Angel Invest Boston is sponsored by Peter Fasse, top life science patent attorney.
Austin-based super angel Hall Martin has an intriguing approach to investing in technology startups that can benefit investors and founders. He’s also done quite a bit of equity crowdfunding. This interview was rich in lessons for me. I recommend you listen.
“…my conclusion after looking at it 20 years, it's not that I'm investing in the wrong deals. I'm investing with the wrong deal structure.”
Click here for full episode transcript.
Highlights:
Sal Daher Introduces Hall Martin, Super Angel from Texas
“Put my money in. In about six months, lost all of it. I started to realize this is harder than it looks and decided I needed to join a group to invest in, rather than do it by myself.”
“In Austin, we didn't have an angel network until about 2006. When they started it, I was the first member to sign up for it.”
“We got about 5 million invested in 20 deals and got a 40x return out of one of the deals.”
“We were in the home of Whole Foods. We started accelerator incubator and we started doing angel investing as well into food and beverage deals, mostly.”
“I found is that it's very hard to make a return in angel investing. You're in these deals a long time.”
"Half the deals that are coming through here are good businesses, but they're not really venture businesses. They're not going to sell for 40 or 50x."
“I came up with a model called Define the Exit, where I came up with my own term sheet, I discovered that was a key factor of success with angel investing is you don't sign someone else's term sheet; you sign your own.”
Built in Option to Exit at Year Three
“When they go on to market-rate salaries, what they're basically saying is we're not eating ramen noodles anymore, we're going to take our exit out of the salary. You, unfortunately, are not on the payroll, and you don't get that choice.”
“Seven years later, they exit the business and there was a 50% return to the investors. Well, 50% after 10 years is about a 4% IRR. It's really not much of anything. I went back and looked at it. I estimate this executive team took out about $7 million worth of salaries over those years…”
“If the C team is going on the payroll exit, I'm right there with you.”
Define the Exit versus Revenue-Based Finance
“My experience has been, so far that 70% want you to leave all the money in and 30% want you to take all the money out because they want the equity back.”
“…if in three years I have a choice of pulling 3x my money out, the dynamic is very different.”
“It's also a Facilities Management Agreement. What it is, is we get access to the bank account and to the accounting system. Every month, we go in and pull out the information rights that are owed to the investors and we send it to the investors.”
“…my conclusion after looking at it 20 years, it's not that I'm investing in the wrong deals. I'm investing with the wrong deal structure.”
Crowdfunding: “The rule of thumb in that world is you're going to spend 20% of your fundraise on marketing. There's a real expense.”
“I think a fair number of angel groups I see are moving to later stage to move out of the way of that [crowdfunding]. Some are moving into starting their own funds or going into a syndicate model where they can get carry from those who invest.”
Scrappy Biotechs: QSM Diagnostics & Hillside BioSciences
CSIdentity: Hall Martin’s 40X Exit
Parting Wisdom from Hall Martin, Super Angel
“For every million dollars you want to raise, it'll take you one calendar year to raise it. It's the rule.”
Transcript of “Plan the Exit Before Investing”
GUEST: SUPER ANGEL HALL MARTIN
Sal Daher Introduces Hall Martin, Super Angel from Texas
Sal Daher: Welcome to Angel Invest Boston, conversations with Boston's most interesting angels and founders. I am Sal Daher, your angel, curious to find out how to build tremendous early-stage technology companies. My guest today comes from Texas. He's an angel investor in Texas. His name is Hall Martin. Welcome, Hall.
Hall Martin: Thanks, Sal. Glad to be with you here today.
Sal Daher: Hall is in Austin, Texas, and he invests in enterprise businesses, the software area. Austin is a great place for that sort of thing. He has carved out a niche for this type of investing. He's been an angel investor now for well over a decade. Anyway, I thought we'd have an exchange of ideas and thoughts. I'd pick Hall's brains and so forth on this. Hall, just tell us a little bit about the kind of investing that you're doing and how you came about being this kind angel investor.
Hall Martin: I've been angel-investing for over 20 years. I actually started three angel networks in Texas back in the 2000s.
Sal Daher: 20 years is more than 10 years. [laughs]
“Put my money in. In about six months, lost all of it. I started to realize this is harder than it looks and decided I needed to join a group to invest in, rather than do it by myself.”
Hall Martin: That's right. I remember the first deal I invested in, it was surgical pack for eye doctors back when LASIK was just coming up. They had an exit and they had everything going. Put my money in. In about six months, lost all of it. I started to realize this is harder than it looks and decided I needed to join a group to invest in, rather than do it by myself. I had worked for a company that had just gone IPO, so I had some money to invest and was always excited about the early-stage world. That's how I got into it.
“In Austin, we didn't have an angel network until about 2006. When they started it, I was the first member to sign up for it.”
In Austin, we didn't have an angel network until about 2006. When they started it, I was the first member to sign up for it. When you're the first member into an angel group, you're automatically on the board in charge of membership. It's a great honor. No pay, but it's a great honor. I started helping them build up the group. After a few months, we lost our director, so I became the director and went on to build that group in Austin for two years. We got about 5 million invested in 20 deals and got a 40x return out of one of the deals.
“We got about 5 million invested in 20 deals and got a 40x return out of one of the deals.”
That really propelled the group onward. My alma mater, Baylor University in Waco, came to me and said, "We want an angel network out of our alumni association for the students." I went and helped them put that together and found that was a great dynamic, there was an affinity with university. The angel group in Waco is really about student experience and give back to the university. That's the why you're there. I found that the turnover rate in most angel groups is about 30% a year because it's just a financial thing, but with the university one, it's really more of a university thing.
“My alma mater, Baylor University in Waco, came to me and said, "We want an angel network out of our alumni association for the students."”
The turnover rate is 30% over seven years. People stay around a lot longer because they're there for the students, for the most part. Making money is the second priority for them. Started doing angel investing and went to the ACA conferences and worked with a lot of startups over the years, helping them. I was in Austin. Austin was coming up at that time with a lot of new companies moving to town, a lot of enterprise software, a lot of tech companies. I got involved with a group called Incubation Station SKU. I wanted to do something for the community.
“We were in the home of Whole Foods. We started accelerator incubator and we started doing angel investing as well into food and beverage deals, mostly.”
I had a local attorney come to me saying they wanted to do something. We looked around, all the tech things were being done, but nothing was going on for consumer product goods. We were in the home of Whole Foods. We started accelerator incubator and we started doing angel investing as well into food and beverage deals, mostly. Back then, we were just repackaging startups to go into Whole Foods and H-E-B. Had that experience of investing in those different things.
“I found is that it's very hard to make a return in angel investing. You're in these deals a long time.”
Over the years, what I found is that it's very hard to make a return in angel investing. You're in these deals a long time. Some deals did well, you got 40x and you were there for the whole ride. Other deals, the deal would go up at certain ways, and then go sideways on you. Venture capital would come in. There would be clawbacks and other things that made it difficult to get a return out of it as well because we just weren't part of their model. We had to be out of it for some reason.
"Half the deals that are coming through here are good businesses, but they're not really venture businesses. They're not going to sell for 40 or 50x."
What I decided to do is I started looking at this and said, "Half the deals that are coming through here are good businesses, but they're not really venture businesses. They're not going to sell for 40 or 50x." Some were, but a lot of these guys were not. The market wasn't big enough, the team wasn't strong enough, the competitive position wasn't compelling enough. You knew it was going to do some good things, but you didn't really know if it was really going to go all the way to be the big return.
I came up with the model of Define the Exit because I always asked these guys, "What's the exit?" You get some handwavy, "In 10 years, somebody is going to buy us for a lot of money, but we don't know who, when or what."
Sal Daher: [laughs] I heard that before.
“I came up with a model called Define the Exit, where I came up with my own term sheet, I discovered that was a key factor of success with angel investing is you don't sign someone else's term sheet; you sign your own.”
Hall Martin: Yes, they buy other companies, so they must be buying mine too, I guess, for the same multiple, not realizing those are really outliers in some cases. I came up with a model called Define the Exit, where I came up with my own term sheet, I discovered that was a key factor of success with angel investing is you don't sign someone else's term sheet; you sign your own. In it, I gave it a redemption right at year three and option to exit the company because I found that about year three is when the CEO would come back to me and they would tell me one of two things.
Built in Option to Exit at Year Three
One, they would tell me, "Oh, we're raising another round. Our valuation is now 5x more than it was before and we're on our way, that's great," or they come back and tell me, "Hey, I think we should take everybody to market-rate salaries because they just worked so hard." The first time I heard that I had this tremendous cognitive dissonance come over me with, "That sounds right but wait that's wrong." Why is that wrong? I took a step back and I realized, "Well, there's an implicit agreement here when you make an angel investment for equity."
“When they go on to market-rate salaries, what they're basically saying is we're not eating ramen noodles anymore, we're going to take our exit out of the salary. You, unfortunately, are not on the payroll, and you don't get that choice.”
The investors are not going to take out any dividends or prefs or revenue or anything like that, profit share. The startup's going to live on ramen noodles for the next five years to make this thing as big as possible because we're all going for that equity exit. When they go on to market-rate salaries, what they're basically saying is we're not eating ramen noodles anymore, we're going to take our exit out of the salary. You, unfortunately, are not on the payroll, and you don't get that choice. My favorite line has always been, you'll get an exit someday [chuckles] not that much, not when.
“Seven years later, they exit the business and there was a 50% return to the investors. Well, 50% after 10 years is about a 4% IRR. It's really not much of anything. I went back and looked at it. I estimate this executive team took out about $7 million worth of salaries over those years…”
I did a deal in Austin back in 2003. Of course, 2006, they come to me with that story. Seven years later, they exit the business and there was a 50% return to the investors. Well, 50% after 10 years is about a 4% IRR. It's really not much of anything. I went back and looked at it. I estimate this executive team took out about $7 million worth of salaries over those years and thought, "Hmm, I'm on the wrong payroll plan here. How do I get on that plan? I don't want to be on my plan." That's how I came up with the redemption right and the convertible note.
“If the C team is going on the payroll exit, I'm right there with you.”
If the C team is going on the payroll exit, I'm right there with you. All the way, I'll be on the payroll exit with you too. If you're on the equity track, I'll join the equity track and we'll take the ride up there as well. Found that, the way convertible notes and term sheets are written today, it's really only for one outcome but there's several outcomes that come out of these startups. Having your own term sheet, it lets you get to the right outcome based on what the startup's doing.
Define the Exit versus Revenue-Based Finance
Sal Daher: Yes, this is very interesting, Hall. I think you're pointing in the direction of a topic that's been discussed on the podcast which is revenue-based financing. Jay Batson, my colleague at Walnut, is a leader here in Boston, pushing in this direction. I think it achieves a lot of the same goals that they're doing with revenue-based financing except that in RBF, they're going in with the expectation that they're going to be participating in the revenue of the company. They're not expecting to be on the payroll, so to speak, but have a part of the revenue stream right upfront.
It basically, the thought process behind revenue-based financing is they're going to allow this really promising company that's proved out a certain product that is not venture scale but is very attractive, very promising, and basically helps them get a top-notch salesperson or a little bit of a sales organization to multiply the sales of the enterprise 10x. Not 10x the investment of the VCs, it's not venture scale but 10x the revenues. The RBF investors will get a multiple 3x or something on their investment and then they're out. It accomplishes similar goals. I think your approach gets me to thinking a lot. That's very interesting. It's good to hear that.
Hall Martin: Yes, revenue-based funding is a great option. You do have to meet certain requirements to get it upfront. You have to have stable revenue preferably recurring revenue and stickiness and all that. You do have to have good margins on the business because you do need to pay out some amount upfront. I find in the first three years of a business that can be a little hard to do that. Many early-stage companies don't qualify for revenue-based funding or not much of it anyway because it's a certain multiple you have to get to.
Sal Daher: You say that; the search for revenue-based candidates is one where there are a lot of nos. This is what I hear. There's always sort of like, "Oh, this company, man, no, they don't quite make it." They seem to be a lot of rejections at least initially. I guess I can see where your formula could just fit the situation of the companies.
Hall Martin: It's not guaranteed you're going to go through the revenue-based funding. You have three years to make a decision. I have seen people do all kinds of things. I find most investors if they want their money back, they want at least their principal back at the redemption time and the rest goes on a revenue share agreement. I do find that some people convert to equity. If it's a really good deal. I ought to have some exposure into the equity as well so they do that. I see how people get very creative, where they want to split half for debt, half for equity, and they go that way.
“My experience has been, so far that 70% want you to leave all the money in and 30% want you to take all the money out because they want the equity back.”
At heart, you want to help the startup and it's interesting to see what they want you to do. My experience has been, so far that 70% want you to leave all the money in and 30% want you to take all the money out because they want the equity back. They don't want to go through dilution, but that's why I put investors sole discretion on it. It is that this is only going to work if the investor gets to make the choice and start to give themselves an exit.
It's really not about going three years and one day and getting all your money back, it's about finding the right option for you to maximize your return. If it does go sideways, you have an exit, a path out of the deal. If you've ever tried to negotiate an exit afterwards without a buyout or going public or whatever, you find it's very, very hard. You're over there as an investor thinking 2X my money, 3X my money, 4X my money. Starts on the other side of the table going 20% return, 30% return, 40% return. It's very hard to close that gap.
“…if in three years I have a choice of pulling 3x my money out, the dynamic is very different.”
That's why, before you signed the check, that's when you have to make the decision if we're going on the redemption, what does that look like? I find the dynamics very different too. If I put my money in for equity and I have no path out, maybe I get my information rights, maybe I don't, maybe I get a return, maybe I don't, but if in three years I have a choice of pulling 3x my money out, the dynamic is very different. If they want you in, you're getting your information rights.
Every story is a fantastic story. They're going to work hard to keep you in the deal versus forget about you. That sometimes happens as well.
Sal Daher: If an angel is interested in your style of investing, where can you be found?
Hall Martin: Our website, tencapital.group, dot G-R-O-U-P. There's no dot-com on that, tencapital.group is our website. There's an investor page. If you go there, you can read about the early exit term sheet, we call it. You can call me through that website as well. I'd be glad to get on the phone and talk with you about how it works. I have companies that come to be raised funding and a good number of them sign up for early redemption right term sheet and we cautioned them, "Don't take too much money on it. You may have to pay it back," but that's true of anything.
Went through the process of shopping those companies out to my investor network, and then I started getting investors saying, "Well, that's interesting, you have those deals, but can you put a 3x in three on my deal? I've got one over here. I want to do; I want to put some insurance on it. How do I get you to do that?" We came up with a program, it's on the investor page of how we work, but we'll come in and we'll actually apply a 3x and three onto it. It's a convertible note with a redemption right and all the terms that go with that.
“It's also a Facilities Management Agreement. What it is, is we get access to the bank account and to the accounting system. Every month, we go in and pull out the information rights that are owed to the investors and we send it to the investors.”
It's also a facilities management agreement. What it is, is we get access to the bank account and to the accounting system. Every month, we go in and pull out the information rights that are owed to the investors and we send it to the investors.
Sal Daher: I liked that. I really liked that.
Hall Martin: It's something that you can just sign me up. Even if it's not an early exit term sheet, I can still come in and do facilities management on it. I charge the company 250 a month and it's just like bookkeeping fee. We're going to do this till the investors get their money back. We log in. I find it's a very different dynamic. If you know all of their numbers and they know you know all of their numbers, we're not going to have this fantastic discussion every time. We're going to have the heartfelt discussion.
Sal Daher: This is what's happening.
Hall Martin: That's right. We really know what's happening. If you see something unusual happen, you can alert the investors now versus finding out six months later. Somebody took a trip to Brazil; unexpectedly. You do see that happen from time to time, but the point is that half these startups really don't have boards that are watching over it. I found many of the other startup boards out there really aren't effective at this.
It steps in and provide some oversight to a deal that you would think is there, but you also have to realize startups just very busy running the business, building product, closing customers, that they don't really put much time into this. Sometimes that can be a mistake or a problem. We solve that with our facilities management. If anybody needs help with that, we're happy to help out there as well. We call it funding as a service. We're helping with the startup-
Sal Daher: Funding as a service.
“…my conclusion after looking at it 20 years, it's not that I'm investing in the wrong deals. I'm investing with the wrong deal structure.”
Hall Martin: -getting ready for raising funding and feed on the investor side. Actually, making investments, we have term sheets, and we have facilities management. We also have on our website, calculators and tools for valuation and how to make returns and so forth on these deals. I think my conclusion after looking at it 20 years, it's not that I'm investing in the wrong deals. I'm investing with the wrong deal structure. I need to have a structure that protects me a little bit better than some of these convertible notes in terms sheets going around that.
I only get paid back if they have a home run hit and that's not all of them for sure.
Sal Daher: Convertible note or term sheet if you're lucky. It's usually a S.A.F.E. (Simple Agreement for Future Equity) which is just nothing.
Hall Martin: Exactly, you got to have a way out of this.
Sal Daher: Before we started recording, we were talking a little bit about crowdfunding and the latest developments there. Would you care to give us what you're seeing and some of your thoughts there?
Hall Martin: Sure. Title III Crowdfunding came up back in 2015, '16. Today, I think there's almost 50 certified portals in the US. We had an intrastate license and did that for about three years in 2014, '15, and '16 we did that, did a whole bunch of breweries, wineries, and consumer product goods. We didn't do much for the tech or healthcare businesses. We hung up the portal and decided to go back to the credit investor world and work in that way, but learned a lot about how you access large numbers of investors in a region or sector space and apply that to the accredited investor world.
Today, in the pandemic crowdfunding, what's called Title III Crowdfunding, rose by over 50%. It was all online, it was COVID proof, and it went up by a great deal. We now rarely see deals going on the portals where they'll raise $200,000 to $400,000 in a campaign pretty quickly because they're using pretty sophisticated social media campaigns. What they're doing is going out and asking everybody, "Hey, can you put in anywhere from $100 to $500." The average investments, around $300 per person. If we get enough of them coming in, you can now raise a substantial amount of money online with those tools.
Crowdfunding: “The rule of thumb in that world is you're going to spend 20% of your fundraise on marketing. There's a real expense.”
I think there's something to be said for crowdfunding as an early-stage investment. Originally, the limit was $1 million and some change. Now, it's going up this month to $5 million. You can raise $5 million on it. If I could go out and run a series of multimedia campaigns to basically pick up $1 million, $2 million, I think you'll see a lot of people running in that direction to go set that up. The rule of thumb in that world is you're going to spend 20% of your fundraise on marketing. There's a real expense.
It's unlike the angel world where I go around and talk to my local angel groups and get my buddy to make an introduction and get a warm intro to a VC and I made some money. It wasn't a dollar you spent, it was time you spent, your credibility you spent on that. With crowdfunding is much more. If you can get the first 100,000, well now you take 20,000 to go get the next 100 and you can stair-step your way up.
Sal Daher: Creating a slick video.
Hall Martin: Slick video, good social media presence, and all the things that go with that. It used to be that people would do family and friends raise, and then maybe a crowdfund. If that was over, they would come to us. We were accredited investors. We're the first stop after the crowdfunding. Today, more and more, we're getting pulled into the crowdfunding campaign. I'm running the crowdfunding campaign, can you have your investor put money in on the campaign? If it goes past the 90-day window, that's one thing you have to realize. Most of these campaigns last 90 days.
On the 91st day, you're off the portal. It's over. They don't want it to be stale or what have you. Those who had more investors to go through, they would come to us and we would just open up a Reg D offering and carry on the investors to the next level in that case. You're just finding a lot of overlap between the angel world and the crowdfunding world because the minimum is going up. You can apply non-personal networking techniques to raise the money so it's coming up.
“I think a fair number of angel groups I see are moving to later stage to move out of the way of that [crowdfunding]. Some are moving into starting their own funds or going into a syndicate model where they can get carry from those who invest.”
I think a fair number of angel groups I see are moving to later stage to move out of the way of that. Some are moving into starting their own funds or going into a syndicate model where they can get carry from those who invest. There's a lot of modifications coming into it based on there's more options there now than there used to be. That's what we see out there. Crowdfunding is a force to be reckoned with. I think you can apply to a lot of things. I think you apply to healthcare deals and you can apply it to other ones.
You don't have to just go to anybody. You can go to people that understand what this is, and then ask them to put in not $50,000, but $5,000. If you get enough of those guys, you can raise a substantial amount of money. By the way, those are people that can help you in your business too.
Sal Daher: You mentioned life science. That's my focus is the biotech, what some people here in Boston call the scrappy biotechs. That's the other 98% of biotechs that don't get all the big money that companies like Moderna have gotten because most of the money in biotech goes to the Modernas of the world. There's just 3% that's going to the other companies. For example, the life science company were to do one of these crowdfunding raises, how onerous are the reporting requirements for them? Are they going to have to be producing, audited financials, and so forth?
Hall Martin: You do have to have your financials audited and there's a cost to that. Once a year, you have to submit a report into the federal department about that, but I don't think that's much more than what people are doing now with investors in this case. There is that step that goes into it because the way the SEC looks at it is you're going public, you're now a public company when you do a crowd mini-campaign.
Sal Daher: It's like a mini public offering, yes. Do you have any idea how much the compliance costs are per annum?
Hall Martin: I've heard of varies, some people have a business up and running with a lot of transactions in the past that have to go through an audit. One person told me it was $25,000 to get their books audited. Others tell me, in the startup, I got half a year. It was maybe $2,000 to $3,000. I think it varies based on how much you have going already in that case, but it's a way of getting access to non-accredited investors. There's just a lot of people out there that are just not accredited that want to be a part of these things.
Scrappy Biotechs: QSM Diagnostics & Hillside BioSciences
Sal Daher: For a biotech company, the financials are not-- [laughs] They don't tell you much because it's not as if they're going to have sales. There's a very, very tiny percentage of these biotech companies that might do that. I'm involved with a company right now called QSM Diagnostics. Instead of going the route of doing a collaboration for strategic players and so forth, they've gone the route of creating a product that will be in the office of veterinarians by the second half of this year. They're going to have revenue. Those are some of the scrappy biotechs that are out there.
It's a brainchild of a professor who's one of the leading authorities in these molecules that help bacteria detect other bacteria present. We can use those as a way of basically having a sensor for bacteria. They'll be able to detect if there's a bacterial infection, someone has a bacterial infection, or an animal has a bacterial infection in a minute. There're no cultures, none of that. It's sort of a complete revolution. Eventually, it's going to come to humans, but for the next five years at least, it's going to be just for dogs and cats, but they're going to have a business.
Hall Martin: Right, in that case, you want to go after all the veterinarians.
Sal Daher: Yes, absolutely.
Hall Martin: Veterinarians understand what you're doing. It's the old Doctor/Dentist Circuit. You find all the doctors and dentists. Once you have 10 or 20 doctors and dentists in there, that's enough proof that if they're in it, I can be in it and it just carries on. You can either do that on a crowdfunding basis or on a Reg D basis either way, but you target people that understand what the value of the proposition is. By the way, they also can help you with the business with beta testing, trials, lots of things can come out of that because they're now, on some level, tied into the business.
You can now crowdsource different things from them to help you on the business itself. I think that's where it goes in the future, it goes out broad to the group, but you have to have an affinity in some way to it. Understand the technology, or want to benefit for your solution. Anyway, it seems like those tools are effective.
Sal Daher: In the case of QSM, in the case of another company that has veterinary product that's been able to podcast, Hilltop BioSciences. I think what attracts the veterinarians is that they understand the economics of it. It's a product that's going to be a very nice money-making product for their practice. They see the rationale of it. I think they've done well with both of these businesses. That's not going to be like a Moderna, that's never going to be a multi-billion-dollar enterprise, but it can be an extremely valuable company.
Interesting. This is the reason I do the podcast, is that I think people's brains [laughs] a lot. This is really very helpful.
Hall Martin: Last I looked, there were 47 Title III Crowdfunding platforms. They're probably at 50 right now because it's now the thing to do. I think three of them have about 85% of the market. What you want to do is go out and look for the other 47 that don't have that much market share and say, "Hey, would you like a niche? Let's go after this niche." You bring in the deals to put into it and then they can adjust their network to go after people of a certain kind because, in today's world, if you want all the veterinarians, it's not that hard to go access all the veterinarians.
Sal Daher: No, it's not.
Hall Martin: Do you target that group of people, or the doctors, or whatever other sector you might want to go after? I wouldn't go and start your own Title III, I'd go find an existing one and just say, "You're looking for help here, let's work together on it."
Sal Daher: If there are 47 or 50 of them, it doesn't make sense to start the 51st, it makes sense to-
Hall Martin: No. [laughs]
Sal:-look for somebody who already has it up and running and is hungry for business, and provide a twist on something for them. Which gets me thinking, I was talking to you earlier about an ultra-rare cell company whose board I’m on. I'm just thinking, I wonder if oncologists across the country wouldn't be likely to fund a company like this. If 5,000 oncologists write $5,000 checks, we've got $25,000,000. They don't need 5 but they need 500 oncologists to fund the company through everything that it needs to do.
That is really interesting. That's an interesting perspective. You're opening an interesting perspective for me. Tell me about your 40x. If you could give me the story of your 40x exit.
CSIdentity: Hall Martin’s 40X Exit
Hall Martin: This is a deal called CSIdentity. They were doing identity theft management tools back before that was really a thing. Today, it's everywhere, but back then, it was this thing that might be coming up in the future.
Sal Daher: What timeframe?
Hall Martin: They probably started in 2004, something like that. They had built a system and just started getting it going. We came along in 2006 and we had $3.5 million of our first-year money into it. It was a good chunk. Two years later, the investors got 7x return on it and they got to keep half their stock. Experian bought them. You ever see those commercials where Experian is saying we searched the dark web for your information. Well, they're using CSIdentity…and they got a $40 million exit out of it.
The guys that kept half their stock all the way up and ultimately that was a 40x for the investors who were in that deal. They were in the right place at the right time. They were doing the right solution. They executed very well. There was a week there I didn't open my email without seeing some good news for closing an account or a new partnership or hiring a new team member. It was always blowing and going. That was great to see as well. That's one example of a 40x. We had another one that has not exited yet. I think it'll be like 140x when it comes out.
They were basically collecting data. When the ambulance pulls up to the hospital, they would take all of the patient data and wirelessly put it into the hospital without having to put it on a piece of paper and turn it in. They were selling that to municipalities around the country and then had a couple of near-death experiences, but then later they decided, "Well, we're really good at this data thing," and so they moved into the data analytics. They sold off the ambulance piece of it to somebody else and they kept the data analytics piece of it.
They got in very early on with data analytics at the healthcare level and they're still going. It's got where the valuation is right now, but it's well north of $100 million and they're still moving forward in a big way. One day, when they have an exit, that's going to be a really nice one.
Sal Daher: Wow. This is tremendous. At this point, I usually put in a little plug for my sponsor, who is Peter Fasse, a patent attorney at Fish & Richardson, which is a leading patent law firm here in Boston. Peter is also my brother-in-law. He happens to be a patent attorney who not only writes patents but he also invests in some of the companies that are his clients and he's put together investment groups for companies. I'm on a board of a company that he helped fund and then help connect with some of the most important strategic players.
Peter Fasse is an all-around patent attorney/VC/investment banker informally. I think that it makes sense for a technology company to think long and hard about the value of patents to its future and to have just the best patent advice. That's why I recommend Peter Fasse on this.
Hall, before we close out the interview, let me just open the floor to you and just get across to our listeners who are angel investors, founders, people who are thinking of founding companies. What do you think would be valuable to tell them?
Parting Wisdom from Hall Martin, Super Angel
Hall Martin: We deal a lot with startups and have engaged in the fundraising process for many years. I think my two messages to startup founders is number one, have the customer always in every discussion with an investor. Never go to an investor without customer information. When the pre-revenue startups come to me and say, "Well, I don't have any customers yet." Well, then you made your first mistake. Before you ever build your product, you should be out talking to potential customers. If you walk in saying, "I talked to IBM," and they had this problem and I think I can solve it.
You walk in and say, "I proposed a solution to IBM and they liked the idea." Then you walk into the investor, say, "IBM is going to pay me 50K to develop my idea." Because you have a customer involved, every step of the way, investors are going to get excited because you now have some market reality, you now have a revenue source at some point. Never go to an investor, unless you have new customer information even if it's very small.
Always have new to show that that's continuing to move forward and they're continuing to stay with you versus, "I have an idea. I'm going to put something together and maybe somebody someday somewhere is going to buy it," which as we all know is a really tough sell to an investor and also a very hard path to row when you build the wrong thing that nobody wants. That's one step. The other is when I ran angel groups, what I witnessed is entrepreneurs would come in and pitch my room full of investors, 90% would go away and we would never hear from them again.
I have no idea what happened to them. They just disappeared on us. 10% though came back, gave us updates, reminders, told us more about it. They're the ones that got almost all the money because they did two things. Number one, they didn't just forecast the growth, they demonstrated it. They talked about the new deal they closed, the person they hired, the product they shipped. You're seeing it happen there in front of them. Many people think all I have to do is come in and tell you I'm going to generate a million dollars next year and that's all I need to do.
Well, that's not really how it works. Also, you're building a relationship. They have to get to know you. You have to know what you're all about. After three or four interactions, you can start to build that relationship, so to speak. They say it takes seven touches to close a sale. It takes seven touches to close an investor. You need to keep that in mind, all the people that came in and pitched, and at the end of 15 minutes, if they didn't see checkbooks coming out, that was a failed pitch. Well, no, that was just a step one of seven.
They had many investors come to me later saying, "What happened to the guy with that, that thing? Where'd he go?" "I don't know. He just disappeared on us." He never came back and talked to us and never gave us updates. Many of the deals didn't get funded because nobody followed up. The message to this to start a founder, it's on you, you have to follow up. Angels aren't going to go chase you down to figure out what happened. If they bump into you at the line at the grocery store, they'll ask but what's the chance of that in most deals? Not very much.
Keep the customer with you all the way through and bring the growth story. By the way, the growth story is on sales team, product, and fundraised. In the first presentation, it's interesting to hear what the market size is or who the competition is. The reality is after that, they don't care what those things are. They only want to know one thing, what are you, Mr. Entrepreneur, doing? How are you executing on this? You must always have some new information. Something is happening that's good in those areas.
“For every million dollars you want to raise, it'll take you one calendar year to raise it. It's the rule.”
Those are the ones that are able to close funding because you have to stay with it for a while to actually close it. For every million dollars you want to raise, it'll take you one calendar year to raise it. It's the rule. Putting documents together, meeting investors, going through the process, doing diligence, picking up checks. Somebody will throw you a 25, 50K checks early on, but a million dollars, it will take you some time for sure.
Sal Daher: That is very true. Hall Martin, this has been a really very rich interview in a sense that I've certainly learned stuff that I didn't know before. It's opened up a certain approach to me to think about more about my life science companies because I'm on this quest to understand how to better fund my struggling scrappy biotechs. I think there's a huge future for them, but they lack for money and they also lack for support. One thing that I would like to emphasize that also leave you with the thought is that these biotech deals are a lot more accessible than people realize.
People tend to think, "Oh, life sciences are so complex. Biology, these are evolved systems, nobody understands what's going on." The reality is if you spend some time on a particular deal, you will come to understand, that little corner of biology to the extent that you can understand the economics of it and so forth. You may even be able to help a founder, a scientific founder who knows all the science, but who doesn't have experience with building a business, doesn't have experience in so many other things.
I like to say that the vineyards are just heavy with grapes and many, many more hands are needed at the vineyards. There's a call out to angel investors who are willing to re-skill to come and help to build these enormously consequential biotechs that are going to be eating the world in the next 10 years. The same guy who talked about the software eating the world back in 2011, Marc Andreessen, they're talking about biotech eating the world in 2021.
As a matter of fact, I have a podcast that I listened to, Bio Eats World or something like that, which by the way, I recommend Journal Club and there and there's a lot of interesting stuff, it's on the West coast. We're looking at stuff here in the East Coast, sitting in Cambridge. For me, it's a call to angels to consider retooling because there are a lot of really interesting opportunities in the life sciences.
Tremendous. I wish you much success. Let's stay in touch. Once again, I want to thank you for taking the time to be on the podcast.
Hall Martin: Well, thank you for having me, enjoyed it.
Sal Daher: Awesome. This is Angel Invest Boston. I'm Sal Daher. I'm glad you were able to join us. Our engineer is Raul Rosa, our theme was composed by John McKusick, our graphic design is by Katharine Woodman-Maynard, our host is coached by Grace Daher.
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