Tip of the Spear Ventures

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

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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

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

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.