Now that TEN Capital is ten years old, we’ve picked up a few lessons along the way in helping startups raise funding and helping investors fund those startups. Here are some key principles for investors funding startups.
The team is the most important part of a startup. Diligence should focus first on the team, not the product, space, or anything else.
Monitor the startup for three months before investing to gauge momentum and traction. You need to peel back enough layers of the onion to know what’s there. Your mantra should be start peeling the onion.
The biggest challenge in angel investing is not that the startup goes under but that it turns into a lifestyle business. Historical returns indicate that 10% of your investments will be home runs, 15% will be singles/doubles, 10% will go out of business, and 65% will turn into a lifestyle business. Ask for a redemption right at investor sole discretion to prevent the startup turning into a lifestyle business. If they go on the payroll exit, you can exit with the redemption right.
(The Payroll exit, is when a startup gives up trying to make a go at a venture exit and decides to sit back and just take above market salaries as their exit. This leaves the investor on the equity exit with no clear path for a return.)
If all you do is take, take, take- don’t be surprised to find your startup ecosystem to be small.
Pay it forward.
Hall T. Martin is the founder of TEN Capital and a builder of entrepreneur ecosystems by startup funding through angel networks, funding portals, syndicates, and more. Connect with him about fundraising, business growth, and emerging technologies