0:00:00 - (Hall Martin): The challenge I found as an angel investor was not that the deal goes under, is that the deal goes sideways. The two guys took out $7 million in the form of salaries over the next seven years. You don't want return on investment, you want internal rate of return and the difference is time. As an investor, what I hear is safe notes give me no rights. So you have to be open to losers because that's how it goes.

0:00:25 - (Andrew Kazlow): Welcome to the Diligent observer where we help angel investors see what most miss. I'm your host, Andrew, and every week we explore what works, what doesn't, and why through conversations with experienced startup investors and operators. My guest today is Hall Martin, founder and CEO of Ten Capital Network, which has helped over 900 startups raise more than a billion dollars. Now, hall has been a part of the Texas angel investing scene since just about the very beginning and he was an early backer of multiple well known angel groups such as Central Texas Angel Network and the Baylor Angel Network.

0:00:59 - (Andrew Kazlow): In this episode, hall walks through the different eras of angel investing, introduces his 3x and 3 term sheet, and explains why he believes international sector specific investing is the next big thing for angel groups. I hope you enjoy learning from hall as much as I do. Paul, thank you for being with me today.

0:01:26 - (Hall Martin): Glad to be here, Andrew. Thanks for having me on the show.

0:01:28 - (Andrew Kazlow): Well, you have been extremely active in the startup investing world for 20, 30 years now and I'm thrilled to be able to speak with you today. I'd love to start with my classic first question, and that is what are you excited about right now?

0:01:45 - (Hall Martin): I have to say AI, I think that's one of the great things that will really supercharge the startup world as we can see in the stock market is supercharging the finance. Finance world for sure. But I think it's also going to supercharge the startup. You know, you can just a lot of control back to the early stage, the small startup where even a two to three person company can do great things with it if they know how to use it and leverage it correctly because it has a lot of potential. And we're just scratching the surface of it now with what people are doing with it. And I think over the time we're going to find it can do really great things and they can also generate great startups as well.

0:02:26 - (Hall Martin): So early stage, with the right technology, the right team, you can build something great in a short amount of time. AI has all of that in spades.

0:02:36 - (Andrew Kazlow): What do you mean when you say leverage it correctly and then Maybe. What's the incorrect way to leverage it,

0:02:43 - (Hall Martin): well, correctly is you can turn it into a scalable business that can grow. You can do quite a bit with it. You can turn it incorrectly as turning it into like a consulting engine to help your consulting business, which would give you the answer, but you would not get a scalable business out of it. In the startup world, you have to be at some level scalable in order to have an impact and to have the reach you could have and then get the potential return you really want.

0:03:11 - (Hall Martin): So those are some of the ideas that you have to frame it up again in a way that it can be, you know, leveraging the technology and in different ways. There's agents, there's applications, there's infrastructure, a lot of different ways to plug into the value chain there as a startup. And then you have to. And the old models of SaaS are. Some still hold, but others are changing. You know, they're, you know, shifting pricing from per seat to usage base or outcome base.

0:03:41 - (Hall Martin): That gets to be very interesting. If you can charge for the outcome of that, that can be quite, quite lucrative.

0:03:48 - (Andrew Kazlow): So say more about how you're seeing the founders you work with actually do this, because it seems like every company has an AI. Every company is an AI company now, or they are thinking about it. If they're not actively using it, how are you seeing folks on the ground like actually leveraging this effectively? You talk about this need for scale, not just using it as a consultant. Maybe give me some more examples of recent.

0:04:13 - (Hall Martin): I think the first place is you just look at the workflows that you're doing now and you're looking at how long it took to build a report or perform a function. And then you're using AI to supercharge that. You bring your core competency to the table and then you can show how I can apply AI in the right ways. There's often a proprietary data stream in there as well that gives you some defensibility that you've been doing this process for many years. You have the history, you have the transactions, and you can take that and inform your AI for how to manage the process.

0:04:50 - (Hall Martin): So you're well ahead of everyone else. And then as it goes forward, you can capture new information from users or what they buy, what they do, how they work, or whatever. And you can then monetize that in a lot of ways. And so you're looking for something that compounds over time. So you're building a flywheel, so to speak, where you're using your expertise to get people to come in, use your service or workflow process and they're giving you more information about a particular area and you're able to monetize that.

0:05:21 - (Hall Martin): So lots of different ways to do it, but proprietary data moat seems to be the core of a lot of success with AI.

0:05:28 - (Andrew Kazlow): Well, let's transition to talking more about your story. You have been involved in the angel investing startup investing world for a couple of years now. And you've articulated to me previously a few different eras in startup land. I wonder if you could describe those eras for me and where we're at now. Sure.

0:05:52 - (Hall Martin): So I worked for a company called National Instruments and I was there for 24 years in total. But they went public in 95 and I started doing angel investing at that time and I wanted to get into the early stage startup world with it, if you ever do investments. My father got me into investing into mutual funds and then we moved to sector funds and then we moved to individual stocks and if you keep working your way up, eventually get to angel investing directly. And I was at that age where I was starting to do that.

0:06:23 - (Hall Martin): And when we went public, had some extra cash and in Austin we had a angel network called the Capital Network and they ran from 95 to 2002 and they went and started going to the deals. Back then that was the era of the sponsor model. No investor paid anything, no startup paid anything. The lawyers paid 50k per meeting because as the dot com was blowing up, there was lots of work to be had and they were funding that.

0:06:55 - (Hall Martin): And so it was a great model for them. You went and at that time, what was interesting is people would stand up for CEOs and they would ask for $5 million to start a web company. And I kid you not, they asked for that much because back then you had to build everything yourself. Couldn't rent anything, you had to pay American wages for everything, couldn't offshore, outsource anything. And the technology is really rough. You're coding in HTML and other low level languages, which was really rough.

0:07:26 - (Hall Martin): About seven years later, AWS comes along and automates the the servers and so forth. You had to build it. You can just rent it from AWS and that $5 million ask turned into $500,000. And so that kind of downshifted from the B.C. world into the angel world. And that's when angel really took off, was in the early 2000s. Well, because I called the go ahead

0:07:51 - (Andrew Kazlow): in the 90s, I mean 90s, this is when angel investing as a kind of an a community activity Sort of began my, you know, my best understanding from history is Band of angels was around 95, 96 when they got started. It sounds like Capital Network was around the same time. Who else was getting started around this time, as you recall?

0:08:13 - (Hall Martin): Well, there was a number of angel groups forming. The Houston Angel Network was there, and there was a few other angel networks around the country, but it was a small handful that was actually starting to form. The process, like I say, during the 90s, everybody was, you know, able to get deal flow through the, through groups where they had sponsors pay for everything. And one thing I learned is if you ever get people on a, you know, in a process where they don't have to pay for anything, and the day comes when you can't do that anymore, the only thing you can do is shut the whole thing down and then restart a whole new thing with membership models.

0:08:49 - (Hall Martin): And then when the dot com bubble burst, you know, the Houston Angel Network was the first one to do a restart. And they came up with the membership models. Fifteen hundred dollars.

0:08:58 - (Andrew Kazlow): So the sponsors went away like nobody was wanting to sponsor these groups anymore.

0:09:01 - (Hall Martin): That's right. When the dot com bubble burst, nobody's paying $50,000 for deal flow in a year because there's very little deal flow to be sponsored anymore. And so we moved from the sponsor age to what we call the membership age. And that started with the dot com bubble burst in 2001. And so now everybody had to restart their program. Capital Network, it went away and we didn't have an angel network for about four years in Austin until about 2006. And the Chamber did a restart here.

0:09:29 - (Hall Martin): They called it the Central Texas Angel Network. And I was the first one to sign up for it as a member. And when you're the first one to sign up, you're automatically on the board in charge of membership. And it's a great honor. No paper. It's a great honor. And so, but I was interested in that. I was really wanting to learn more about it and I wanted to invest with other people is what I wanted to do.

0:09:49 - (Hall Martin): And I guess I have to go find help build that organization, which is something you have to do as an angel investor. You have to be able to not just give first, but give second, give third and later, more you'll be giving. So if you're not in that mode, angel investing is not for you. But if you are, it's a great place to be a part of a community and help build it. And so I ended up becoming the director of the first angel group in Austin called the, they called it the Central Texas Angel Network and became the director because our director had two other part time jobs and they just didn't have time to do a third one. So I took it over and I ended up recruiting about 50 members into it. And we got about five men invested in 20 deals and we got two home runs out of it, 35 and 40x home runs. It was, it was really a big win and that really propelled the group onward.

0:10:40 - (Andrew Kazlow): This is like 0608 timeframe.

0:10:43 - (Hall Martin): Yeah, 2006 to 07 was when we did that. And then like I say, this is now the age of the membership. So when I was putting the Central Texas Angel Network, I went down to Khalil Marathi at Houston Angel Network and said, can you share with me your membership documents? And they had two. One was a membership form, the other was a we're not going to sue each other document. So I got those, brought them back, scratched out, Houston wrote in Central Texas and you know, there we were and then Baylor came to me.

0:11:17 - (Andrew Kazlow): By the way, this is one of the things I love about the angel investment community is just how collaborative it is. I think it's, and I'm curious at your reaction to this, but I just feel like the angel world, like no angel is, is going to carry around. No angel is going to solve all the problems and it's just naturally collaborative in a way that other types of investing don't necessarily lend to.

0:11:38 - (Hall Martin): You're right. You know, it's not competitive because you find in these deals you're looking for support, not trying to own everything. You want help in funding that deal. And so you're always trying to build more collaborators to come help you with it. And then you also want them to bring you in on good deals as well so you have access to more. So it does foster great collaboration. But after two years, Baylor University came to me and they had five alumni that wanted to start an angel network out of the Alumni association and make it a part of the Baylor University process.

0:12:13 - (Hall Martin): And so they asked me to come and help put it together. And so we had a professor. I actually tried this in when I was at Central Texas Angel Network in Austin. I went to the University of Texas and I went to the Alumni association and said, I think you guys ought to have an angel network. And they said, that's very interesting. What's an angel network? I said, well, it's like a venture capital group, but it's individuals.

0:12:37 - (Hall Martin): The question was, what's a venture capital group? Okay, so this is gonna be harder than I thought. And started to make the case that we can build a community of getting alumni back together to help the school. And you can help the alumni raise, generate money, they can earn money and we can earn money from the school. Well, UT has the second largest endowment in the world after Harvard. And so they looked at me and they actually said, we have all the money in the world. We don't need your money.

0:13:09 - (Hall Martin): And so I said, okay, this is the wrong approach. And looking back on it, I made, as one guy said, you didn't make 25 mistakes, you made 50 mistakes. And so mistake I made was walking in there alone. Because what I found at a university is they don't want alumni running around doing things without oversight from a professor. So when Baylor came and said, we want to start one, they had a guy named pil, Bill, Bill Petty, who ran the venture finance class. And he was trying to put this together and he asked me to come help and do the, you know, the basics of how do you put an angel network structure together.

0:13:41 - (Hall Martin): So I signed up for that and, you know, gave him my position at CTAN and started working with Baylor because these things do take a minute of time and I'm still working at a full time day job. And Bill Petty was this the quote unquote business sponsor. And that's what I missed at University of Texas is I, I walked in there alone and you really can't do that. They're not going to give anything to an alumni unless there's somebody in the university that's kind of watching over this group and taking care of. And that's what Bill Petty said. I'll watch over these guys and I'll see this through.

0:14:10 - (Hall Martin): And what Bill did was he brought in students. And it was interesting because he built the program around the students. Not students that were just kind of bolted on the end as a, as a, as a intern, but somebody that we were there for the students. 1. So the why of the angel group was very different with CTAN is we're here to make money and we want to foster the community. Second With Baylor, it was here for the student and we want them to have a good experience in job placement and making money as second. And so that changes the why of it and it really changed the dynamic of it quite a bit. And it was a lot of fun because students do the deal flow and other things up front and they get great jobs afterwards that and that program continues to expand and grow.

0:14:55 - (Hall Martin): And then so that was the age of the Membership model again. At that point, when we put Beta Rangel Network together, we went and got the CTAN membership documents and we scratched out Central Texas and we wrote in Baylor and off we went and we took the CTAN logo and took the CT off and put the B on it and put a bear around it next. We're on our way. And so. So we kind of had a process going here. And then the city of Round Rock in Texas came to me in 2008 and said, we want to attract startups here.

0:15:29 - (Hall Martin): What can we do? Well, let's put an angel network together. And we called it the Wilco Angel Network for Williamson County. And we were doing deal flow out of the Terra Vista Golf Ranch and Round Rock for about seven years and running that program. So I'm having more fun doing these angel groups. And this is the age of the membership model that I decided to retire from my day job at national instruments in 2009, and I started what was called Texas Entrepreneurs Network.

0:15:56 - (Hall Martin): And we were helping Texas entrepreneurs get help in raising funding for their startup, because that's a piece that was really hard to do back then. So we kept building and growing that program just to continue the story. In 2010, syndication became the big model. And so instead of having a formal angel group, people started setting up syndicates where you're on my list, I'll lead the deal, everyone follows, and if you get the choice to be in or out of the deal.

0:16:25 - (Hall Martin): And it was like an angel group light model, you don't have to have all the meetings and so forth. Somebody's kind of leading that for you. In the angel group world we set up, back in the membership model, everybody is responsible for their own decision. And you may. You have to do your own research on it. There's lots of sharing and collaboration, but you're fundamentally, it's member led rather than manager led.

0:16:47 - (Hall Martin): And so this carries on and so forth until we get to the pandemic, and then now it shifts again where everything goes online. And truth be known, almost all angel groups got cut in half by the pandemic. They lost half their membership. And afterwards, about half of those groups were able to come back and reestablish themselves, and about half of them did not.

0:17:09 - (Andrew Kazlow): Why didn't memberships cut in half?

0:17:13 - (Hall Martin): Because the angel groups were built on the member model. And it was basically people paid membership fees because they needed access to deal flow and to diligence. And back in 2001, when that member world started in post.com, it was very hard to find deals. I knew guys that hung out at the law firm offices to see what fell off their desk, to see if they can find a deal to invest in. It was that hard.

0:17:38 - (Hall Martin): And then diligencing it, there were very few tools available like PitchBook or others that gave analytics or analysis or data to look at it. And it was always who you know. And so that world from 2001 to 2021 changed dramatically. As you know, now they're on LinkedIn. Every tenth message is a deal and every fifth email is a deal. And there's plenty of tools online to help. So the tech world's rose up and gave us a lot of online tools and communication things where we really don't have to have pay for deal flow. Deal flow is everywhere. What we really need to pay for is intelligence. How do we know that's a good deal to invest in?

0:18:20 - (Hall Martin): How do we know that's a good team to invest in? So it kind of shifted and many, many tech platforms have risen from that in that time to kind of take that over in many ways. Still people want to talk to each other and there's still an interest in angel groups. It carries on, but there's plenty of other tools, especially crowdfunding. Crowdfunding came into being at that time, and we actually looked at crowdfunding for a while.

0:18:46 - (Hall Martin): And in theory, crowdfunding works great. You know, anybody can invest, everybody can be an investor and so forth. But the reality, when it started in 20, I think they approved it in 2015, but it didn't get started until a few years later. Is that what I found with most startups is they were spending as much time trying to get a $500 credit card click out of a investor than as they were spending time getting a 50k check out of an angel investor. Answering the questions, doing this and that. The other, I mean, there were some free clicks, but for the most part, you had to work for each one

0:19:21 - (Andrew Kazlow): because for that $500 person, it felt the same as it does for the $25,000 check. Right. Because if you've got a smaller balance sheet, $500 makes up a much larger part. And so the thinking right, in terms of how impactful is this $500 investment is actually the same for the investor as the 25 or 50k or 100k check.

0:19:43 - (Hall Martin): That's right. And so like I said, many people said I should have been working on the 50k guide, not the $500 guide, because it was a. In some cases it was the same amount of work Right. And so what I later found out, figured out is that you should really go to your small network of angel investors to get your first 500k and then if it made sense, go do crowdfunding afterwards. Crowdfunding works if you have a good.

0:20:07 - (Hall Martin): My role is you have to have at least 10,000 names in your network and a lot of consumer product goods, especially direct to consumer, they have that great go run that. Turn your customers into investors. Turn your investors into customers. That, that makes a great deal of difference. If you don't have that, it's just very expensive. You end up spending 15, 20% of your fundraise on social media spend and email marketing spend to get to real altitudes. And I have done a few of those campaigns where I helped them out and they were, you know, the first 250 is easy, next 500 is hard, next a million is very hard. Had one person doing $5 million. Well, the, the spend was 30, 40% at that time, at that point to get to that much, because that's just a lot of people you have to get out in front of to get a $500 credit card collect. And there'd be some outliers, but not a lot.

0:20:55 - (Hall Martin): So that became the crowdfunding world that came along. But don't consider that really part of some things fit well into that. But my role is if I can look at something on the screen and understand it in less than three seconds, then that's going to be a good fit for crowdfunding. If it takes me more than three seconds, that's not going to be a good fit because nobody's going to sit down and dig it out. So back office software for an insurance company doesn't do well with crowdfunding because you're not going to get that in an instant for sure.

0:21:23 - (Hall Martin): But to carry on. The angel world continues to grow and develop, but the tech platforms really take over now. They're really the ones that are. And some angel groups are very good at using those tools and others are, they're just not angel groups anymore. They're just networks that come together to share the deal flow and the diligence that way. And people, they still have events and meetings and so forth like angel groups do as well.

0:21:48 - (Hall Martin): But those are the different ages that came out and what happened at each stage kind of informs what people do. Because today you have great tools, great social connectivity and so forth. But now what's rare is the really good deal. Everybody wants to do a startup, which is what is a qualified startup that you should want to do. And so the challenge I found as an angel investor was not that the deal goes under, is that the deal goes sideways.

0:22:17 - (Hall Martin): And so in the 2000s, I made several investments, especially before I got into CTAN, I was just investing on my own with some friends. And what I found is out of 10 deals, one becomes a home run, one goes bankrupt. I mean, it literally declares bankruptcy and is gone. 2 or 3 are 2 to 3 x doubles and triples are nice, but the rest turn into lifestyle businesses. And what I ended up figuring out is that what you really want to avoid is not the one that goes under. That's a 10% chance.

0:22:46 - (Hall Martin): You want to avoid the one that turns into a lifestyle business, because that was a 50% chance and that was half of them. I invested in a deal once in 2003 here in Austin, and they were doing it. Asset deployment, look at a great deal, put in 50k and off we're going. 2006, they come back and I found three years was about the time you figure this out. Well, it's not the rocket ship we thought it was.

0:23:11 - (Hall Martin): And our guys have worked so hard. I think we should take them all to market rate salaries. And at first I thought, well, that makes sense. And then I thought, well, that doesn't sound right. Why is that wrong? And I went back and forth and then it finally dawned on me, oh, this is not going to be an equity exit anymore. They're all moving to the payroll track and they're leaving me on what I called equity island, which means the equity is not going to be worth much down the way, if anything.

0:23:37 - (Hall Martin): And found that that happened more than once and that became a standard thing. So I got very good at watching pitches and trying to discover that looks like a lifestyle business. I can tell right now because there are two guys raising 500k and they're starting to get consulting business. Well, that's probably not the scalable business we think it is. And we're all going to discover that three years down the road when they decide that, well, hey, it's good business for us, it's just not for you.

0:24:03 - (Hall Martin): And to continue the story, the group that went in 2006 to go and go for market rate salaries, that's the trigger when you know that they're switching over as the salaries go way up. I estimate they took out the two guys, took out $7 million in the form of salaries over the next seven years. And I was shocked by that because why was I not a part of that? Because they did sell the business at the end of that. So it was a 11 year hold.

0:24:35 - (Hall Martin): I got a 50% return on my money. So my 50k in was 75k out. But they got so much more. And I thought to myself, I don't want to be on my plan, I want to be on your plan. How do I get on your plan? To the entrepreneurs, what I came up with was what I call the 3x and 3. It was my own term sheet. I took a convertible note at the end of year three investors whole discretion, you had the right to move to either going on the cap table for the equity investing or 3 exit and go into a revenue share agreement and give the equity back. Here's your equity. But I now have an equity agreement. So $50,000 turns 150 get 2 to 5% of top line revenue until I get my 150,000 out.

0:25:16 - (Hall Martin): And has started doing that and found that that's really great. And have found that surprisingly enough, most people think, well, no founder wants you to stay in and doing those deals. Done quite a few, about 50% want you to go out. They want to clean up the cap table, they want the equity back. They gave up too much equity. They can't raise more more until they get more back and they need it. And so I've had people offer me 4x my money if I go out of the deal.

0:25:43 - (Hall Martin): And so sometimes you take that, sometimes you don't. If you like liquidity, you do great. And I was trying to get into IRR because when I got the return on that deal, it was a return. I got an roi. And what I learned is you don't want to, you don't want return on investment, you want internal rate of return. And the difference is time. ROI is gains based without respect to time. IRR is with respect to time.

0:26:12 - (Hall Martin): If I did my IRR on that deal, I think it was three. It wasn't a very good number and certainly not something to be proud of to spend that much time on a deal. And so you want to get out in early phases. And angels typically do well in the early phase. But the longer you're in the deal, in many cases you don't do well because you get diluted out. They raised much more money. And especially in the life science space, that happens a lot that you have to be careful how long you stay in the deal if you can.

0:26:39 - (Hall Martin): So those are some of the things we got into.

0:26:42 - (Andrew Kazlow): Have you found this three and three approach to be acceptable in all industries? Have you found particular openness to that in specific niches like how wide are you rolling out this term sheet?

0:26:57 - (Hall Martin): Well, the reality is if you're going to pay back in 3 and at year 3, if they need to pay you back 3x, they, they really need to be in revenue before you go in at the beginning. So life science deals on the FDA path don't, don't fit that. Climate tech don't fit that. But if you're a tech deal and you got, you do need 40% gross margins, if not more, you need, you have to grow at least 20% a year to be in a shot to even be able to pay it back.

0:27:24 - (Hall Martin): And even then, if you do a 3x and 3 at year three, you're probably going to take two more years to get paid back. But the original mantra in the angel world is they want three to five times their money in three to five years. But most of the deals I was doing without 3x and 3, I was not getting paid back in 5 years. I helped start a accelerator here in Austin called SKU as Consumer product Goods. And some of my best exits came from a consumer product. Good.

0:27:53 - (Hall Martin): And Sherry Wynn Ressler came to me in 2012 and said, I want to do something for the entrepreneur ecosystem in Austin. And we looked around and all the tech things were done. Everybody had. It just seemed like there were so many tech things that there wasn't much space for us. But I remember when I was at sea can the first two years, I remember rolling up the results once. And while everybody was, quote, unquote, a tech investor, about 50% of the investments were into consumer product goods.

0:28:19 - (Hall Martin): And that was back in the age when we were switching from boomer brands to millennial brands. I don't want grandpa's oatmeal. I want the millennial oatmeal. So it was a new and improved oatmeal. It was all natural. And we had a lot of people moving to Austin because of Whole Foods. You could get find a welcome audience and a very high price to put that thing on the shelf. And we were basically repackaging and rebranding products to put them through that channel. And that worked great.

0:28:50 - (Hall Martin): You had to get into the accelerator originally was called Incubation Station, later named SKU was you had to be selling your product already. And about half the people were selling it in the local farmers market. They bring me something, I say, do you make this with a laser writer? And the answer is, yeah, yeah, I made it with a laser. I'm doing it, I'm cooking it. In my stove on the kitchen at home and selling it at the farmer's market.

0:29:11 - (Hall Martin): But, you know, I found that was one of the more successful groups because they were testing the product, they knew what people liked about it, what they didn't, what they would pay, what they wouldn't pay for it, what the competition was. And so they learned a lot about that. So we ran that program for several years and one of my biggest exes came out of a group called Dude Wipes.

0:29:34 - (Andrew Kazlow): Yes.

0:29:35 - (Hall Martin): And so I remember when they first came in, they were in our second cohort and I was thinking to myself, oh my gosh, wow, did we really vote these guys in? I can't believe we did that. But what I didn't foresee was that seven years later there would be this thing called the pandemic and toilet paper would be in short supply and this thing would rocket through the roof and later got a 50x return out of my investment.

0:30:04 - (Hall Martin): Which goes to show, there are many exogenous factors that go into these things. So if you lose, don't beat yourself up. It's just very hard to find the winners. I won't say it's a lottery, but it's not far from there in some cases because there are factors that happen beyond your control and beyond your vision to ever see what it might be. So you have to be open to losers, because that's how it goes.

0:30:27 - (Hall Martin): It's just one of those things.

0:30:30 - (Andrew Kazlow): A quick note before we continue the conversation. Alongside the Diligent observer podcast and newsletter, I also run an outsourced operations service specifically built to serve angel networks. My team handles things like initial screening, social media, newsletter prep, platform management, and a whole lot more. The kinds of things that either aren't getting done or shouldn't be done by busy community leaders.

0:30:52 - (Andrew Kazlow): If that sounds interesting to you, send me a note. Now back to it. Okay, So I have 100 follow ups for you. What I will start with is let's talk about the investor community of today and of the future. You talk about these multiple ages and communities. You've been approached at a number of places in your career, it sounds like, about forming and helping grow these ecosystems. And so as you think about the investor communities of the future, deal flow is sort of democratized at this point.

0:31:24 - (Andrew Kazlow): What is the role of the next generation of investor communities?

0:31:31 - (Hall Martin): Yeah, you know, AI brings a lot of intelligence to the table. We got into, you know, life science used to be 15% of our deal flow. Now it's 55%. And there's just a lot of innovations in life science. And one thing about life science is funding is not an option to go after or not go after, you have to go after it. Tech companies, they can decide just to bootstrap and grow slower and there's no FDA and they can bootstrap all they want.

0:31:57 - (Hall Martin): But life science and to a certain extent climate tech, you have to raise money because those clinical trials have to be done, FDA has to be done. And it's really beyond most people's ability to do on their own with it. So you end up getting into they need money, but you need to have. I used to have a saying back in 2009, you need to have a national perspective on your fundraise from day one, you need to be able to go across.

0:32:26 - (Hall Martin): And in almost every deal back then you had angels, you had angel groups, you had syndicate funds, you had high net worth, you had VCs. Everybody was in the same deal in the same round all the way through, going around trying to find people that would put money into the deal itself. And so what I was doing was taking people that were in Chicago and they talked everybody in Chicago and I'm putting them in front of investors in Seattle and in LA and Austin.

0:32:53 - (Hall Martin): And so I was taking them from their local geographies and taking them to a national level post pandemic. Most everybody now has a national perspective. They're not just trying to do the local city, that's just one thing, but they're doing a national perspective. I think the next stage is going to be international, not just getting US investor money, but getting Europe, getting Middle east, getting Asian money into it as well.

0:33:19 - (Hall Martin): And the tools are starting to. The communications are there, the platforms are there, the tools are there, but the mindset's not yet there. People still think I need to have a Delaware C, I still need to invest in my local country itself, but I think that's going to be the next greenfield for us, is starting to source the best deal. Not just in Texas like we used to say, but now us, but now the world.

0:33:43 - (Hall Martin): And you have access to great deals. So to that end, we opened up this past year our office in the Middle East. We have a guy in Cairo, Egypt named Mustafa Shahat that's actually helping us get into it. We've had two online events already with the Middle East, North Africa groups. We have now a list of 250 VCs. They're more VC and high net worth focused than they are angel worth. There's some angels, but really not a lot. It's Mostly VC based, but we can now take deals over there and get funding for it. And I now have those guys coming back to the US trying to raise funding from the US side and then get access to the market because the market's much bigger here, of course.

0:34:24 - (Hall Martin): But international is going to be the next stage for us and what we're going to do. And so we're positioned to work in Europe and Middle east at this point. Eventually we'll go to Singapore and Korea. Those are two great spots. There is Australia, New Zealand. They're just not very big. There's just not a lot of people there. But I think if you take all the Middle east, it's like 1 billion people in all those areas together.

0:34:47 - (Hall Martin): So a lot of really great technologies come out of that. Very sharp people coming out of it. Their market is not as big as the US but when they get to a big market like the us they typically do well with it.

0:34:59 - (Andrew Kazlow): So I'm curious, in this next phase of the early stage angel stage world, why do you think so many of these investor communities are forming? We've featured over 100 angel groups through our newsletter. I've interviewed dozens of angel group leadership teams on this show. The appetite, it seems to me, for investing in community continues to grow. So I'm curious, why do people start? You were there for starting Wilco and Baylor and CTAN and more in this era. Like, why are people forming these communities in your opinion?

0:35:37 - (Hall Martin): Yeah, I think it's shifting from being geographic centric to being more sector specific. If back when we started ctan, we would literally have in one deal, flow room, a mockingbird, games, a video game came through, we had a medical device, we had a hummus and then we had a B2B SaaS deal. And you're sitting there trying to diligence across four different verticals like that, which was a little bit hard unless you were expert at all of it. So you end up doing, is that a good team, Is that a good product? And you do the basics there.

0:36:12 - (Hall Martin): And the world's moving more to sector specific. I want to hang out with the life science people or I want to hang out with the medical device people. And as you keep going, you now want to hang out with the laparoscopic people and now you want to hang out with the laparoscopic people with special technology. And so you're continually trying to find your ideal group and is moving from geography to. Because now the tools let you go anywhere. Zoom goes everywhere.

0:36:39 - (Hall Martin): And yeah, you can get a plane, you go everywhere. There's a limit to that. But still you can network with people that have the very same interests you have. So back in the CTAN days, we were just trying to help. Let's just grow Austin, let's just support Austin. But you can only get so much depth when you have that many different verticals you have to or sectors you have to cover and diligence and so forth. And so I think people are just moving to be more sector specific because you can become an expert in that. You can become very good at not only investing in the deal, but helping the company because you have a network of other people that can provide support for clinical and regulatory aspects that they need.

0:37:20 - (Hall Martin): So I think that's where it goes

0:37:22 - (Andrew Kazlow): and just to continue the logic and that works because even if there's, let's say there's 10 deals every year in the whole world that are focused on like laparoscopic technology, probably way more than that, but let's just say there's 10 deals. If there's a group that that's all they do, they're probably going to see eight or nine of those deals and be able to add value that no one else can. So essentially, just like we're seeing movement towards verticalized application of AI into particular areas, you're essentially saying that hey, since deal flow is kind of democratized, that's not the main reason to join. It's this hyper niche value ad focus community around a particular theme. That's where the opportunity is in the next generation of investor communities.

0:38:07 - (Hall Martin): That's right. They're going to be very, very specific, very deep that they go into it. When we were doing it ctan, we were very horizontal. We're just going across everything. And so you can't go very deep into it. But if you can go deep into it and you really know the space, you can be more effective at diligencing it as well. And then if you have a network of people that are like you, then you can do go further as well. We can actually add more, a lot more support to this group. And that that became one of the factors of success was how many hours of diligence you do and how many hours of follow up do you do to help them? If you stay in touch and help them, they come does so much better.

0:38:45 - (Hall Martin): And it was huge different than the returns that came out of it. So if you have a network of people that are in that space that gives you more support to make that group successful. So I think it's just people going to more sectors that they're interested in.

0:39:00 - (Andrew Kazlow): So what are the, what are the community like? What are the alumni or you know, interest group affiliated communities do? Like you, you're talking about the Baylor angel network in Central Texas which is kind of a regional focus. Obviously these communities have a local interest. So what is that? Like what is this theme? Let's say this progresses and all the communities that are doing well tend to be really, really focused. Like what's the role or what's the place for the regional or you know, university affiliated investor community?

0:39:29 - (Andrew Kazlow): Is there a place do they go away?

0:39:33 - (Hall Martin): I think that, I think there still does. I think people still want to like with Baylor, you know, one thing I found was the why was to support the student. And so we ended up graduating. We started with three students going through the first semester and then I think we got it up to 18 going through now every, every year. And so we got a many alumni association of about 180 students that have gone through since we started.

0:39:59 - (Hall Martin): And most of them are now out in the finance world. And so we're talking about where does this go next? Well, it may be that we just go support those guys in their career at the private equity firm or the hedge fund or the venture fund or whatever and they're now experts in those fields and they're connecting us back into it. So that can be interesting as well. But if you're looking at sectors and so forth, I think there are a number of angel groups that are specific to life science. Now we're going to go vertical into this life science and get very specific because life science is one of the places where when it hits the exits are truly spectacular.

0:40:39 - (Hall Martin): It's just way off the charts. And then there's tech and general tech which is starting to get more specific as well. There's AI and other things that people are going at. Cyber is a big one. There's crypto web that's finding its place with stablecoins and DeFi finance and so forth. That's getting to be interesting. And so we can go deep on finance technologies with those. So the idea is people are still hanging around with their groups and I think some of the geographic things kind of go away. In some cases they don't hold as much. But you know, they have conferences in wherever their main city is and you can go meet people in person there and the rest of the time you're online with them communicating and gets your costs down quite a bit. I think we used to do 30% online, is 70% in person and Today it's probably the other way around. It's more like 80% online at 20% in person because the cost of doing the online is so low and you can get a lot done, but you still want the in person at some level. But I found it shrunk quite a bit over the last couple of years as well.

0:41:47 - (Andrew Kazlow): It's interesting. It feels like the angel network, while the name has stayed the same over the last 20, 30 years, the problem that it solves for people has sort of evolved. Like as deal flow has become more democratized, that has become less of a reason. And the importance of the community and the other things like the student experience or whatever else seems to have risen. And so these look more like clubs or private communities than pure play investment communities. Because I can get deal flow anywhere to your point, right?

0:42:20 - (Hall Martin): Well, one guy once tell me that in the finance world, the way you make more money is you move up and to the right. You do later stage deals at bigger dollars. So there for a while, what angels were doing was what we would consider crowdfunders today. But angels kind of moved up into the ride and they became the vc and the VC moved up into the ride and it became more like a private equity fund and the private equity moved up into the ride onto being a hedge fund.

0:42:47 - (Hall Martin): And it just goes on. And then of course, we're trying to work with bigger dollars because that's how we get bigger commissions or fees, whatever we're doing. And you're creating these new things up front, such as crowdfunding, that kind of fills in. And I remember when VCs were back in the Capital Network days, VCs will look down on angels and say, well, you're not the professional, you're not doing due diligence. And then when crowdfunding came along, the angels were looking down on the crowdfunder, saying, well, you're not professional, you're not doing due diligence.

0:43:18 - (Hall Martin): And so every generation has that moving up into the right phase. And that's what we're doing now is we're continuing to move even VC funds today. If you have a very, very large fund, some of them have like a billion dollar fund, you really don't need returns anymore. You've got the management fee to pay for everything and returns are icing on the cake, if at all. And so it kind of changes. That doesn't look like a VC fund anymore, that looks more like a private equity fund or maybe it's something else altogether. So they do have a. They do move and we'll, we'll see how they work out with that.

0:43:56 - (Andrew Kazlow): Are there any other like strategies or approaches that you're seeing specifically in that earliest stage? Like things are moving up into the right. What's coming in to fill the early stages? Are there any, are there any other like models or creative financing approaches that you're seeing? I mean you're working with founders every week.

0:44:11 - (Hall Martin): So, so, so found that the, the key is to align with the founder. And one model that came out recently was the income funding model where I get paid back based on how much you take out in the form of salaries. And we know founders want more salary and they're motivated to do that and they're going to find a way to do that. So let's just align with that. And it's called the income funding model as ISAs they call it. And you basically say take out as much salary as you want, but I get 10% of what you take out.

0:44:46 - (Andrew Kazlow): Huh.

0:44:47 - (Hall Martin): And as they grow their salary base, which good successful companies probably getting more, more people or more, more salary going out, well then I can just be a part of that. And so that's one way to align with a founder is that if they, they want to make the company bigger, you know, they could reinvest or they could be taking money out for themselves. I find there's, that usually gets balanced pretty well. You don't get one over the other very much.

0:45:13 - (Hall Martin): So you can be a part of that. So you're aligning with them on that side as well. So instead of looking at the outcome which used to be profit, you look at the salary base because that was where a lot of the money ended up going. Profit began. We're going to just go and make money, take money because I got to go pay my bills.

0:45:32 - (Andrew Kazlow): I'm hearing a lot of lessons from this one investment in 03 to 06.

0:45:39 - (Hall Martin): Well I think most people find the same thing happens, they call it the walking dead. The founders. That's really not going to be on an exit anymore. And what I found is that I don't think we should just take that. I think we should re engineer the structure so that if they're not going forward, I have had some VC funds signed up for the 3x and 3. Why do you care about that? He says, well if the founder's not going to go forward with it and to an exit I want to take, I want to recycle the money back into another deal.

0:46:10 - (Hall Martin): And so it kind of makes sense. Instead of giving people infinite amount of Time. You give them a certain amount of time, and then if they're not getting there, and a lot of them never get there, you just recycle the money back into another. Another. Another opportunity for it. So I think that's. That's. I think it's just the people dealing with the fact that so many startups never make it to even five years, that we really want to put money into something that can actually make something back for us. And then if it's not, it goes to, we can fund another startup. Because I found that some people, we raise funds for a group of startups and people would take money and blow it. And then that's money these other guys could have had but didn't because you blew the money.

0:47:01 - (Hall Martin): And so it makes people a lot more serious about putting these together.

0:47:06 - (Andrew Kazlow): So how do you balance these more creative financing strategies with not making the deal too weird for future funding? Like the quote, unquote hairiness, like, hey, this is a weird financing structure. What is this? It doesn't make sense to the series abc. And one of the concerns we talked about on the show often is not making a deal too weird because it can blow up the capacity to raise more in the future. How do you deal with that? With these more innovative financing structures early in the company's life cycle?

0:47:35 - (Hall Martin): I think people have to try them. I think they have to go out and do some of these and then see, oh, this is how it works and this is where it fits. And they just have to be open to doing more. Right now, a lot of people don't do anything with startups. They could make a lot of money if they were just going and trying some of these things. And then maybe coming up, and someone once said, I never sign anybody else's term sheet. We always sign my term sheet.

0:47:58 - (Hall Martin): So I think down the road, we'll see people coming up with their own term sheet and saying, I'll put money in, but it's on these terms. And you have 3x and 3, you have income agreements and you have other things where you're getting paid out, if they get paid, if the money goes out that direction. So I think we'll see term sheets change. Right now, it's controlled by safe notes. 90% in Austin are done by Safe Notes.

0:48:20 - (Hall Martin): And the argument is that Safe Notes are simple. As an investor, what I hear is Safe Notes give me no rights. Simple means no rights to the investor. I have no information rights. I have no registration rights. I have none of that. There was a reason why they were in the term sheet to begin with. And even the ACA came out with a model convertible note where what was surprising was how much of the rights were put back into it.

0:48:46 - (Hall Martin): Did a education day at Baylor and I said, most of these guys download these, most download off the website their safe note and convertible note. And half of them are surprised. They don't have a lawyer review these? No, they don't have a lawyer review these. They just download it, put the terms in, off we go.

0:49:03 - (Andrew Kazlow): At one point on that point, we had Peter Walker on the show, or maybe this was during one of his keynotes at the Angel Capital association annual summit. He was like some giant percentage of safe notes are, you know, cap only post money, no discount. And he was like, why is this his guess? Which I agree with. I think this is right, is that that's just what YC posts on their site as the standard offer that people just download and use. And so why doesn't have a discount? Why doesn't have any other terms?

0:49:30 - (Andrew Kazlow): Because that's the easiest way to get up and going.

0:49:34 - (Hall Martin): That's right. You know, they just download it and off we go. And no, no lawyer reviews it and you just have to deal with it in that case. And. And I think maybe some groups will start to come up with their own term sheet. At ctan, we actually did that in the early days. People would show up without a term sheet and it was kind of a struggle. And so we came up with the idea, we're going to have our own term sheet.

0:49:58 - (Hall Martin): Well, that was an investor leaning term sheet and happy to give up some of the terms. But we kind of said, well, we were in some discussion with founders and we would say we get a 2x liquidation preference. And he turns to, he turns to his lawyer and asks, what does that mean? Well, you should know that before you get into the negotiation what those mean. Because we would hand it to him when they walked in the door saying, I want to apply, that's fine. If you get to us without a term sheet through the room, this is where we're starting. We're starting with this.

0:50:27 - (Hall Martin): So we actually gave them the homework. Go to your attorney and figure out what these things mean. And it was very investor leaning in that case, where you can negotiate some of those terms back, but you have to take the time to sit down and do that. And so that's how we got into it. And then some people decided, well, you know, these guys either make it or they don't. And if they don't make it, why are we spending all this time negotiating a term sheet that is, you know, they just, they're never going to make it past the 500 mark as well.

0:51:00 - (Hall Martin): The interesting part we'll see is secondaries. If secondaries really come up and take hold, well then we can do more things with it where I put money in and five years later I can sell it on a secondary for a meaningful return. My experience in the last round that we did that, which was about 10 years ago, was that the big names have a secondary market. Back then it was Facebook and LinkedIn and Twitter.

0:51:24 - (Hall Martin): Those guys got plenty of secondary actions. Everybody else zero. If you haven't heard of that guy, I'm not putting money. I don't know who they are and you can show me the financials all day, but I just don't know who they are. So we'll see if people over in this next round with secondaries and some people are raising on us exit. That will be a secondary for this price at this time. We'll see if we get there on this next round because last time people didn't really understand how secondaries work.

0:51:55 - (Hall Martin): And in most cases secondaries in between those two events were basically 10 cents on the dollar. People come in when the market is way down. Somebody would buy you out and they would do something with it. They'd sell it for IP or they would wait till the market improved or they would do something with it. But we'll see if secondaries go somewhere this time with it. Well, I'm watching that closely because I do get some deals saying I'm going to go on a secondary at this point.

0:52:22 - (Hall Martin): Yeah, yeah. Are you sure you're going to be able to close that number? That's, that's the issue.

0:52:29 - (Andrew Kazlow): Paul, anything else you leave our audience with as we wrap?

0:52:33 - (Hall Martin): No, I think startups is a great place to work. You're on the cutting edge of technology. You're meeting smart, sharp people, you're working with the next generation. It's great to see these things start small and then turn into billion dollar marketplaces and so forth later. I know you are a part of that at some level, so it's a great place to be. But you do have to know kind of what you're doing and pick your niche.

0:53:00 - (Hall Martin): What do you find interesting? Where can you add value? Makes a big difference. If you can add value in certain ways, you can then find a place in the ecosystem wherever you go in the US in most cases. So I always encourage people to get involved with it because that's why I left NI was I just want to get back to the early stage because that's where the innovation and the excitement was. And fundamentally, I believe at the end, the government doesn't solve your problem.

0:53:23 - (Hall Martin): Innovation entrepreneurs solve your problem. So the more we support we give them, the better we'll do.

0:53:29 - (Andrew Kazlow): Wonderful. Well, hall, thank you for joining me today. I look forward very much to our next conversation. Right.

0:53:35 - (Hall Martin): Thanks for having me.

0:53:38 - (Andrew Kazlow): Thanks for listening to this episode of the Diligent Observer. I'm your host, Andrew, and if you're an angel investor looking for essential angel intel and five minutes every week, I think you'd enjoy my newsletter. I send my best stuff, interesting deals and more straight to your inbox so you never miss a thing. Subscribe today@the diligentobserver.com.