Tip of the Spear Ventures

A Family Office that behaves like Venture Capital | Private Equity | Business Consulting

Sam Palazzolo, Managing Director

Business Funding – Raising Capital

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The Point: We’re often asked at Tip of the Spear Ventures, “What are the best ways to go about business funding through raising capital?” While raising capital is just one way to accomplish business funding, it is often misperceived as being the only way. So in this article we’ll explore business funding through raising capital… Enjoy!

Small business funding is a very general term that can be applied to a wide range of different types of funding options. While this represents a broad range, there are a few more options that are common to many potential business funding scenarios. Typically, small business funding comes in the forms of loans and equity infusions, with some lenders offering lines of credit as well. The purpose of a loan is to provide a business owner with the capacity to obtain necessary funds to conduct business. Typically, this is done through a traditional bank that acts as a lending institution and with a financial officer on hand to handle business loan applications.

Equity infusions are very popular business funding options for many small businesses. These provide businesses with ready cash in return for an agreed upon level of equity (typically 35%) committed to the business. For the most part, this type of business funding scenario provides a business owner with ready cash resources to conduct business once the term loan has matured. However, there are some notable exceptions to this general scenario. For instance, some angel investors may require a certain amount of tangible assets as collateral in order to provide a loan to small businesses.

Another very popular type of business funding scenario is one that uses lines of credit. Lines of credit are typically offered by various private lender sources such as banks and credit card companies. In this scenario, business owners are given a credit score from a private source that is then used to qualify for financing from that source. In many cases, the rate of interest on lines of credit is based on the credit score of the business owners applying. This rate can be somewhat competitive when it comes to small business funding options.

Sam Palazzolo

Why Raising Capital Might Not Be Your Best Funding Strategy – 6 Tips!

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I recently met with one of our holdings – a technology-software startup in Las Vegas, Nevada USA (Headquarters for Tip of the Spear Ventures) and we reviewed why raising capital might not be your best funding strategy. Let me be frank… While being an “entrepreneur” is fashionable these days, Las Vegas was never/is not now a major powerhouse in the tech industry. However, even with its limited entrepreneurial scene Las Vegas would appear to be awash with more capital for funding entrepreneurs than it has ever seen before. Investors are doling out money to promising startups, and major corporate Acquisition Departments at Google, Facebook, and MSN are ready in the wings to acquire interesting technologies and more importantly the smart teams that work therein.

Bootstrapping Your Business

I am an entrepreneur who bootstrapped his first company more than two decades ago, and it has been interesting to see the Las Vegas startup scene mature since forming Tip of the Spear Ventures in 2012. Similarly, the tech-software entrepreneur previously mentioned also bootstrapped his startup. Since we invested and began mentoring the organization five years ago, they now garner more than 40,000 visitors a day to their website, generate revenue of seven figures a year, and are extremely profitable. As such, they’ve had quite a investors and private equity firms approach them with funding, ready to invest in a business with a positive cash flow and pristine reputation in exchange for equity.

Capital Funding Sources

I remember the first time I had the conversation with the leader of the organization (There have been many approaches over the years, all of which seem to follow the same pattern – We’ll give you $XMM in exchange for XX% Equity). As the startups strategic partner, we reviewed each and everyone of the approaches, but elected not to accept any. While most would look at this as unfashionable (Shouldn’t you look at raising capital and ensuing Series A, B, and C rounds of funding as “right of passage” on the road to exit?) While congratulations are in order because most entrepreneurs would consider this as recognition by the business community as having arrived. Most entrepreneurs mistakenly believe at these moments that they’ve got it made (They’ll take a few million, expand the operations, juice up revenue and, within a few years sell out and cash an eight-figure cheque – WINNING!) Isn’t this the 21st -century success story – launch something, build it (They’ll come, right?), gain a bit of traction in the marketplace, get an infusion of cash and then sell, sell, sell as you get on the infamous train!

So why did we not recommending and why did the startup leaders not take any offers of funding? Simple… They retain complete ownership of their company and have never taken a cent in investment money. You see, it’s easy to get swayed by the upside but few entrepreneurs look at what they give up in exchange.

Why Raising Capital Might Not Be Your Best Funding Strategy – 6 Tips!

While in no way against funding (I mentioned that we were one of their original investors, and this is how we make our money at Tip of the Spear Ventures by investing in entrepreneurs), here are six considerations (or tips) that you should similarly consider before accepting funding:

  1. How badly do you need the cash? If you’ve successfully bootstrapped to profitability, perhaps your company is not in a situation that it cannot meet its financial obligations. You have money in the bank for those rainy days (Hopefully a year), so ask yourself “Do I even need the money?”
  2. What’s the endgame? The startup world is abuzz about moonshots and unicorns (Those companies valued at a minimum of a billion dollars). But is that something you really want? Do you want to build a disruptor? Or do you want to build a small company that does what it does best and serve the market for a long period of time?
  3. Are you willing to lose control? As the majority owner of your company, you don’t need to worry about anyone else’s opinions (for better or for worse). You don’t need to worry about keeping investors happy or making sure the board is happy. Keep in mind that the early-days of funding-marriage soon become cantankerous and almost divorce-like as demands placed on the entrepreneurs for ROI and other OKR metric attainment begin. No funding means you are the decision-maker.
  4. Is your share of the pie big enough? Raise enough capital (especially when your own company’s value is low) and have enough co-founders, and the threshold on how much money the company has to sell for before you make back your money goes up. I think it was one of the Beetles that when asked if they thought they’d ever reunite snarled “and split this tour 4 ways?!?” Sure, 10% of a $100Million exit is bigger than 100% of $5Million, but the reasons unicorns are unicorns is because they are extremely rare! You hear about the moonshot and unicorn success stories, but companies are far more likely to fail in achieving those levels.
  5. How much time do you have? Venture Capital backed startups are notorious for sucking time. As mentioned in #3 above, control also equates with time. You’re probably already wearing multiple hats as an entrepreneur. Will you be able to wear them all as effectively with less time to do so?
  6. What are your goals? What do you really want from your business? For most it’s freedom. The ability to go for an hour long walk with your dog during the middle of the day or sneak in that round of golf is appealing. While most entrepreneurs dream of time today it actually is in exchange for time tomorrow because the goal of why they became entrepreneurs in the first place was so appealing.

At the end of the day, most entrepreneurs operate their business to help provide for their lifestyle. Taking external funding would bring into play external forces that would make it harder for entrepreneurs to enjoy their lifestyle.

SUMMARY

While most entrepreneurs are content realizing that they can/are here to make a dent and don’t need to dominate. Taking external business funding will limit those lifestyle choices and freedoms in making those dents.

Sam Palazzolo

How to Finance Your Startup

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The Point: How to Finance Your Startup… It might appear as an entrepreneur that money grows on trees! Securing financing to help fund your entrepreneurial dreams should be an easy process, right? Wrong! While financing your startup appears to be a relatively straight-forward process, it might not be the appropriate or best route for your startup. So, in this post we’ll explore how to finance your startup… Enjoy!

how to finance your startup

“How To Finance Your Startup” is one of the most persistent questions I’m asked by entrepreneurs, followed closely by “Should I consider Venture Capital and/or Private Funding sources?” The process of raising private money consists of advantages and disadvantages regardless of method. Perhaps a better entrepreneurial approach would be to identify what has worked and what has not in terms of raising capital for your startup.

In exploring how to finance your startup, entrepreneurs could benefit from exploring case studies from real-life entrepreneurs who have successfully used a variety of funding options to launch their own successful venture. This perspective provides an extremely helpful resource that will help entrepreneurs in understanding how to finance their own business, regardless of what business vertical they are embarking on. Entrepreneurs will be able to quickly compare and contrast the pros and cons of each method, allowing themselves to make informed decisions about the most feasible way to start your business funding initiatives. Some “How to Finance Your Startup” typical outline steps consist of identifying the various venture capital firms that available based on previous investment history and alternatively, the different ways to raise capital for the business.

If as an entrepreneur you are seriously considering launching your own successful business with external capital (instead of “bootstrapping” your funding), you should establish guidelines for how you will go about starting your business with such funding. This comprehensive overview of how to properly fund your startup will include not only funding resource potentials, but give special consideration to what you’ll be willing to give up in return for receiving the capital. The more knowledge you equip yourself with about how to properly go about funding your startup as well as other aspects of business finance will benefit the entrepreneur, regardless of the entity stage of the organization.

Sam Palazzolo

Is Your Capital Raise a Boot Drop?

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The Point: If you are asking the question, “Is your capital raise a boot drop?” then I have some bad news for you. We often think of business as waiting for the other shoe to drop. So, what happens when it’s not just a shoe, but a boot that you’re waiting to drop! When it comes to raising capital for your business, it is and can very much seem like a boot drop moment. So in this post, we’ll explore some alternatives to ease the “drop” event and turn them into more of a “raise” one… Enjoy!

is your capital raise a mic drop

Yes, it’s very hard to raise capital because no matter how hard you try, investors don’t care about your business health or how great your products or services are, they just want information on money. In fact, many investors make their money this way because they use the equity in their business to finance their own projects instead of using credit or other capital sources that require repayment. Many investors also like to borrow money and using equity from their own company helps them with that as well.

If you look at any traditional business, you can see that capital raises are used to expand the business into new markets and/or services that can bring in more income and dividends. However, if you ask most private investors today if they are going to pay additional dividends, you might find that they aren’t as likely to do so as they used to be. While there are still some private investors that are willing to provide additional capital to growing companies, the reality is that they are generally not willing to do so when faced with companies that are doing well and have the wherewithal to grow even further.

So, when asking yourself, “Is your capital raise a boot drop?” the first thing you should do is take a hard look at the business health of your organization and determine whether or not it is really worth investing additional funds into. Next, you will need to look at your overall capital raise and determine if you are going to need to raise additional funds based on the business health of your organization. Lastly, you will need to make sure that you are able to absorb the additional investment that you are going to be getting. If you find that you are unable to absorb the additional funds, then you may want to consider taking a different route to raise capital and perhaps wait until you have a much better operating cash flow before getting involved with another capital raise.

Sam Palazzolo

If your organization is struggling raising capital, we should talk… info@tipofthespearventures.com.

Just How Much is Your Business Worth?

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The Point: If you are thinking about selling your business, then you’ll need to identify just how much is your business worth! This article is intended to offer perspective to the small business owner looking to sell their company. Specifically, we’ll attempt to shed some light on how businesses are valued. There are a lot of elements that go into what a business will sell for and we’ll attempt to hit the high-points… Enjoy!

Earnings

The monetary health of your organization will certainly be a substantial consideration for prospective purchasers’ decision on what they will spend for the business. Earning, EBITDA, Cash Flow or Net Income are basically what the owner makes from the company, including their income, perks, benefits, and net income. 

EBITDA (Earnings Before Interest, Taxes, Depreciation, and Amortization) resembles cash flow, however it deducts what it would cost to pay a common CEO in this market to run the business. This might vary from the actual income that the existing owner makes. EBITDA is what the business would produce for their financier after paying the typical income to a President that would run the Company for the financier.

The factor that Cash Flow and EBITDA are vital is that what individuals want to pay is frequently based upon a number of annual cash flows or EBITDA. These multiples can differ considerably depending upon lots of considerations. If 2 business’s net earnings are both $500,000, one business may offer for 3 times the yearly money circulation ($1,500,000), and another may offer for 5 times annual money circulation ($2,500,000). Why?

We will check out a few of the aspects that can impact what kind of multiple (3x or 5x from the above example) a buyer will utilize to identify what they will use for the company and what other aspects besides Net Income purchasers may utilize to identify the listing price of a business.

Market

The market that a business is in definitely plays a part in what multiples prospective purchasers are ready to pay for a company. Even within technology, a company that sells their own proprietary software will usually sell for more than a company that sells IT Services or acts as a reseller of other companies’ technology. The multiple is meant to be a multiplier of risk.

There are still many factors that go into what someone will pay. A Profitable construction company might sell for a lot more than a software company, depending on other factors such as size, number of years in business, long-term contracts, etc.

Size of the Company

In general, the bigger and more lucrative an organization is, the greater the multiple of rate to profits is. A company that has an annual net cash flow of $200,000 might sell for 2.5 times Cash flow ($500,000). Depending upon the information, a business that has capital of $5 Million may cost 7x Cash circulation ($35 Million).

There are a lot more aspects to this, however this is an illustration of the quantity of the profits likewise factoring into the numbers that purchasers will spend for a company. Valuing a company is part art and part science to integrate all of the elements that enter into a possible list price of a Company. We’ll continue with other elements that will enter into it.

Synergies in a Merger or Acquisition

Getting a purchaser or purchasers that have excellent synergies with acquiring a business can be an outstanding method to increase worth in the sale of a business and result in a greater cost paid. There are a great deal of various methods which you can have a synergistic purchaser. We’ll detail synergistic possibilities from purchasers in the very same market and purchasers in numerous markets.

Expense Reduction: A purchaser within the exact same market that can minimize expenses by integrating a few of the overhead. Whether that overhead is the financial investment in underutilized devices, area, or workers, when underutilized properties are more totally made use of, there can be a boost in the combined profits by lowering expenses without minimizing profits.

More Services to Cross Sell: More typical than expense decrease is synergies that lead to a revenue boost through a boost in combined profits. An example of this is where a civil engineering firm acquires a Land Surveyor company, and now they can cross-sell their existing client base to supply more services to each other’s clients and increase the combined earnings. They can win larger jobs where the bid involves both areas of expertise of the combined companies so that they don’t need to use subcontractors and can better control the quality and costs of the projects conducted.

Making the Most of Each Other’s Strengths: An example of this would be an acquisition of a little software application business that has actually established excellent brand-new innovation, however does not have a big sales force. This could be acquired by either an IT Services or Software business that has a big sales force and relationships with IT Departments at their existing clients, however maybe their services have actually ended up being outdated over time. The mix of these 2 companies would have the ability to quickly offer the brand-new innovation and permit the more recognized company a business development course that it would not have otherwise.

Financier’s Contacts and Strategy: Synergistic mergers do not always require the mix of 2 business. Sometimes, you can have a rich business owner or personal equity company that can obtain a business in a market where they have contacts that they can utilize to present an obtained company and get them into some big consumers that they would not have access to. A knowledgeable financier’s understanding of a market might likewise result in vital suggestions on how a business must continue to grow its Company beneficially.
Patterns

How to Value a Business

The trends in your business will affect the valuation of your Company. On average, they will pay a higher multiple for a company that is trending up compared to one that is trending down.

The net income and revenue might vary a lot from year to year. In this case, some prospective purchasers may average the last 3 or 4 year’s earnings, or they might utilize a weighted average where more weight is provided to the most recent yearly monetary outcomes.

Purchasers will attempt to examine what an affordable projection is for a business in the coming years based upon its patterns and other aspects, such as what the general patterns of the market are and external elements.

Consumer Density

If two companies are both making a net income of $1 Million and Company #1 has 300 customers with no one customer making up 10% of their revenue and Company #2 has 20 customers with their top customer making up 40% of their revenue, typically Company #1 will sell for more than Company #2.

Company B can still be sold; however, in some cases, they will have to decide between a lower sale price and a higher sale price that includes an earn-out. It is a way for the buyer to pay more and have the seller assume part of the risk if their largest customer doesn’t continue on with them.

Recurring Revenue

If a business has repeating earnings, this will normally make it more valuable. Repeating income can happen in various markets. An example would be 2 manufacturing businesses.

Business #1 primarily does brand-new widget manufacturing. When brand-new advancements are being developed, they do the manufacturing for these advancements. Business #2 has long-lasting clients that they have continuous relationships with and expense reimbursement from them on a monthly basis.

If their consumer retention is high and both Company #1 and Company #2 make the exact same quantity of earnings, generally Company #2 will cost more since they have repeating earnings with long-lasting clients that they have actually kept. This lowers the danger in a purchaser’s mind that the income (revenue) will decrease.

Team Member Skills and Accountabilities / Responsibilities

Prospective Buyers will think about the abilities and duties of the workers when figuring out the worth of the Company. If business is based around the owner’s abilities and the owner has all of the relationships with the consumers, this will be a greater considerable threat aspect when the owner moves-on, and normally, the owner will be required to remain on with the organization for a more prolonged shift duration.

A plus is if there is a strong second-in-command. This management structure under an owner where workers report to the department supervisors rather than everybody reporting to the owner. If there are salesmen that deal with client relations and other necessary functions in the Company, this is likewise a plus.

Business Reputation

What if your reputation isn’t that great in the marketplace? It doesn’t mean that the Company can’t be sold, but it may mean that the Company will sell for a lower valuation. For example, if online reviews of the Company are outstanding, this will be a plus and put buyers more at ease as opposed to if reviews were terrible.

Agreements or Contracts

As previously mentioned, beneficial long-lasting agreements or contracts with clients (and workers) is a plus. The length of the contracts will likewise be an element to consider. If there is a brief contract, if a brand-new business buyer can get a beneficial long-lasting agreement put in place, this would alleviate the brief (or expiring) contract if the area is vital to business. Business buyers will look at any contracts with clients that may be favorable or unfavorable as the term of the contract are set to expire. In some cases, the buyer may have to buy the corporate stock to ensure the transferability of the contracts.

Full Disclosure of Seller’s Discretionary Earnings (SDE)

If the monetary info and other details on the business are plainly set out and easy to understand, this is handy. It works to plainly determine what the owner’s wage, benefits, and advantages are so the purchasers can get a genuine understanding of what the owner is making.

In discussion with the buyer, it helps to be open and honest about the business to give potential buyers an understanding of not only the opportunities but any challenges they might face. No company is perfect, so it’s best to be honest in answering any questions.

Alignment

There is no accounting for the alignment between buyer and seller until they meet and get to know one another. A Seller that is easy to get along with and work with makes it easier for potential buyers to pay a premium price for a business.

Dealing with Business Brokers / Mergers & Acquisitions Companies

If you are considering buying or selling a business, it helps to work with an experienced Business Brokerage firm. A good Business Broker / Mergers & Acquisitions firm can help both buyer and seller to work out a price that makes sense for both parties. CAUTION – Keep in mind that typically the Broker solely works for the seller of the business. Therefore, it might be beneficial to coordinate with a buy-side Broker or M&A firm to represent the interests of the buyer.

Sam Palazzolo

Selling Your Business to Tip of the Spear Ventures

If you are thinking about selling your organization and your organization fits within our Acquisition Criteria (“”), then we should talk. Contact us at Selections@TipoftheSpearVentures.com.