Three Pieces of Controversial Advice Which Founders Receive

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July 17, 2023

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Every founder’s journey is paved with advice – some of it gold, others while well-intentioned are only as valuable lead. In this post, we’re tackling some of the most controversial advice that founders often receive. Let’s debunk some myths and set your startup on the path to success. Remember, not all advice fits all – it’s about finding what works for your unique venture.

1. “You should practise your pitch with “backup” VCs before trying for the tier-1s”

Drawing from a variety of experts in our network, it’s clear that the advice to “practice your pitch with ‘backup’ VCs before trying for the tier-1s” is not only misguided but potentially harmful to a startup’s fundraising efforts. Here’s why:

Firstly, every interaction with a VC, regardless of their perceived tier, is an opportunity to generate buzz and momentum for your startup. The simple breaking of fundraising news can create a ripple effect, attracting attention from other investors, potential employees, and even customers. Treating any VC as merely a “practice” run undermines this potential.

The venture capital landscape is more than just an industry; it’s a tightly-knit, clique-like community where key players are often interconnected. This interconnectedness means that impressions and reputations can spread rapidly within the network. If a founder treats a VC as a mere “practice run,” it could inadvertently tarnish their standing with their purported “tier-1s”. Moreover, if founders fail to get funded by these “tier-1s” they would have little choice but to fall back down the list. It’s not a good look if these VCs realize they have received differentiated treatment. 

Ultimately what matters is not the perceived tier of the VC, but their alignment with your firm’s vision, goals, and sector.

2. “You should focus on building out your back office”

One piece of advice that founders often receive is the need to focus on building out their back office. The back office, encompassing functions such as accounting, human resources, corporate services, and IT, is undeniably crucial to the smooth operation of any business. 

The case for building an in-house back office stems from the belief that having dedicated, internal teams for these functions can lead to better integration, control, and understanding of the business. However, this approach can be resource-intensive, requiring significant investment in infrastructure, technology, and talent recruitment.

On the other hand, outsourcing back office functions can offer several advantages. Firstly, it can be a cost-effective solution, eliminating the need for substantial upfront investment in infrastructure and human resources. Secondly, outsourcing can provide access to a pool of experts who specialize in various back office functions, ensuring high-quality service delivery. Lastly, it allows startups to focus on their core competencies, dedicating more time and energy to areas like product development and sales which directly contribute to growth.

Therefore strategic thinking is often required. How crucial is direct quality control to your company? The key is to evaluate the trade-offs and consider the company’s unique circumstances, growth trajectory, and resource availability.

3. “You should raise as much capital as you can”

This advice, while seemingly beneficial, can be potentially detrimental to the long-term success of a startup. The reasons for this are rooted in the principles of dilution in incentives, control, the pressure of high expectations and low cost discipline.

Equity dilution is a natural part of the startup journey. As a startup grows, it often needs to raise capital to fund its operations, and this is typically done by selling equity or shares in the company. However, the more equity a founder sells, the less control they retain over their company.

Let’s illustrate this with a simple example. Suppose a founder starts with 100% equity in their company. They then decide to raise $1 million in exchange for 20% of the company. After this round, the founder still retains 80% ownership. However, if they had followed the advice to take as much investment as possible and raised $5 million instead, they might have had to give away 50% or more of their company.

Moreover, raising too much money can inflate a company’s valuation prematurely, leading to greater expectations from investors. If these expectations are not met, it can result in a loss of investor confidence and a decrease in the company’s perceived value. Raising too much funding can lead to inefficiencies in operations and an inclination to spend just because the money is available.

So, how much should your company raise? The answer lies in careful planning and a clear understanding of the company’s needs. Founders should figure out a single number, as accurately as they can in order to reach the next step for their business’s evolution.

In the dynamic world of startups, navigating through advice can be as challenging as steering the business itself. At BlockOffice, our team of experts is dedicated to providing you with the guidance and support you need to make informed decisions for your startup’s success. We invite you to reach out to us to explore how we can help you sift through the noise and focus on what truly matters for your business.

Outside Venture Capital: Alternative Fundraising Strategies for Your Startup

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July 12, 2023

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As a startup founder, have you ever questioned the conventional wisdom around startup funding? While venture capital funding is often viewed as the gold standard, it might not always be the best option for your business. In other times, not everyone is endowed with a blue-chip background with VC firms at your beck and call.

The good news is that there are several alternative ways to raise capital for your business, each with its unique advantages and disadvantages. Here, we explore some of the options to consider:

Friends and Family (F&F)

Friends and family are often the first place startups turn to for funding. While not everyone has access to a wealthy network, those who do can secure funding relatively easily. However, it’s important to approach these relationships with caution, as they can become strained if things don’t go as planned. 

Furthermore, as friends and family investors are typically investing based on their relationship with the founder (their investment thesis being likeability and love), they may lack strategic industry knowledge a sophisticated investor might possess. 

When raising a F&F round it is also important to seek proper advisors who can help you navigate regulatory pitfalls. For example, if you’re an entrepreneur in the United States considering raising funds from friends and family, it’s crucial to be aware of certain regulatory exemptions. These exemptions can help you avoid the need to register the offering with the Securities and Exchange Commission (SEC). The most common exemption used is known as Regulation D. This allows you to raise capital from what are known as ‘accredited investors’ – typically individuals or institutions that meet certain financial criteria set by the SEC. Understanding and complying with these regulations is key to ensuring your fundraising is legal and above board.

Angel Investors

Angel investors are a unique breed of investors who are often seasoned entrepreneurs or established industry veterans. They invest in early-stage startups, providing them with the much-needed capital to kickstart their operations and fuel their growth. But the benefits of securing an angel investor extend far beyond the financial aspect.

Securing funding from angel investors can indeed be challenging depending on the entrepreneur’s network. It requires convincing lukewarm ties of your startup’s potential. However, if successful the effort is often worth it. Aside from the cash influx, the positive market signalling of super angels can significantly accelerate a startup’s growth trajectory.

These investors bring to the table their wealth of experience, industry knowledge, and a vast network of connections. They can provide startups with strategic advice, mentorship, and outside of it, their support could lead convincing potential partners, clients, and even more investors to join in the fundraise.

Debt Financing

Embracing debt as a financing option can be a strategic move for startups, despite the perceived risks and stigma. This method of funding, which includes business loans from banks,wealthy individuals, family offices or other financial institutions, offers startups the opportunity to access capital without diluting equity. However, it’s crucial to approach this option with caution. High interest rates can pose a significant burden for startups, and the terms of any loan should be scrutinized carefully. 

Key considerations include:

  1. Conversion Clauses: Some loans may contain a conversion clause, enabling the lender to convert the debt into equity under specific conditions. This could potentially dilute your ownership stake in the company.
  2. Covenants: These are lender-imposed terms that borrowers must adhere to throughout the loan period. They may include maintaining certain financial ratios, restrictions on additional borrowing, or regular financial reporting requirements.
  3. Repayment Terms: Understanding the repayment schedule is crucial, including the commencement of payments, their frequency, and the loan’s duration. Some loans may impose penalties for early repayment, so it’s important to be aware of these potential costs.
  4. Security: Many loans are “secured,” meaning they require collateral. If the loan is not repaid, the lender has the right to seize the collateral, which could be intellectual property, equipment, or other assets for startups. In some cases, lenders may require personal guarantees from the founders, making you personally liable if the company cannot repay the loan.
  5. Legal and Closing Costs: Securing a loan can involve significant legal and closing costs. These should be factored into your calculations when determining the cost of the loan.

When managed responsibly, debt financing can serve as an alternative tool for growth. It allows startup founders to retain control over their business while accessing the necessary funds. However, a robust revenue generation plan is essential to ensure the debt can be serviced and eventually repaid.

Crowdfunding

Crowdfunding is an emerging tool that democratizes the investment process, allowing anyone, not just the wealthy, to contribute to your startup’s growth. This method of fundraising can serve as a dual-purpose marketing campaign, simultaneously raising funds while building brand loyalty and engaging your user base. However, it’s not as simple as it sounds. Successful crowdfunding requires strategic planning, compelling storytelling, and relentless promotion.

There are several types of crowdfunding, each with its unique characteristics and requirements. Reward-based crowdfunding, popularized by platforms like Kickstarter and Indiegogo, allows contributors to receive a product or service in return for their investment. Equity crowdfunding, on the other hand, offers a slice of ownership in the startup, giving contributors a vested interest in the company’s success. This form of crowdfunding has seen rapid growth, with platforms like Wefunder and StartEngine facilitating millions in investments for startups.

However, crowdfunding isn’t a one-size-fits-all solution. It requires a significant commitment and a clear understanding of your target audience. You’ll need to create a resonant campaign that effectively communicates your startup’s value proposition and future potential. This could involve leveraging emerging trends like NFTs or launching innovative products that capture the imagination of potential investors.

Ultimately, crowdfunding isn’t just about raising funds; it’s about building a community around your startup. It’s about turning contributors into brand ambassadors who will champion your startup to their networks. It’s about maintaining control over your business decisions and growth trajectory, rather than being beholden to the high demands of venture capitalists.

Grants

Often overlooked, grants present a unique and often underutilized avenue for startup financing. These non-dilutive funding sources can propel your business forward without the need to compromise on equity. Governments, community organizations, and private entities worldwide offer a diverse array of grants aimed at bolstering entrepreneurs and startups.

In the United States, programs like the Small Business Innovation Research (SBIR) and Small Business Technology Transfer (STTR) offer competitive grants to small businesses operating within the technology and innovation sectors. Meanwhile, the European Union’s Horizon program provides substantial grant funding for research and innovation initiatives.

In Asia, and particularly in Singapore (where BlockOffice is based), the grant landscape is equally vibrant. The Singaporean government, known for its robust support of the startup ecosystem, offers various grants through agencies like Enterprise Singapore. These grants cater to different stages of a business’s growth journey, from early-stage innovation to international expansion, and can sometimes cover up to 90% of new hires’ salaries.

Applying for grants involves more than just paperwork. It requires a compelling demonstration of your business’s potential, your team’s capability to execute your vision, and a clear outline of how the grant will facilitate your goals. It’s also crucial to align your business with the grant’s objectives, which may be designed to stimulate economic growth, job creation, or industry-specific innovation. Therefore, navigating the global and regional grant landscape can be complex. Each grant comes with its own set of eligibility criteria, application procedures, and funding conditions. Therefore, thorough research and understanding of each grant’s specifics are essential before application.It is therefore paramount for companies to work with grant experts like BlockOffice and its partners.

Beyond the methods discussed above, there are more niche avenues for funding. These include bootstrap firms and family offices, strategic partnerships, revenue-based financing, and even competitions or startup incubators. However each of these options must be assessed on a more specific basis, tailored to your startup’s circumstances.

As you navigate your entrepreneurial journey, how will you choose to sift through the sea of advice you receive? Will you follow the crowd, or will you dare to challenge the status quo?

At BlockOffice, we understand that every startup has unique funding needs.Our team of experts can provide you with the guidance and support you need to navigate the complex world of startup funding. We’ll work with you to identify the best funding options for your business, and give you the tools you need to succeed. Don’t let funding be a barrier to your success – let us help you find the right funding option for your business today!