Funding for Texas Startups -- It's not about how much you invest, it's how much investment you can attract

There's an ongoing debate between Texas investors and Texas startups about how to bring more funding to the startup and growth stage companies.  Recently, in Austin this debate has bubbled over with the Texas blogosphere bantering posts back and forth between the investors demanding better startup deals and startups demanding more funding from Texas investors.

The investors claim there is plenty of money to be had.  The startups argue the opposite.

Let's turn to some data to see where Texas stands.   For starters, Texas represents 10% of the country in population and business across the board. The National Venture Capital Associate tracks venture investment by state.  The NVCA data which you can see on this page, clearly shows the amount of VC funding going into Texas companies is currently around 1.5% with a a two year average hovering around 2.5%-- well below the 10% benchmark. It appears we are below potential. So what do we do about this?

I argue that the burden of funding rests squarely on both the shoulders of the startups and the Texas investors.  The startups need to look nationally for their funding as the world has gone vertical.  Investors are increasingly looking for deals that match a specific criteria (e.g. wearable deal with $1M in revenue and a fund raise of less than $5M).  The chance of a startup finding all of their funding in Texas or any one region of the US is quickly shrinking.  No longer can you find all your funding in your own backyard.  As the startup looks nationally, the range of competition increases.  Startups absolutely have to bring their A game to the national table -- B players need not apply.

For Texas investors, the question is no longer, how much funding are you going to deploy in Texas companies -- it's also how much your funding can attract from the national stage.  The investor's funding should be leveraged to bring in more dollars.  All funds are limited but its ability  to attract more funding is unlimited. Investors need to build syndicates with their fundings.  Investors absolutely have to bring their A game to the national table -- B players need not apply.

For those who are investing, thank you.  Now let's talk about how your funds can be leveraged to attract more capital -- in particular from out of state.  For those who are starting up a company -- thank you, too. Now let's talk about how you can take your startup to the A game level.

Best regards,
Hall T.

What angel groups can learn from Crowdfunding

I came from the world of angel group investing and now run a crowdfunding portal.  As the first director of the Central Texas Angel Network, I helped build the groups programs and processes.  Today, I run a crowdfunding portal that focuses on Texas deals and now view the angel group process as one under siege.  The number of deals and the increasing virtualization of the membership requires angel groups to move online or at least some portions of the investment process.

Angel groups have used Angelsoft/Gust and Proseeder, but those tools are built as repositories of information and not promoters of deals or membership.  They work well for due diligence as they can store and share key documents throughout due diligence but in general they are rarely used for the rest of the investment process because they require the user to proactively log in and search for deals.

Crowdfunding teaches us to place the deal in a mailer and send it out to the investors so when they open it up, the deal is staring them in the face with only a few choices such as "Invest" or "Pass". The email that shows up in their inbox is something they must react to in some manner. In today's work world if you don't make it easy for users to interact with your system they will bail out on you and your program.

The traditional angel world sees the angel meeting as the core of the program.  People coming together is how investors and entrepreneurs exchange information.  In crowdfunding, the web portal is the core of the program and is where people come together to find deals, share information, and interact with each other.  In most crowdfunding deals, the investor ultimately wants to meet with the team and that's the benefit of the angel group process. It's strength is the face-to-face engagement between the investor and the entrepreneur.  It's weakness is the rest of the process -- screening, monitoring, researching, and closing the deal as well as the ongoing post-investment follow up. Combining the angel group's face-to-face format and comraderie with the efficiency of online funding tools for screening, monitoring, and closing the deal makes for a strong partnership.

Angel groups can improve their process by drawing technologies and formats from crowdfunding as they move into an online world.

Screening--this needs to shift online and in particular to well formatted mailers through which members can view and vote on deals.  Instead of slogging through fifty deals in one sitting, the submitted deals could be sent out 1 or 2 a day to the members to see which ones capture interest. By the end of the month, the top vote generators move to the next stage of the process.

Presentation--this part can be done in person and provides the high touch interaction which is always key to closing the deal.  Angels want to meet the team and share experience and the entrepreneur wants to know who they are pitching to.

Monitoring -- this is another key step where crowdfunding can help the current angel group process. Regular updates from the entrepreneur can be distributed and then archived with previous updates so people can see the historical progress of the deal.  This works well for deals that are interesting but not ready for prime time.

Due Diligence--the online tools for researching the deals increases every day.  Online databases, comparisons to competitors and other tools are available to help investors decide which deals to pursue.

Closing--most angel deals are still papered the traditional way with hard copy papers.  Crowdfunding brings online tools for completing the transaction without having to sign physical documents but rather using electronic signatures instead.

Deal Syndication -- this is where crowdfunding really shines.  It gives the angel group the ability to take a funded deal and pass it to another group or "crowd" of investors.  A strong syndication network raises the value of the angel group as it can bring more dollars to the table and thus attract better deals.

In summary, crowdfunding brings online tools that make the angel funding process more efficient and effective. It can save the angel investors time as well as manage the increasing dealflow.

Best regards,
Hall T.

How to pitch investors through an email

Increasingly investor communication is going online.  Your initial pitch will most likely come through an email so it's important to be effective in pitching investors this way. Most email is now read on a mobile device so it has to pique his interest before he jumps to the next one.  Here are some tips on crafting an effective pitch online:

Investors will always look at the subject line so make good use of it by giving a description of the topic such as "Introducing StartupX to Greyline Capital."

Address the email to the individual investor (Jim, Bob, Mary, etc) and not the generic (Investor, All, To Whom it May Concern).

Show a network connection to the investor such as "Our CFO worked at one of your portfolio company -- Hotspot App before joining StartupX."

Get to the point of what you do and say it in five to seven words or less, "We make cybersecurity tools for retail businesses."

Then explain how this is a real business and not just an idea, "our core platform is installed in 300 sites and growing by 20 sites per month."

Close with the team, "Our team has experience from Intel, Microsoft, Google, and the Cyberintelligence arm of the US government."

Finally, close with the ask, "We're raising $500K to expand the product into the market and would like to give you more details over a coffee next week."

The more numbers you use to describe the business and the market, the stronger the impact of the presentation.  The overall email should be no more than 75 to 100 words.  Anything longer will most likely go unread.

Texas Venture Growth Forum 2015 Infographic

Texas Venture Growth Forum 2015

The Contractor Startup --Why this gives the investor pause

I hear many entrepreneur pitches and the one point that stops the conversation cold comes when the entrepreneur says he can start building the business just as soon as he raises funding.  He goes on to explain why he can't do anything unless he has funding.    An investor hears that the entrepreneur and his team can't (won't?) build the product unless someone is paying them and apparently there's no customers to pay the team.  Again, the team can't (won't?) sell the product unless someone is paying them.

I call this type of business-- the "salaried startup".  They only work when money is available to fund the process.  Bootstrapping, sweat equity, and doing it for the passion just aren't in the mix.  If the investor asks for traction or other evidence of progress the excuses fly fast and furious--a thousand reasons why that's just not possible.  The investor then imagines this conversation at a post investment meeting and hears "I can't grow sales unless you give me more money to hire more people," or "I can't build more product unless you give me more funding."

At scale, this is certainly true. In a seed stage startup this is certainly not true. The investor is looking for a team that is building and the growing the business now.  It may grow slowly but it is moving forward.  In the early days the founders are building it and selling it.  They're not waiting for someone to pay them to do so.  Those who take that path are "contractors" not "entrepreneurs".

You can start building your startup now.  You can grow it with or without funding.  If the fully funded startup is your only path forward, you'll find fewer investors willing to climb aboard.

You have to look beyond your backyard

Recently there as been a lively debate about the lack of funding in Texas. It's actually not a new debate but rather an ongoing dialog between entrepreneurs and investors.  Entrepreneurs feel that funding is scarce in Texas compared to other parts of the country.  Investors counter that they would invest more and more often if the deals were further along and better prepared.

The debate is not new.  It comes up every year.  The solution is to change the way fund raising is handled.  It's no longer in your backyard.  You must have a national focus on your fund raise from day one.

When I was the director the Central Texas Angel Network we had just restarted the formal angel community in Austin.  The previous group, the Capital Network had gone out as they were tied to the dot com world and when that went away, they went away with it.

At that time, it was a great boost to have a formal angel group in Austin so central Texas entrepreneurs could raise money in their own backyard, so to speak.  It worked for awhile.  When we started, we had 15-20 deals on each round of which 4 would receive presentation slots and 2 would get funding on average.

As the years progressed two things happened.  First, the number of deals grew.  Today it's not unusual to see 75 to 100 deals considering CTAN of which 4 will get to pitch to the membership and 2 will get checks.  The funding rate is higher because there are more members, but fundamentally, entrepreneurs looking for funding have a 2% chance of getting it from the group.

Daunting odds.

The second thing that happened is that crowdfunding came into its own.  After several years of debate and government (in)activity, the rules are starting to change.  It's now possible to raise from non-accredited investors as well as from accredited investors who are not in your backyard.  At CTAN, we all gathered at the Headliners club in downtown Austin to see the live pitches.  With crowdfunding, one can source angels from across the country if not further because the pitches are on-line.  The tools are improving and the entrepreneur's ability to use those tools are increasing.

The world of angel investing is going vertical.  The chance that an angel investor interested in your particular application (mobile apps, enterprise software, consumer product good, etc) is in your backyard is shrinking.  To reach an investor interested in your stage and type of deal, you much reach across the country.

Crowdfunding is how you do that.  By placing your deal online angel investors can now find you.  You can now reach angel investors from a broader area.

It's helpful to have some support from your local area, but from day one entrepreneurs should have a national perspective on their fundraise.  If you have a real business (not just an idea) you probably have an investor out there who would be interested in your deal.  He's just no longer in your backyard.

River Cities Capital Fund Venture Profile by Patrick Dunnigan

What is the history of River Cities Capital Funds?

River Cities has been making principal investments as an institutionalized fund since 1994, however, you can trace the firm’s roots all the way back to 1978 when the founders, Glen Mayfield and Ted Robinson, began doing business advisory work and merchant banking. So while we’ve been making investments under the River Cities Capital Funds moniker since 1994, the firm’s been helping entrepreneurs since 1978. Initially, the firm focused on smaller, more venture-oriented investments. Since then and over subsequent funds, RCCF has moved to growth-stage investing focused specifically on healthcare (services, devices and IT) and b2b technology, where the firm has developed significant expertise.

Tell me more about your fund and the checks you write.

We’re currently investing out of our 5^th fund, which is a $200 million vehicle, where we’re looking to make $5 million to $12 million minority investments in high potential companies with outstanding management teams. With our LPs we can syndicate deals up to $30 million. While that’s a wide range, we like that we have the ability to flex up and down, allowing us to back the best teams and opportunities.

Ultimately, we view our business as providing capital and business acumen to innovative companies that want to grow at an accelerated rate. We believe a crucial part of our job is helping entrepreneurs wherever we can, as our business will always be dependent on talented entrepreneurs taking risks and envisioning a different future by building new products and technologies – often leading to a need for growth capital and good partners. Thus, we’re always looking for ways to help entrepreneurs, even if it doesn’t make sense for us to invest at the moment. We try to keep an open door policy with all entrepreneurs and want to build relationships over time.

What are your criteria for companies?

Given our growth-stage focus, we look for companies doing $3 million to $50 million in revenue, growing at more than 30% annually. VCs are good at saying a lot of obvious things, so I’ll say the higher the growth the better. We don’t expect the businesses to be profitable (yet), given the growth rate they are trying to maintain, but we are careful and thoughtful about cash burn. We are also looking for compelling ROI on sales and marketing spend and validation of customer satisfaction (and therefore retention).  That’s a high level answer, but obviously each industry has specific metrics and criteria that are important.

Our two sectors are b2b IT (tech-enabled services and Saas) and healthcare, which includes everything except drug development, so we’ve made investments in healthcare IT, healthcare services and medical devices.

In our IT practice, we aren’t averse to software businesses that have a services component.  Generally speaking, we like businesses that are solving complex problems, and services can sometimes be an indicator that the problem you’re solving isn’t easy to solve. Said another way, we’re leery of point solutions solving less complex problems that might struggle when more competition inevitably shows up. In a world where start-up costs for software products are so low, possessing some level of barrier to entry is critical to create sustainable value over the life of the investment and beyond (again, obvious things investors say).

Do you look at consumer businesses?

We tend to shy away from b2c companies, not that there is anything wrong with them. It’s just not what we know. We try to stick to our knitting.

How do you handle syndication?

We welcome opportunities to co-invest alongside other firms, particularly firms who share our partnership-approach to investing. We view ourselves as investors for the long haul and aspire to be known as a great partner not only when things go well, but when things inevitably get challenging. It’s easy to be a good partner when the company is hitting plan, but in our experience there will always be challenges along the way and that’s usually when having a good partner is most important. We want to make sure our co-investors also have a similar belief system and reputation.

What is the strength of your services to portfolio companies?

Continuing with the partnership theme, ultimately, our most consistent value-add will always be the collective wisdom the firm brings to each investment, compiled over more than 20 years and through more than 100 investments. That history is full of a lot of things going right but has no shortage of challenges. Having a partner at the table who has navigated similar challenges and witnessed both sound and poor decision making, can help a management team avoid critical mistakes – we believe that breadth of perspective is crucial for young companies.

We take a very metric-driven approach to portfolio management and offer benchmarking tools and reports to guide management teams to successful unit economics. We offer benchmarking regarding compensation, SaaS operating metrics and valuation, healthcare CEO roundtables and more.

(And going back to the fact that) it’s never been cheaper to start a company, it’s important to keep in mind that the cost to scale a company is essentially the same as it’s always been. Once you have proven you have a product and service to build a business around, you still need smart people and prudent decision making. And people are expensive! So while we’re bullish on the fact that there will be more high quality, disruptive companies, than ever because of the steep decline in infrastructure costs and the ubiquity of information, we also have conviction that there will always be the need for experienced capital and sound counsel to grow and scale those businesses. 

Where do you focus geographically?

We have a national footprint and can invest anywhere, however, we try to stay out of the high-traffic corridors of Silcom Valley, Boston and NY. We’ve always sought to be one of the trusted capital providers for all of the great entrepreneurs and management teams outside of those markets, in places where there tends to be much less resident capital than in those coastal markets.

We are big believers in the entrepreneurial/technology ecosystem in Austin. Innovation and entrepreneurship are in the city’s DNA and our firm believes this area of the country will continue to produce high-potential disruptive technology and healthcare companies, which is why we are spending time here on a regular basis. We’ve talked to a number of promising companies in Austin and hope to invest part of Fund V in this market.

Funding Analytics--How it helps you raise funding

Fund raising is moving from a local exercise to a global one.  One can still get a loan from a local bank or an equity investment from a local angel group, but the availability of capital throughout the world awaits those who know where to find it.

Investment Analytics shows investors how to make better investment decisions.  Funding Analytics shows entrepreneurs how to find better investors.  By researching the track record and criteria of venture capital funds, private equity funds, and angel group portfolios, the entrepreneur can more accurately target the right investor group for their deal.

Funding Analytics includes the current market rate for valuations -- always a key decision in a negotiation with investors.

Funding Analytics shows the best way to approach the investor and keep them informed of your progress.

Funding Analytics shows which investors have funds ready to deploy versus those who are still raising their next fund.

Funding Analytics shows what due diligence documents are required and how to build them.

Total capital investment throughout the world is over $100 Trillion. The funding is there -- to find it you'll need Funding Analytics.

Five Universal Principles for Startups

Startups are great.  They provide new careers.  They constitute new jobs.  They are the path to the next generation but it's not for the fainthearted.  There are five universal principles in the world of startups:

1. It always takes longer than you think -- this goes for building the product, closing the sale, and growing the market. 

2. It costs more than you thought -- most entrepreneurs are off by a factor of 10 when it comes to estimating time to complete the software, the work required to raise funding, and the effort needed to close the sale.

3. There's always a better idea -- no matter how great your idea is there's always a better -- it's called progress.

4. The journey is the reward -- in retrospect building the company is best part of having a company.

5.The team is what you will remember -- products come and go, markets go up and down, but the team and the relationships you build will stay with you in the long run. 

5 Things Investors Love to hear in a Pitch

Investors hear pitches continually throughout the year.  There are so many that one's eyes can glaze over.  From time to time, an entrepreneur will make a pitch and the investor's eyes light up.  It's because investors are listening for a few key things that show you have a real business with real growth.  The rest is filler.  Every entrepreneur has a story--many are interesting, some are not.  But for investing purposes there has to be 5 key elements to capture their interest.  Here they are:

1. Real traction--entrepreneurs who have sales and show it are head and shoulders above the rest.  Most talk about the traction they will have in the FUTURE but not what they have today.  In an investors mind, this equates to "No Traction".

2. Real pain point--the entrepreneur has found a real pain point in the market and is filling it.  Someone once said, customers pay for pain to go away -- they don't pay for nuisances or inconveniences.

3. Real team -- they have someone building it and someone selling it and those team members know what they are doing.

4. Real product -- the product works and is non-trivial to build. It's more than just spin marketing.

5. Real growth prospects -- the market opportunity has strong growth potential and is not going to run out of steam in a year or two.

Those are the elements that light up the investor room if you really have it.