Tip of the Spear Ventures

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raising capital

Business Funding – Bootstrapping

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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 – Is Bootstrapping an option?” The short answer is “Yes.” Bootstrapping is just one way to accomplish business funding, but it also has the most heartache or ramen diet attached to it. So in this article we’ll explore business funding through bootstrapping… Enjoy!

Small business funding refers to the means by through which an aspiring or already existing business owner gets enough money to begin a new business, buy an already existing business or finance future business activity. A small business is usually defined as a business that earns less than $10 million per year and employs fewer than 100 employees. This definition does not necessarily mean that small businesses have a low income or are considered unprofitable. Small businesses can be very successful, and many small businesses are able to become profitable even with relatively small capital investments.

Bootstrapping, on the other hand, refers to using existing resources (cash) to launch a business. Bootstrappers typically start with personal savings or credit cards to obtain the funding they need to launch their business. These loans are typically secured loans, meaning that they require collateral in the form of personal assets or property owned by the borrowers.

There are many small business funding options available to small businesses in today’s economy. Most angel investors and venture capitalists prefer to invest in well-established businesses with proven track records and a good track record of success (revenue). The more risk involved, the less likely these investors are to provide business funding in raw form, such as business loans. However, even in the absence of venture capital and angel investors, there are numerous other sources of funding available to small businesses, including personal savings, business loans, credit cards, small business investment funds, lease option funds, business franchises and subcontractor companies.

Sam Palazzolo

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

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.