Episode 24 | Part Two: 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.

Thanks again for listening to the podcast and the conclusion of my talk with Hall T. Martin, the founder and CEO of 10 Capital Group. His team helps companies raise funding from angels, VC, and high net worth individuals. Hal, in part 1, you mentioned the word team 3 times. Not that I was counting. I like to think of the horse and the jockey, the horse being the product or company and the jockey being the entrepreneur trying to build the business to the finish line. And it seems to me you put a lot of weight on the jockey in that scenario. Would you be able to break that down for me and say, well, at this point in the lifecycle, the jockey is 90%, and at this point in the lifecycle, the jockey is, say, 40%?

Sure. Well, in the very early stages of pre-seed, you have 2 people there, the founder and the co-founder, one building it and one selling it. And so the team has got to be a jack of all trades. They've got to be able to make the basics work without a lot of support or a lot of funding. They have to be self-motivated for the most part because you're actually building the core elements of the business. And when you get into the growth stage, that's where the team starts to spread out into what we call the customer acquisition, customer retention machine. It's the team around that that is really critical for building and running in a repeatable, predictable way the business itself. I always tell startups, investors don't look for big revenue, they look for predictable revenue. And the more you can do that, the faster you'll raise funding. And then when you get to scale, well, that's where your systems really take over. And now you're looking at groups that can build and run systems and not just individual functions like sales or marketing. You're— now you're running call centers and now you're running social media campaigns and other things that are on a much bigger scale and maybe much more focused or refined in how they're actually run. They're more specialists in that case. So the team changes as you go up the curve from the co-founder, founder to the growth machine to the scale machine.

So one of the things that I looked at when I did this study was that in 2010, there were more accelerators than there were businesses being accelerated. And now what you see is this huge increase in the number of businesses that are being started up, even at the, at the university level. The universities are investing a tremendous amount of money in, you know, their incubators, etc. And we've seen an increase in growth and diversity of the startups that we see, like space and AI, of course, medical, sustainability, robots, SaaS. I wonder if you could provide some insights. On what's hot for the investors listening to this?

Well, you know, the hot topics today are AI, ML, machine language. Everything needs to be AI-enabled, and we're seeing a lot, a lot of startups come out that are in that space. See a lot of blockchain applications come out. We did a lot in 2017 with the ICO white paper scenario, and we're now seeing— here we are 4 years later and seeing substantial systems being stood up, real applications, real value being provided. A lot more to do in the way of regulatory, but it's certainly getting there in a fast way. And then we see a lot in the direction of data analytics. Data just becomes more and more the driver and the key pervasive factor. It also, if it takes your valuation company up by an order of magnitude over what a standard service business might have. So some of those are some of the hot ones that we see right now, and we're seeing more come out in the way of marketplaces and e-commerce post-COVID. A lot of e-commerce systems are coming up, and we're seeing the marketplace move into the B2B world as well.

When you look at new deals submitted to TEN Capital Group, what are some of the top things you guys focus on?

So my experience with angel groups is that investors are looking for a growth story. Sales team, product, fundraise are up and moving forward. And so we look for the existence of a growth story, and things are moving in the business today, things are happening, because this is what gets investors excited, because it's not just predicting the future, it's actually demonstrating the future. The growth is happening now at some level. And so we're looking at that aspect of it. We also look hard at the team. It's always a key part of it. Do they have a complete team? Do they have an experienced team? Do they— are they all in place and everybody's working in the same direction? They have a good strategy going forward. It will change, it always changes, but we're all together at this time is what we find there as well. And so those are the things that we look for in an early-stage company that we like to take with us.

If you were to list out the most frequent successes you have, are there any patterns that you can point out that you've seen So, you know, the team is making good decisions for the company.

They're providing leadership. They're not just being driven by the market waves this way and that way. They're not pivoting every 2 months. I've had companies come in with a new business model every 2, 3 months, and a year later they give up. Well, it was a little bit too much, too many pivots. And so you have to have a strategy, a direction. And you have to have a team that's committed to it. And you have to stay with it at least 6 months, better a year before you'll know if it's really working or not. And then you also have a group that has systems in place. They have a system for acquiring leads, a system for closing the sales, and for retaining the customers. And those systems are well-defined and they're predictable, they're repeatable. And so that's what we see a lot of out there that proves that we've got a good growth story here, a good winning company.

If you look at the numbers and you were to look at leading, lagging KPIs and valuation drivers, are there any specific percentages by functional area that you could vocalize to the folks to say, you know, if you're an early-stage startup at, let's say, Series Seed or Series A, your numbers should look something like this?

So yeah, in the, in the seed stage, you should really have some initial customer sales and your growth rate should be 50% year over year or better. Ideally, it should be 100% growing year over year, but things like COVID happens, which can torque the numbers around a little bit. So you're really looking at just very high growth rates on your core product and core market that you're going after, because you should be there with a transitional product that is disrupting the marketplace, that is ahead of the competition in many cases. When you get into the growth stage, what you're looking for is you've got a very repeatable, predictable process for how you find leads, close them, you know what percent, you know how much it costs, you know how long it takes, you know what the steps are. It's all known. There's nothing unknown. Everything is predictable and you have all the data analytics to show. You give me— you tell me how many— how much revenue you want, I'll tell you how many leads we have to generate, how many clients we have to call and how many deals we have to quote for the customer. So it's all very predictable from that point of view itself. So the idea is that as you go forward, more elements become known and so more elements get baked into the core business. And yet we're still growing at a very healthy clip because we're able to move those numbers up because the market is big. The market is growing and we're in a great space. So those are some of the things we look for.

So, you know, TEN Capital has over 12,000 investors in the network, right? And you've raised closing in on $1 billion here. And your background is just extensive. I was reading up on your background. I mean, it's just really good, especially you have this 501 nonprofit dedicated to the education of investors, which obviously incubates and grows the startup community. And I'm wondering if there's any last words with all that experience and these folks listening, investors and a lot of new investors and a lot of startup entrepreneurs listening, that you could give them as a parting word of advice from the investor perspective and then from the entrepreneur perspective.

Well, from the entrepreneur's perspective, what I always tell the entrepreneur is you want to take the investor on the journey with you. I had an entrepreneur come to me once saying, I'm not raising money now, but in 6 months I will be. Can I keep you informed of our progress? And every month for the next 6 months, I got an update, short, you know, 5, 6 bullet points of what they were doing. And when it came time to close the round, he was able to close it in record time because he had spent the time already in educating the investors while he was getting ready for raising funding. And when it came time, all the investors were up the curve. It takes 7 touches to close a sale, so it takes 7 touches to close an investor. And so I thought that was a clever way of doing it. And the key is you have to demonstrate the growth story, not just predict it. You have to go back and show it is actually working, and you have to build a little bit of a relationship. On the, on the investor side, you need to make clear to yourself what are you going to be able to do to help 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. You know, what am I going to return? The why I'm doing this is what really drives it going forward and so you want to get clear on why you want to invest and what you want to do for those startups that you were going after and let that advise your investment thesis and strategy.

So I'm going to do a little plug here for Simon Sinek on his book, Start With Why. But is that basically what you're talking about is that idea of starting at the center and then working out and selling from the center, your why, instead of selling the outcome?

That's right. So, I helped start an angel group in Austin and it was pretty much a financial thing. People came in with 3 $75K checks and they go bang, bang, bang. Now what? Well, I'll wait to see how this works out. Well, in the startup world, that's waiting 5 to 7 years. If not longer. And so we had a very high turnover rate in the group. I think it was about 30% every year because people were just treating it as a financial transaction. I then also started an angel group in a university, my undergraduate, and found that they were there primarily for student education and experience and job placement. The students were doing part of the deal flow and the diligence. And so the why was very different. The why was for the student. Second and third was making money and giving back to the university, etc. But because they had so much better why in that university group, their turnover rate, 30%, was around every 7 years, not every 18 months, because they were there for a very different reason. And so, if you approach your angel investing with a proper why, not just to make money— that's on the list but not first— you'll find that you'll stay with it a lot longer and you'll get a lot more out of it. That's the challenge. What is your why?

I get it. I get it. You know what? As an adjunct professor at the University of Texas, go Horns, my daughter went to UT also, and leading the idea of programs and fostering startups through the engineering program, is there anything at the university level that entrepreneurs that are in university should be looking at?

Well, the University of Texas has a great number of accelerators. I think every college on campus has their own accelerator, part of that explosion of accelerators you talked about before where it's very, very specific to their domain. So there's plenty of solutions out there and supports for starting a business. And so the university is a great place to go test things out, go look at the technologies, go validate markets while you're getting a degree. You can validate and research markets. I don't coach people to start a business while you're a freshman, but I do coach them if you want to start a business, say, after you graduate, start doing the market research now. Use your time on campus to use the resources to figure out if that market is really there and validate it for yourself, and then figure out how you're going to approach it. So it's a great place to plan for it. Because many students, you know, their first job is going to be with a startup after Graduation, not with a big company. And so you can use the campus time to actually get ready for that.

Hal, I really appreciate your time and energy, and it— this was a really incredible podcast because you're so concise and to the point. I love that. Thank you so much.

Well, thanks for having me, Greg. I really enjoyed it.

You're so welcome. Find out more about Hal and his team at tenncapital.group. And that wraps up this episode of the Boss Podcast. If you enjoy the show, please take a second to subscribe so you automatically get my new shows when they drop. Also, if you have a minute, I'd love it if you left a review so more folks like you can discover the show. I'll see you next time. Namaste, my friends.

Learn more about the Boss Business Operating Support System at bossstartupscience.com. Or you can reach Gregory Shepard at GregoryShepard.com. This has been a production of Forbes Books.