Episode 24 | Part One: The Angel Network

Gregory Shepard, an entrepreneur who's built and sold 12 businesses, a recipient of 4 private equity awards, TEDx speaker, and Forbes author. This is The Boss Podcast with Gregory Shepard.

So you've got a startup. What do you do next? Well, you probably need some capital, which is easier said than done, much easier said than done. This week, I'm honored to be joined by Hall T. Martin, the founder and CEO of TEN Capital Group. His team helps companies raise funding from angels, VC, and high-net-worth individuals. Hall, welcome to the podcast.

Greg, thanks for having me. I'm looking forward to it.

Cool. I think we're going to have some fun. I've been excited to talk with you for a while here in front of all these folks that are interested in talking and listening to people like you. So, let's get started. Hall, we're familiar with the term angel investor. But how does an angel investor network work for those folks that are new to the startup ecosystem?

Well, an angel network is a group of angel investors who come together to share the deal flow and the due diligence that goes with it. If you've ever been an angel investor, you know how much work it is to find the deals and how much more work it is to go and actually diligence those deals. And by grouping together, they can share that load and find the best deals and make their time more efficient.

Basically, it allows you to have an entrepreneur do the same thing, you know, basically go after the investors, but do it once instead of, you know, every day for months on end. They can just come to you, you vet the investors, help them choose the investors that are appropriate for them at the stage that they're at, and then help them through the rest of the process. Is that correct?

That's right. You're pitching to a group of investors instead of one at a time, which saves the entrepreneur time in meeting the investors, doing the pitch, and diligence because oftentimes the angel groups will share the diligence and have one process where everybody is participating as opposed to multiple processes. So it saves everyone time when you do it that way.

So now that that's said, let's step back and talk about the genesis of TEN Capital Group. It's been around 10 years. How did you find this company and why did you fund it?

My background is I started 3 angel networks in Texas back in the early 2000s, and I saw the challenge that startups had in raising funding. Even with the efficiency of an angel group, I found many startups didn't have their documents together, they didn't know how to pitch, and almost nobody followed up. And I thought that was really the key, was you had to go back and demonstrate the growth story, give updates, and at heart build a little bit of a relationship. And found that most entrepreneurs were too busy building product, hiring team, closing customers to do that. And so I started the company under the name Texas Entrepreneurs Network in 2009 with a mission of helping startups raise funding by helping them get introductions and do that follow-up work.

Tell me about that transition. You mentioned Texas. So what made you go beyond the borders of the Lone Star State and, and step out?

So, as I was working with companies going through the angel process, I found that many of them also needed venture capital funding. And so, from 2010 to '15, I would go out to the Bay Area and New York, that's where most VCs were back then, and build a relationship and find more funding for the startups I was working with. In 2016 and '17, a whole bunch of family offices came into my network wanting to get access to startups because they wanted to go direct, not just through funds, but make direct investments. And along about 2017, I had companies outside of Texas— Seattle, Chicago, Bay Area, New York, all over— call me up saying, well, I'm not in Texas, but I want access to your investors, because by then we had about 5,000 investors in the network that were actively working with us. And so, I decided to go national with it and I changed the name from Texas Entrepreneurs Network to TEN Capital. That's what TEN stands for.

Ah.

And started working the process around the country instead of just around Texas. Texas was 10% of the US, but, you know, the US is 100% of the US, and so it was just a much bigger market.

Yeah, so for many people, they don't understand the difference between incubator, accelerator, and angel network. Can you explain that and unpack that for folks? Sure.

You know, in the process, startups need help in getting their deal together, and at the very beginning, it's probably best to go to an incubator where you can get a lot of hands-on coaching and experience and get the basics down for sales, building product, organizing the legal structure, etc. And then some groups found that accelerators were also helpful in that they take companies that were already up and running and they would just accelerate them with key skills in marketing and go-to-market strategies and other things. And then angel groups are really around go-to-market. That's where they come into play. They, they really aren't there for basic education. They're there to help you get into the market and start growing. And so if you go one after the other, it's a logical sequence to go one to the next. And as a startup, you want to look and ask yourself, what help do I need? And then go choose the right group to help you with it. Not every group is a good fit, and you want to make sure that their offering is what your company needs at this time.

How big is your network and how much have you raised?

Well, we are now over 14,000 investors in the network nationwide. And over the last 11 years we've been working, we've helped companies raise over $900 million in funding. We deal with seed, Series A, Series B venture deals for the most part. We don't do debt, we don't do private equity, but it's primarily in the venture category that we work.

So earlier this year, we spoke to an entrepreneur and investor, Patrick McKenna. And we talked about the investment opportunities he's found outside of the Valley in places like Austin and Baltimore. Which of other cities outside of those 2 have you found to be great areas for deal flow and opportunities?

So, yes, across the country, we're seeing many tech hubs sprout up and are good sources for venture deals. Nashville is a good one. Phoenix is a good one. The Denver area and Colorado Springs are also good areas for finding deals, and you'll find even small clusters in Kansas City and other places like that. Chicago, and one of the hotter spots that has come up recently is Miami. Miami is just now getting an influx of venture capital, but we had a fairly substantial number of family offices there before, but it is now a great place for running a startup in that area.

So one of the things that we do at Boss Startup Science is study why and when entrepreneurs fail at this 90% rate that seems to be the, the going rate for the last 10 years. What have you found at TEN Capital Group in terms of why entrepreneurs fail?

Several reasons. One is they, they really don't have a large market that they're going after. They're going after something in a fairly small market, and then they find the competition is just too hard and There's just not enough customers to make it work. Another area is they, they don't really come up with a solution for a painful problem. They come up with what I call a nice-to-have. This is nice to have, but you really don't need it. And when it comes down to closing the sale, that can be very hard as well. And the third reason is many companies really don't focus on the operational aspect. It's just all about building the product, but they forget about the process for Generating leads, closing sales, and putting in a consistent flywheel that runs the business every day, day in and day out, which is what you need in order to grow a business is to have consistency in the operations. One of the key hires we always coach on is get an operations person, especially around sales, to really drive that process. Scott Adams once had the saying, you know, losers have goals, winners have systems. And so we look for those who have systems behind their business.

So now that we've talked a little bit about the startup failure rate, let's switch it around and talk about the success rate and what makes entrepreneurs successful.

So the ones that are successful are the ones that have all the skills they need in order to do the business at that stage. At the very early stage, you need a complete team, and at the very beginning, you need someone building it and someone selling it. No fair, we're all building it and nobody's selling it. I've actually worked with companies where they were all selling it and nobody building it. And I can tell you neither way works except the way of having a complete team, someone building and someone selling it. As you grow, that expands into more areas of, you know, having the complete coverage for what you actually need to do, having operations, having sales, having go-to-market strategies, etc. So you have to always have a complete team. Because startups win and die based on the team more than anything else. Products come and go, markets come and go, but teams, when you hire, that's what's going to make it.

So in my research, we've noticed that there's a drop-off of startups in terms of the failure rate a year, about a year post accelerator, about 40% of them fail within a year of leaving an accelerator. Why do you think that that happens and how can entrepreneurs avoid this landmine?

I think one of the issues is when many people graduate from an accelerator, they think they're ready for the market. But my experience is most companies are not ready for even funding and a strong go-to-market strategy for about 1 year after they leave the accelerator. So it takes a year just to get ready to go into the market in a big way. And I think many companies go to market prematurely. They have unrealistic expectations about how how fast things are going to happen. And they burn through their cash, they burn through their momentum, and people give up and go away because they thought they'd be done by now. But when in fact, 1 year afterwards is when you're really just going to start. And so, it's a missed expectation for the most part.

So, you think they just get tired? They just get going, going, going, and then, you know, a couple of years in or a year in, they're just like, wow, this is a lot more than I bargained for. And then just go back to work. Is that— what do you think?

That's right. They just thought that it would be— they would be much further along by now. They weren't as far along, so this is a failure and they drop out, not realizing they're pretty much on the track with every startup that ever existed. It just takes longer to get going and it takes longer to close sales than people realize by a factor of 4 in some cases. And so, it's just without Realistic expectations. People think they're going to be further along, and when they're not, they throw in the towel and go on to something else because it didn't work out the way I thought it would. And so, it's just have to reset your expectations on these things.

Because you just said that, it brings up this concept of a lifecycle, meaning from pre-seed or vision ideation all the way through to exit and this 5-year timeframe. If you were to look at that lifecycle, where in the lifecycle would you say are the critical points where somebody could anticipate before they get started that they're going to have to step on the gas, to your point, versus back off and say, okay, I'm too tired? Like, how do they plan that out so they can have those expectations to not walk away?

So, in the pre-seed, you're really looking to validate the idea. You're really not going to have a lot of revenue. But you want a lot of testing. You want to know what's out there. You want to know how well your business works at the unit economic level. And then once you have a product market fit and you have some initial funding, that's when you step on the gas. And then when you get into the seed and then Series A, it's all about sales, driving sales forward, focusing on the ideal customer profile, focusing on your core product, you know, just really making a machine that just works very efficiently and— very consistently going forward. You're looking to build a repeatable, predictable business model, I say, and that's what you need to focus on there. Once you finish that and you're on to scale, well, now you have to start looking at the systems behind your business and start thinking about 100x, 10x improvements on everything. And so, you have to take a little bit of a different approach at that point. You're no longer growing the business, you're now scaling it, and that just means tying into much bigger systems that you can drive your business up. So there are key points in there where you really have to put on the gas. At the pre-seed, you have to go out and engage customers and find out what is really working and not working and write it down and analyze the numbers. You have to have numbers. At the growth, it's about selling, just selling to everybody you can to get the revenue up as high as you can. And then scaling is about focusing on those systems that will really take you to the next level.

To your point, you know, you have your valuation drivers: growth, margin, and retention. So in that cycle, there are different points that you focus on, different valuation drivers that you focus on in that cycle, right? So in the— later on, you had mentioned growth, and at scale, maybe it's margin, and then throughout, it's retention. What other valuation drivers do you think people should be focused on?

So in addition to those, you really have to think about You know, the team that you have coming into it, and you have to think about the market that you're in. Is your market big enough? Are you hitting the market at the right place? Are you competitive against the competition? So you get into some other factors that change, you know, the outcome that you're going on, because you're not operating alone, you're operating with others. And you might find that certain channels or certain customer acquisition systems are going to be more effective than others as you go into it. So you start looking for ways to make your market bigger and make your systems more efficient to go forward. Like sales efficiency is a great metric to be looking at.

Wow, that's really good stuff. All right, we got to stop here. But coming up in the conclusion of my conversation with Hal T. Martin, the founder and CEO of 10 Capital Group, Hal shares some sage advice for investors.

You need to make clear to yourself what are you going to be able to do to help that that startup. And you want to invest in startups that you can help in addition to actually just putting in money, because the why of your investing is ultimately going to become more important than the what. Learn more about the BOSS Business Operating Support System at bossstartupscience.com, or you can reach Gregory Shepard at GregoryShepard@bossstartupscience.com. This has been a production of Forbes Books.