Tip of the Spear Ventures

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

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30 Days to ETA | Day #1 – Startup or Acquisition?

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My goal for this 30 Days to ETA Series is simply to walk you through the journey of sourcing, searching, and ultimately buying a business. However, make no mistake about this whole world of Mergers & Acquisitions… There is nothing “simple” about it! And in this Day #1 post we’ll explore whether as an Entrepreneur you should Startup or Acquisition — That is, should you start your own business from scratch (i.e., Startup) or buy a business that’s already in existence (i.e., Acquisition).

The Purpose of the 30 Days to ETA Series

If we want to take a trip, I’ll begin my travels with an end destination in mind. In order to leave my home in Las Vegas, Nevada to get to Seattle, Washington, we all know that I need to head northwest. But what route(s) should I take in order to get there? How will I be traveling to Seattle — Airplane, Car, Uber, etc.? It would be helpful if I had detailed directions from a GPS to outline the quickest route possible. Because of the distance between Las Vegas and Seattle, I’m more than likely going to run into delays and problems somewhere along my path — Wrecks, construction work, road closures, storms. Inevitably, my GPS will reroute me and get me to my final destination (I hope!)

30 Days to ETA DAY 1 Startup or Acquisition

Attend Webinar Workshop: 30 Days to ETA

Mapping out directions for my trip is no different than you acquiring a business. You see, from my perspective it’s a matter of knowing what you want to happen at the end that should determine your focus at the beginning. Are you building your business to pass it down to the next generation? Or are you growing your company to sell it for profit? Do you hope to sell a lucrative business to your employees or to another entrepreneur so that it will continue into perpetuity?

You can spend 40-80 hours a week, 50 weeks a year, for an entire career working for someone else in their business helping them achieve wealth… OR you can spend the same amount of time creating your own wealth!

Sam Palazzolo, Managing Director @ Tip of the Spear Ventures

The whole idea behind this series is to help you understand the purpose of your business so that you can sell it for profit. Surely you don’t want to make just enough money to get by while you run a company. Don’t you want to make tons of money while you work and then make millions of dollars when you sell it? Is that even possible? Is it actually possible for you to build a sellable business?

What Happens at the End of a Business?

According to the Exit Planning Institute, or the EPI, 80% of companies below 50 million dollars in revenue never sell. 80%. Another statistic tells us that only 30% of family businesses survive into the 2nd generation. Do you understand that — There’s only a 30% chance that you will pass your business down to your children or have some other type of succession plan! What will happen to your company then?

The EPI has two other revealing statistics:

  1. 75% of the business owners (who make less than 50 million dollars) who actually sell their business aren’t even happy that they did after all is said and done.
  2. Three out of four companies will be changing ownership in the next ten years.

It’s The Opportunity of a Lifetime

So why are 75% of businesses changing ownership? Well, the Baby Boomers who wanted to sell or get out of business years ago ran into the financial recession of 2008. They couldn’t get out profitably then, so they’ve been holding onto their companies until they could recuperate a profit or until they’re just too old to continue. And now that we’ve just come out (🤞) of the pandemic recession on 2020, those that made it through the financial recession could, once again, slug it out to get through this recession as well. However, most Economists look for them to exit.

This presents entrepreneurs with a huge opportunity, or as I like to call it the opportunity of a lifetime. With all these Baby Boomers exiting the economy, they’ll be leaving behind the companies that they lead. Unless they have a clear path for succession (Kids that want to take over the business, relations that care to run the organization, and/or staff that want to buy the business from them) they’ll have to look for external sources to purchase the business.

I Lead a Startup… I have no Hair as a Result!

So here in Day #1 of the Series, appropriately titled Startup or Acquisition you may be wondering why I’m not telling you to start a business (Startup) as opposed to buying one (Acquisition)? The reason is that buying a business is a much better path to successful entrepreneurship. Why? The Small Business Administration (SBA) sites that less than 2% of startups achieve a private equity exit. Furthermore, about 90% of startups fail. 10% of startups fail within the first year. Across all industries, startup failure rates seem to be close to the same. Failure is most common for startups during years two through five, with 70% falling into this category.

The technology startup I lead was one of the few that succeed (I guess I’m a 2%’er!) So if startups are not a good opportunity to flex your entrepreneur muscles, what is? In my mind, the answer is simple — Acquisition or Entrepreneurship Through Acquisition!

Sam Palazzolo

Do You Really Need Venture Capital?

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The Point: “Do you really need venture capital?” is a question that we’re typically asked at Tip of the Spear Ventures, regardless of the organization is lead by entrepreneurs in a startup pursuit or an existing entity. The short answer is “No!” The long answer, well that’s a “No” too… In this post, we’ll explore the question do you really need venture capital… Enjoy!

Would you be surprised to learn that the majority of companies, successful companies, never took a dime from a venture capital firm? Companies on the Inc. 5000 in the USA, the Fast Track 100 in the UK, and similar lists everywhere didn’t follow what most would be consider the “conventional” script when it came to funding their business.

What did these organizations do then to raise capital? The huge majority of them never obtained a pound or dollar or rupee of venture funds, and they did not guarantee or mortgage their houses in the process. Rather, they were able to find ways to achieve getting their businesses up and running, then growing, without pandering to VCs or groveling to their company’s CFO.

These organizations accomplished their business funding goals by simultaneously solving pressing consumer problems, or by creating delightful customer experiences that transformed the previously mundane business that was present. Most of these entrepreneurs constructed vibrant, growing businesses without increasing treasure troves of venture capital.

“Where did their business funding come from?” you might ask. The lion’s share of these got almost all of the money–initially, at least, and sometimes for the whole journey–from a much more hospitable and agreeable source: their customers.

Sam Palazzolo

If you, or your organization are exploring Business Funding options, please drop us a line at info@tipofthespearventures.com.

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