started to realize that startup investing is not as easy as it looks, but I was still interested in it. I started doing some angel investing on my own around Austin at that time. About 2006, the city did a restart and they called it the Central Texas Angel Network. I was the first member to sign up for it.

When you’re the first member to sign up for an angel network, you are automatically on the board in charge of membership. It’s a great honor. There’s no pay, but it’s great. I did that for two years. Two months into that, our director left, and so I stepped in and became the director of the group for the first two years that we ran it. We put in the processes, got it going, had a great time, got a 40X return for the investors. It was a lot of fun.

My undergrad at Baylor called me up saying, “We want an angel network out of our Alumni Association, can you help?” I said, “Okay, I’ll do that.” I stepped out of the CTAN role, and I went to help my alma mater help put their program up and running. I showed them how you do the membership, recruiting, and how you build the deal flow and all the usual things that go with an angel group. I got that up and going, and it became part of the Alumni Association where it’s about the student experience and about job placement.

[bctt tweet=”Be sure to follow up to get funded. Startups fail in the execution of their idea.” username=”John_Livesay”]

That’s one thing I learned in working with universities. It’s not about the money. I remember when I started CTAN, I went to the University of Texas to talk to the alumni director and said, “We ought to start an angel network here.” They were interested in that. Stanford and Notre Dame had one, but they didn’t have one. In the end, they had too many other things going on, but the big mistake I made was I walked in alone. You never walk in alone.

You walk in with a business school professor that’s going to be your sponsor. He’s going to own this thing. He’s going to keep you on the straight and narrow. You also walk in with five check writing alumni. If you bring those things, you can then build it. I learned the hard way that didn’t work. When we went to Baylor, that’s what we did. We got five check writing alumni and a business school professor, and we’re able to kick it off. Now, there are several 100 angel groups at universities around the country because there’s a real affinity between an investor and their alma mater.

What you’ll find is the why is not about making money, the why is about providing a give back to the university. You’ll find that people stay in those groups for a long time compared to the others. I started a third one in Williamson County, North of Austin. We were holding a deal flow in Round Rock, and it was a lot of fun as well. I saw the challenge that startups had in raising funding. What I saw was people coming in and they didn’t have the documents ready. They didn’t know how to pitch, and almost nobody followed up. Some did but the vast majority did not.

I started a company called Texas Entrepreneurs Network. After 25 years, I was ready to move on to my next career. I retired from my day job, and I started Texas Entrepreneurs Network. We were helping those startups raise money from Texas Angel Networks. We were helping them pitch, get their docs ready, and coach them. We did a funding forum series around the state. We got all the way out to Lubbock to El Paso and all the way around the state.

I had a theory that for every 10,000 people in the city, there was one angel investor. Lubbock had 100,000 people. There were ten angels, voila, there you go. We got out to the second-tier cities to do that process. There was one problem. It’s a big state and we’re driving everywhere. We decided to put everything online in the form of a funding portal because crowdfunding was starting to come into its own.

We did a portal style for a while and learned how that worked as well. We had an interstate license and did a whole bunch of breweries and wineries. That was a lot of fun to work with those guys because breweries have a real community flavor to it. We helped a group in Georgetown raise funding. They had almost 2,000 people come out to the opening, and I asked this guy, “Why are there 2,000 people at a microbrewery opening in Georgetown, Texas?” He said, “This is a German community. In 100 years, there’ll be two things left standing, the brewery and the bank. I want to be a part of the brewery because I want to leave a legacy here.” That was a neat vibe that went with crowdfunding breweries and so forth. We did a bunch of others as well.

After a while, we realized that crowdfunding didn’t help the tech companies and the healthcare companies. We wanted to get back into that. We hung up the portal, went back to working with the credit investors. About that time, we started getting calls from outside of Texas. I was getting calls from Seattle, Chicago, and the Bay Area saying, “I’ve talked to everybody in my area. I need more investors. I want access to investors. How do we do this?” We then changed the name to TEN capital and started running our program around the country instead of just around taxes. It kept growing ever since. Now, we have 12,000 investors. We’ve helped companies that went on to raise over $900 million over the years that we’ve been doing this, and we continue to grow and expand.

That’s quite a story. I love it. What I find interesting about what you’re doing with TEN Capital Network is you offer people the ability to figure out which program works best for them. You’re typically working with people who have some revenue, I would say, and have some experience. The biggest problem that I have seen and I tested this a little bit. I’m curious to see if you find this. Investors typically fund about 1% of the pitches they hear. They hear about 2,500 in a year and fund maybe 25, 24 of those 25 are from warm introductions typically.

 

The biggest challenge is that the founders are in the wrong room. They’re pitching to people who don’t fund what their industry is, or they don’t have the warm intros. They then have a bad pitch. I remember talking to one investor, and she said, “We listened to this doctor go on and on for twenty minutes, and we still didn’t know what he did. Finally, I asked him some questions, and I said, ‘You fix holes in people’s hearts. Is that what you’re saying?’” “Yes.” “Okay.”

That need to be clear and concise is so important in a pitch. Few people know how to do it. In order to get in that 1% Club, you have to get the right pitch in the right room and then be able to answer some questions, as you said, the paperwork, and have everything ready to go to get the next meeting. You alluded to one of the mistakes you see people making, which is not following up. Having a sales background, that blows my mind, that they would not be organized enough to check back in or give you an update on what they’re doing and things like that. Let’s zoom out a little bit and start with, what do you look for when you hear a pitch?

The first thing I look for is, do they have a real market for it? Are we solving a real problem? The old painkiller versus vitamin test, are we solving something that we’re going to put money down for? It’s hard to get people to pay for it. They have to be needing that. The next thing is, like you said, I try to figure out exactly what they’re doing. I always coach them, “In five words or less, tell me what you do,” and I’ll state that at the beginning of your presentation.

If I don’t know what they’re doing, I don’t have context and it’s hard to focus. My mind is always wandering around wondering, “If they’re in health care, that would make sense.” You have to state that. I once read a business plan with 85 pages. I went through it twice. I went back to the guy and said, “This is great. What is it? What do you do?” They never actually stated it. They kind of talk around it. They have what’s called that curse of knowledge. They’re so close to it that they think everybody knows that when we don’t. There’s that aspect of it.

The thing I look for is a complete plan. They’ve got a complete team, they’ve got the team ready that can take it all the way through because the team is a key part of it. Have they put together a strong team is a big part. We look at post-revenue companies because I had too many people coming by with an idea, they would mess around with it for a while, and then they would drop it in. They need to be a little bit further along before they engage with my ambassadors. I look for some revenue because I want product validation and market validation. If the product works, then somebody will pay for it.

If you get into that stage, you’re ready for post family and friends fundraising. I do see a lot of people doing crowdfunding in that early stage and doing well with it. Crowdfunding came up strongly during the pandemic because it was all online and it’s becoming more and more accepted. The key thing there is, the average investment is anywhere from $100 to $500, so somebody’s transactionally putting in a bit of money off their credit card and it’s no big deal.

When they take the next step forward and they go to the angels or the venture capital, these guys are writing $25,000, $50,000, $100,000 checks. There’s a lot more due diligence that’s going to go on this thing. It has to be a little bit more solid. What I look for is what I call the growth story, which is sales, team, product, and fund raise. The core four are moving up into the ride because when I ran those Angel Networks, the ones who did raise money, 10% of them would come back and give us updates and reminders. Tell us more about it.

It’s part of building a relationship. That’s a little bit of it. You got to get to know people a little bit. Also, they were demonstrating that I’m meeting milestones. I’m clicking forward. It’s in the area that counts. Many startups want to talk about their forecast or they want to talk about how a competitor fell down or how big the market is. Those are things you’re not in control of. What you are in control of are the sales, the team, the product, and the fund raise. Intellectual property could be in there as well.

[bctt tweet=”If you don’t have a lead investor, start with convertible notes.” username=”John_Livesay”]

Investors are looking at how you’re making progress on those things that you’re doing. It took about four of those touches before investors would say, “I know what’s going on here. I can make a decision.” They say it takes seven touches to close a sale, so it takes seven touches to close an investor. That’s what we’re looking for. Do they have a growth story going? Can I see momentum going in the right direction here? There’s that aspect of it.

Let me break down what those are again. The growth story is how are the sales going, is the team strong and is it steady?

Is the product moving forward, and then the fund raises? Those are the core factors that go into driving a startup. You have to be moving your way through the beta to the MVP, through getting out there to generate some revenue. Has anybody put money down for this? It makes a big difference if they do. Team, have you built the right team? Are you adding more with affiliates, partners, board, and other people? Product, if you’re going from beta to MVP, version one, version two, and things are moving forward. Fundamentally, they’re execution level metrics because that’s where most startups fail. It’s not that they didn’t have the right idea or whatever. They just didn’t execute.

Can you execute? That’s the number one reason besides no follow-up.

You’re watching how these guys do before you write the check because afterward, it’s going to be hard. It’s going to take time, and can they execute afterward? You’re looking for a sense that these guys are making good decisions, they’re getting things done, and they can move forward. They are working on the right things at some level. They all make mistakes. Everybody makes mistakes. Nobody worries about that, but fundamentally, are we progressing?

That’s what I look for, the growth story. That’s what investors are trying to see. The last question is, do I want to be in the game with these people for a period of time? It’s because of the team. Do they have the right team? Are they smart and making good decisions? You do spend a lot of time with them. I once wrote a blog post that says, “Are you ready to get married?” At the time, I had found that people were in their startup investment longer than they were in their marriage on average.

About seven years is the divorce thing. You’re in a relationship with your investors longer than that.

In some cases, you are. I saw people doing variations on that theme in other ways. It’s a big decision. That’s the thing that most people don’t get about angel investing. People are in these deals for a long time. They are careful about getting into them, unlike crowdfunding where you’re putting in money and maybe it works, maybe it doesn’t, but you’re not in there working with them or helping them in many ways.

 

I’ve heard series A and series B is defined as how much money you’re raising? “We’re revenue, and we’re trying to raise $5 million, does that make a series A or series B?” From what I can see on TEN Capital Group, you look at it through a different lens of tell me how much money in revenue you have, and then we’ll decide whether that’s a series A or B? Is that accurate?

The challenge is everybody counts series A or series B differently. If you’re on the west coast, that’s one thing. If you’re in the Midwest, it’s another. I had one guy say, “Mom gave me a check and dad gave me a check so I must be on my series B now.” It’s the non-standardization around the nomenclature. What I tried to do is go back and say, “Where exactly is the business on the curve, so to speak?” When I go to investors, then I’ll be able to level-set them. “They got $1 million of revenue. They’re in their series A.”

How much does that range? Is that $1 million to $5 million typically, series A, or is it $3 million to $5 million?

Series A’s are typically $1.5 million to $5 million. Seed are $500,000 to $750,000. Pre-seed are $250,000. You don’t raise anything less than $250,000 because it looks funny. Series B is usually $5 million to $15 million, but you have $3 million of revenue. If you get back to what the revenue is, you can start to get a little bit back to how you might relate that to other deals you’re seeing because, by themselves, it is all over the map.

Let’s talk about valuation and convertible notes a little bit. Here’s the mistake I hear a lot. I don’t know if you hear this too. People overvaluing their company so they’re giving up little equity. It’s not based on anything. “Because the competition is this kind of valuation, even though we don’t have that revenue, we should be at that same level of valuation.” What are you looking for? Let’s talk about a convertible note so we don’t have to lock in a valuation based on raising, let’s say, $5 million, and figuring out what percentage of that is going to be. I’m curious to hear what your thoughts are around that, because again, it’s all over the map, right?

I always coach people, “We start with convertible notes if you don’t have a lead investor.” Some people want to come in and artificially set the price. I tell them that’s going to be hard to sell to other investors down the road if you don’t have a real lead investor or someone that put in. My definition of a lead investor is somebody that’s going to put in $100,000, $150,000, and they want equity. They’re going to sit down and take the time to properly value this, look at comps, the status of the business, and be able to make the case that it is what it is because you’ll need to sell that to other people.

We start with convertible notes because there’s a whole bunch of investors that are not going to take the time to do that. What you do is go out and start picking out $25,000, $50,000 checks from people that just want to be in the deal and rolling close. The money comes in and goes into business the next day so you can start to build the business. You’re looking for the right lead investor. When that guy comes in, you say, “I already have $300,000, $400,000 raised.” That’s great validation, there’s something there.

The lead investor says, “Good, I don’t have to raise the rest of it. There’s some interest in this already so I got a sanity check on this deal.” That’s why we start with convertible notes but with the idea that we’ll move to a price round when we find the right lead investor but you don’t know if that’s the 1st, 5th, 25th, 75th investor to walk through the door. I know many companies that live off of convertible notes for several years.

[bctt tweet=”Most people were in their startup investment longer than they were in their marriage on average.” username=”John_Livesay”]

You can raise too much convertible note money. Some people treat it like a credit card. “I need money,” go pull out the note and go and raise money. When you get to series A, that birdie comes home to roost because the series A investor wants 20% of the deal. If you’ve given away too much, it can be a tough time in that case. That’s the idea behind it. It starts with a convertible note. Even when you’re at series A or B, you start with a convertible note. Get out there and start talking to people. What you’re doing is setting up a flow of investors until you find the right lead investor and have that discussion with them as opposed to everybody that walks by because most people don’t want to do it.

Are there specific industries that you at TEN Capital like to invest in? Is it virtual reality or augmented reality? Is that artificial intelligence? Is it healthcare? Is it social media, or are you completely agnostic?

Generally, we like most businesses, half of our investors are tech-enabled. There’s a good section in there for health tech, FinTech, and EdTech. Most investors are tech-enabled businesses. They do look for recurring revenue platform-based businesses, the usual things. Twenty-five percent are healthcare specific. It is a big space with a lot of money and a lot of big exits out of it. We have done devices, therapeutics, diagnostics, as well as digital health. The therapeutics can be a tough space for angels and many VCs given the amount of money that goes into it, but the other spaces are fairly straightforward. Consumer product goods, there’s a tremendous amount going on in the CPG space with brand development, food and beverage innovations, and so forth.

That’s here in Austin, right?

Yes. I started an incubation station called SKU. It was an accelerator here in Austin. It still is. Most people are coming to Austin because they wanted to sell to Whole Foods. It was the premiere, it still is, in many ways. We were repackaging, rebranding them, and putting them into the brick and mortar channel, either Whole Foods or H-E-B in this area. Since then, it has shifted to be direct-to-consumer, there’s a lot going on in that space as well. Those are popular ones for us.

We are seeing more cleantech deals and climate change deals coming through, but those can be out of the range for angels pretty fast. We’re angel, VC, family office, and early-stage funding, so it covers a number of different areas that are out there. Every three years, you get a new type of startups, AR/VR, now you have mobility. Everybody’s got an eBike and a different way of getting people around, different methods for mobility.

There are other things coming out. Cybersecurity is a hot topic once again because of all the hackings that are going on. I learned in cybersecurity, every 3 to 5 years, you have another dozen devices you have to monitor, control, and measure. Now, they’re working on IoT, cars, and those types of things to protect. It’s great to be in the startup world because you get to see all these great new technologies going on. We try to work as much as we can across the board with all of them.

If somebody wants to explore working with TEN Capital Network, the website is so clear about who it’s for and who it’s not for. I thought I’d ask you to sum it all up for people to see if this is a fit for what they want to do.

 

Come to our website and we have a Click the Stars button and you go to our company page which shows what we offer. At heart, we’re investor relations and introductions. We’re not a broker. We’re not charging back-end fees. Back when I started Texas Entrepreneurs Network, I looked at becoming a broker/dealer, get a FINRA license and do that, but I found I had such a large network of angel groups and venture capital firms. Most, if not all, don’t allow brokers to be in the deal.

I went the non-broker route. We charge a monthly retainer. You look at the different levels that we have there, set up a call with us and we’ll talk to you about if your deals a good fit for our network. There’s no signing up online. You have to talk to us first because we want to make sure it’s a good fit and nobody is unaware of how it goes. That’s how we work. Sign up on the website for a call and then we’ll discuss your deal and look at it.

The TEN Capital Network is quite an impressive thing. What do you see that you’re excited about for the future? You mentioned a few new industries but is there any particular category that you are jazzed about?

The pandemic has given us a whole new set of care abouts. I’m excited about supply chain manufacturing and reshoring. We’re going to see a lot of hardware come back to the US. We’re going to see a lot of things with blockchain going after supply chain systems. I’ve never talked to a supply chain manager who didn’t just jump up and down on the table wanting blockchain because this is what he needed. It’s going to do well there.

The stock market is at an all-time high. In fact, the stock market is at an all-time high at least once a week these days. It’s a good market. There’s a lot of money coming out. I have investors coming in saying, “I have all this cash. What do I do with it?” If you’re ever going to start a startup, now is the time because you have a whole new startup cycle forming after the pandemic. You have money available to go after it. The ‘20s are going to be a great decade for innovation and moving things forward because the pent-up demand is going to explode across the landscape. The world is ready for something new and different. You feel that in the air. It’s great to be at the beginning of these cycles because that’s where you see some of the great startups form.

What an optimistic, wonderful way to end the episode. Hall, thanks so much for joining us. If anybody’s interested, check out TEN Capital Network.

Thanks for having me, John.

 

Important Links

• TEN Capital
• Hall Martin – LinkedIn
• Investor Connect
• Baylor Angel Network
• Better Selling Through Storytelling Method Online Course

 

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Tags: brand building, business pitch, convertible notes, crowdfunding, growth story, investing tactics