The Angel Network | Hall T. Martin | Part One & Two | The BOSS Podcast

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'm— 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 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. Expectations about 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 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— is that, uh, 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— you 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 gonna 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 gonna have a lot of revenue, But you want a lot of testing. You wanna know what's out there. You wanna 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 bossstartupsience.com, or you can reach Gregory Shepard at GregoryShepard@bossstartupsience.com. This has been a production of Forbes Books. 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. Hall, 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, 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. 'Cause 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, 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. 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 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 university level. The universities are investing a tremendous amount of money in their incubators, et cetera. 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 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 is 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. That'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.

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 at TEN Capital Group?

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, that's not a good business model. It was a little bit too much, too many pivots, and so you have to have a strategy, a direction, 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— 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 number 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, 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 creek. 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 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 start— 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. And 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 play. 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 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 Hall and his team at ten capital dot 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 bossstartupsience.com, or you can reach Gregory Shepard at gregoryshepard.com. This has been a production of Forbes Books.