Hall Martin, Austin-Based Super Angel Investor - Plan the Exit Before Investing

Sponsored by Peter Fasse of Fish & Richardson, Patent Attorney: https://www.fr.com/team/j-peter-fasse/ 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." 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 A 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."