Tip of the Spear Ventures

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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

Family Office as Entrepreneur Capital Source

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The Point: The Family Office as Entrepreneur Capital Source is an avenue rarely investigated, until recently. Why? The Family Office structure is one that is a relatively new “player” in the capital source space. So what do you need to do as an entrepreneur in order to approach a family office and successfully secure capital? In this post, we’ll explore family offices as Entrepreneur Capital Source… Enjoy!

Family Office as Entrepreneur Capital Source

When you are looking into the best way to raise venture capital for your entrepreneurial effort, you need to keep in mind that there are two main options when it comes to raising capital – Angel investors and institutional investors. Angel investors are wealthy individuals who provide small amounts of money to start a new business with the intention of generating a much larger return later on. While these investors do not normally require any particular terms nor have control over organizational operation when providing capital, they are also extremely impatient and lack understanding of the technology and risk issues that you are going through in building your new company as an entrepreneur. Most angel investors will prefer to see a business plan and more importantly, a projected financials so they can get a full picture of the business you are attempting to build.

Family offices on the other hand, run more like private equity firms where joint ventures between entrepreneurs and them as business partner generally require an initial investment. Typically, this relationship is formed because it allows family offices to tap into the entrepreneurial mindset of their entrepreneur partners and receive returns that are superior to other capital instruments. Most family offices that run like a private equity firm prefer to provide capital to small to mid-sized organizations rather than large corporate companies because of the obvious benefit of being personally involved in the business and being able to contribute ideas and help direct the business (Again, don’t overlook the returns!) They also are able to provide a direct exit path from the current project to providing capital to future projects. In order to raise family office capital funding requires the entrepreneur to again submit a formal business plan along with a well-written equity prospectus and a complete financial statement so the family office knows exactly what kind of return they can expect.

Family offices provide a great way for relatively inexperienced entrepreneurs to obtain the experience needed to raise large sums of capital and have a smart-money partner along with them. Because the entrepreneur receives small investments from family offices and not from institutional investors, they typically view paying very good returns on these investments as a small price to pay in return for the capital received to accomplish goals. The key to success is in the collaboration and relationship building between the entrepreneurs and family offices. Family offices are really just an extension of a venture capital outlet, allowing entrepreneurs to access the wealth of the family office entrepreneurial team at a much lower hurdle.

Sam Palazzolo

The Family Office – What is It and How Can They Fund Your Capital Raise?

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Many entrepreneurs, be they existing businesses or startups have never heard of a “Family Office.” However, the Family Office is a type of funding source that should not be overlooked when searching for funding or capital raise. In this article, we’ll explore the Family Office – What it is and how they can fund your capital raise… Enjoy!

Looking for Funding / Capital Raise

Whether you’re an existing organization, or especially if you’re an entrepreneurial startup you’ll sooner or later look to conduct a capital raise to fund your business. But where will you look to raise capital? In a “no stone left unturned” approach, one alternative for funding a Small Business that’s frequently ignored is the Family Office. Household Offices run as personal business that handle financial investments and trusts for a high-net-worth household or group of households. They’re usually extremely personal and misconstrued, however if you open the tricks to how Family Offices purchase brand-new endeavors and the requirements they try to find, it could be the secret to funding your organization.

What a Family Office Is

Family Offices are an especially crucial source of capital for small-to-medium-sized companies. According to the Family Office Club, there are presently more than 3,000 household workplaces in the U.S., and these Offices, which normally have a minimum of $100 Million in properties, frequently take a look at alternative financial investment chances– which could be your start-up.

While Family Offices can be evasive and extremely selective, recommendations, relied on networks or entrepreneurship conferences might supply entry. The business looking for financing needs to likewise line up with the Family Office’s Investment Criteria and Philosophy. Numerous have a predisposition to buy business straight or indirectly related to the core organization on which their success is developed.

Positioning of Interests

Eventually, any brand-new financier is banking on both business Plan and the Founder/CEO. On the other hand, the Founder/CEO requires to discover and determine a brand-new financial investment partner who has a long-lasting view and the time and interest to assist move business forward.
If you’re being presented to a Family Office by a monetary company, there can be costs connected with the deal. All financiers will wish to comprehend the exit technique of the financial investment and plainly articulate that it’s crucial.

If a Family Office picks to purchase your service, you might discover that Family Offices:

  • Provide extraordinary connections
  • Are able to benefit from a circumstance where markets might stop to work in a routine way
  • Are more lenient/understanding than Institutional Investors or Private Equity
  • Appreciate just how much work needs to go into beginning an effective business
  • Serve as coaches

When John Doe * (* Fictitious name to safeguard the person) went looking for seed financiers for his Biotechnology / Pharmaceutical business in Tampa, Florida, he outreached to us at Tip of the Spear Ventures for support. After structuring his effort, we recognized a regional Family Office to pitch. One casual conference with the Private Investment Firm, which handles the wealth of people and their households, was all it required to land his endeavor a high-figure financial investment early in 2018, together with continuous recommendations, client intros, and part-time office.

Such experiences are uncommon, however they do take place, and more Family Wealth-Management Groups are banking on Private Equity offers. There are some downsides: Family Offices can take longer to “Seal the Deal” than conventional Angel Investors or VCs, and they typically have a lower tolerance for Startup failures. Numerous Family Offices take pleasure in recommending and supporting leaders beyond just cutting a check (Plus, they have containers of Dry Powder to pay out!)

How to Find a Family Office

How do you go about discovering a Family Investment Office to back your organization? Not all Family Offices are so called or named, making them hard to identify by means of Web or LinkedIn search. Get to understand who the person is you’re attempting to connect with. It’s often best to let the financial investment neighborhood understand who you are and what your business does prior to you actively trolling for financing.

When you’ve got some leads on Family Offices, call to ask whether they invest in Early-Stage or existing companies, what business their existing portfolio consists of, and what Industries interest them. The truth is, if you had a list of 100 Family Offices and individual contacts at each of them, just 5 or so would be legally interested in straight investing.

As soon as You Find a Family Office … Then What?

Your e-mail ought to be created to get the Family Office’s attention. Keep these preliminary e-mails light … The concept is to prevent frustrating the Family Office and rather fascinate them enough so they desire a follow-up conference. In other words, reveal regard for the truth that these households continuously get tapped for capital, and they’ll be more most likely to invite you into their Family.

Household Offices run as personal business that handle financial investments and trusts for a high-net-worth household or group of households. They’re generally extremely personal and misconstrued, however if you open the tricks to how Family Offices invest in brand-new endeavors and the requirements they look for, it might be the secret to funding your company (See the article I wrote titled “Effect Of COVID-19 On Raising Capital: How To Secure Funding During a Crisis?“).

One casual conference with the Private Investment Firm, which handles the wealth of people and their households, was all it took to land his organization a seven-figure financial investment early in 2018, along with continuous recommendations, client intros, and a part-time workplace area (Sweet!)

SUMMARY

How do you go about discovering a Family Investment Office to back your service? Our advice – Regard the reality that these households continuously get tapped for capital, and they’ll be more most likely to invite you into their “Family.”

Sam Palazzolo

If you/your organization is looking to raise capital, we should talk. Please contact us at info@tipofthespearventures.com.

Effect Of COVID-19 On Raising Capital: How To Secure Funding During a Crisis?

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The response depends on three R’s – Research, Reassess and Restructure

The COVID-19 pandemic will have a lasting and significant influence on the international economy. Although lockdown limits have actually now been relieved and then replaced in a number of nations, capital markets are most likely to take a long period of time to recuperate from the coronavirus-triggered crisis.

As reported by the International Monetary Fund, this is the worst financial slump since the Great Depression, forecasting an enormous loss of $9 trillion in Global GDP over the next 2 years.

These are difficult times for companies, much more so for existing organizations and start-ups seeking capital that run with razor-thin margins. Dealing with weak need, quickly altering consumer patterns and losses to profits, the business environment is further challenged with the obstacle of raising capital. With financiers ending up being careful of the pandemic’s financial ramifications, there has actually been a considerable decrease in financing activities. But does an opportunity for raising capital still exist?

Not simply regional Venture Capital (VC) and Private Equity (PE) firms, however lots of deep-pocketed international financiers have actually increased brand-new financial investment offers, electing not to wait for the present scenario subsides. In these uncertain times, a relevant concern then emerges– How can existing organizations and start-ups raise funds throughout the crisis? The response depends on 3 R’s – Research, Reassess, and Restructure.

Research

The start-up financing area might not be as active as it was around this time in 2015, however VCs are still looking for financial investment vehicles that can help them grow their wealth. Learn which financiers are more than likely to purchase the sector your existing business or start-up conducts commerce in, and after that create a shortlist of their names. Check out their current financial investments to collect crucial info such as the typical offer size, funding round (whether they typically buy existing organizations, or start-ups that are pre-revenue or post-revenue), and how active they are with the businesses they invest in (A concept known as “Smart Money”).

Your research study should aim to provide you with a clear point of view so you can zero down on the number of potential financiers that are “best fit” to finance your endeavor. You can likewise have an edge over your competitors who may be considering the very same capital sources when you understand the ins-and-outs of the market through your research.

Reassess

As soon as your research study is finished, reassess the practicality of your organization design in the present environment. If not, then you most likely require modifications to guarantee there is a real need for the products/services produced by your business.

The pandemic has actually brought a decade-shift in customer state of mind over a ten week period, which in turn is affecting their purchasing behaviour and costs routines. Clients are most likely to end up being more price-sensitive going forward and choose companies that can supply the finest value-for-money. Considering these external aspects, you will need to take the next strategy into consideration when planning for the future. This future should be shared with capital sources as an advantage to be taken.

Restructure

Considering that capital sources tend to invest in companies with a strong Unique Selling Proposition (USP), you have to guarantee that the pitch deck you create reflects the very same. Be it in terms of item development/production or the issue you are attempting to solve, capital sources want to know that your organization will be able to stand alone from the crowd of competitors.

Versus the present background of financial unpredictability, beginning with very high evaluations can irritate most financiers (Ok, let’s be real here… All will be irritated!) Rather than run the risk of irritation, set practical valuations so as to not just acquire capital source trust, but also alleviate their dilution danger. Preserving transparency regarding capital use is essential to draw financial partners outside of a pandemic, but even more important during the crises.

SUMMARY

Capital sources have actually gotten over the preliminary shock associated with the pandemic and are now looking to increase their investments once again. The loosening of investments point towards greater capital raising for existing organizations and start-ups.

Sam Palazzolo

If you/your organization is looking to raise capital, we should talk. Please contact us at info@tipofthespearventures.com.