Raising Capital with an Internet Go-Between
Entrepreneurs often come across finance brokers of various kinds, including many on the Internet, but I recently met Hall T Martin who founded TEN Capital in Texas. Hall T has created an organization that has been very successful in raising capital for new ventures in Texas. I forecast that we will see more of this kind of new Go-Between, elsewhere in the United States or across the globe, if TEN Capital doesn’t get there first.
What is special about TEN Capital is that they use a service model that enables entrepreneurs to join the program for a monthly fee of $295, once the viability of their business model has satisfied Hall T or one of his colleagues. Entrepreneurs who join the program can stay as long as it takes to find funding or give up the race.
A member of the TEN Capital team helps the entrepreneur prepare the company and its investor documentation, as well as to develop a campaign plan for whatever kind of funding is appropriate. The neat part is that in addition to the mentoring, TEN will steer the client towards the form of funding that is most appropriate for the company at its particular stage. They can help with raises of between $5K to $50M.
TEN Capital is not restricted to one kind of capital raising. TEN has built a financing ladder, across many kinds of finance, each with its own particular characteristics. The first rung of the ladder that’s appropriate for very early stage companies is likely to be on the basis of donations—from friends and family, with the expectation of raising between $5-10,000. It generally sounds simple to the budding entrepreneur, but the process is often fraught with difficulties, both in terms of how to raise the money, as well as in the establishment of appropriate documentation. In the case of debt finance, it will probably involve a promissory note, whereas for equity finance the creation of the right share structure will be a bit more hazardous.
The second rung could involve using reward-based crowdfunding on a larger scale and involving a bigger network to raise something between $5-50K. Though this process also seems simple, the campaign will involve a lot more work to plan, as well as executing a social media campaign. At the same level, TEN Capital can help with P2P (Peer-to-Peer) lending, which is a special form of crowdfunding, but using the same kind of social networking campaign.
The next big step might involve an Intrastate Crowdfunding raise, for up to a quarter of a million dollars. This process exists in more than 35 States, including Texas, and came about because the SEC was slow to issue the rules for what is designated Title III crowdfunding at the Federal level. Many States created exemptions from Federal public fundraising that made it less onerous and expensive for companies to raise equity, provided that investors are only drawn from within the State and with limits on the scale of the offering.
Higher up the ladder, Hall T and his colleagues will guide entrepreneurs towards accredited investor raises among business angels. In Texas, such raises will be from single or multi-family offices (a family controlled investment group). An accredited investor is one who can deal with securities not registered with financial authorities, by satisfying one of the requirements regarding income, net worth, asset size, governance status or professional experience—essentially very wealthy individuals.
TEN Capital works also with many other forms of business finance, including revenue-based funding, where loans and interest are paid as a percentage of the borrower’s revenue stream; partnerships and acquisitions, where another business can bring funds to mutual advantage; grants from foundations or government bodies; straightforward, old-fashioned bank debt and lines of credit.
Fundraising Model for the Future
The new kinds of financing becoming available through what I would call the democratization of equity markets, means that entrepreneurs have to choose the appropriate kind of money raising process and the best sources, not only in terms of the kind of financial arrangement, but also which kinds of individuals or institutions can bring added value because of who they are.
The freeing-up of capital markets has been spurred by the JOBS (Jumpstart Our Business Startups) Act of 2012. It has taken the intervening years for Federal and State civil servants to establish the new rules of the game, which are now in place for 2017. In part, this has been because bureaucracy is complicated, but also because the powers that be have not wanted to create financial markets without protection of the consumer/investor. The democratization of equity markets has resulted in a clearer set of rules, still protecting the investor, but more appropriate to the Internet age.
Now that new energy has been pumped into the financing of startups, the field has become even more complex than it was before. Hence the need spotted by Hall T and his colleagues—entrepreneurs full of passion for their creation tend to lack the overview and knowledge of what may be the most effective financing the way to turn their ideas into reality. The tendency for borrowers will still tend to be a knee-jerk reaction for creators of new ventures to go to a retail bank, cap in hand, with the hope that their credit score and house valuation will persuade the bank to make a loan. The tendency for capital seekers tends to be that they have to aim at an angel or a VC, but even today that route is open to a small proportion of startups.
In the tech world, many business accelerators attract business founders, since if they are accepted, they get the kind of support and networking that TEN Capital can offer, but in exchange of a small equity stake. TEN capital partners may decide to invest, but their business model does not of necessity require the entrepreneur or co-founders to part with an equity stake.
There are some alternatives to the TEN Capital process. One is Onevest, that offers entrepreneurs the CoFoundersLab, for learning, ways of building startup teams, as well a network to find advisors and provide investment. However, such platforms as Onevest, or Angellist which is not dissimilar, do not offer such a range of financing options.
The banks themselves have not really woken up to the sea change taking place in the financing of new enterprises, so they themselves are not always a good source of advice, most particularly because they are actually risk-averse. These are reasons why a Fundraising Go-Between, like TEN Capital, provides a really good model for the future. Traditional CPAs, another ‘first port of call’ for many aspiring entrepreneurs, are seldom well versed in all the options now available, and in any event, will cost much more to hire than the $295 monthly fee that TEN charges.
If you are not starting a business in Texas, you better hope that either TEN Capital will expand to other States, or that you can find as creative a go-between near you. My prediction is that one way or another there will be a growth of such go-betweens, both on the Internet, within other States, and among nonprofits that are dedicated to fan the startup flames of their region or sector.