Dissecting Services Offered to Your Startup
One of the reasons I asked my friend, Les Hamashima, to join me in this startup was my acknowledgement that I need help with business operations. Practicing medicine was so much easier that running a startup. I understood the relationships with patients, hospitals and vendors. The startup world is less transparent, especially when you begin to get solicitations from service providers.
After working on EMF Disturbance Monitors for more than a decade, I have begun to understand the different categories of startup services. I am trying to raise up my business and make it commercially successful. Startup companies represent new business opportunities for established companies like venture capital, business service providers and business consulting firms.
If you are a new startup, maybe my analysis will help.
Every startup needs 3 business services: legal, accounting and insurance. Lawyers help you incorporate, help protect your intellectual property and help you write documents that define your relationships with investors and other businesses. Accountants help you categorize your expenses and prepare your taxes so if you are acquired, your finances are in a format that other businesses can understand. Lastly, insurance brokers provide protection from liability in the event your product is accused of poor performance or injury.
Venture capital companies are the unicorn of startups. Venture capital has become part of the portfolio of wealthy individuals, family businesses and universities. Most are done professionally by companies that review pitches from promising startups and choose the few that are most likely to succeed based on criteria developed by each venture capital company. My advice is to shotgun venture capital companies with your “leave pitch” and hope that one sticks. They are unlikely to seek you out, so make it a habit to reload your shotgun regularly and seek out new sources of funding by pitching at events or through the online portals of the venture capital solicitations.
Business service companies offer services like marketing, management and finance. Many offer “fractional” services like a part-time CEO, part-time CFO, etc. This concept is similar to staffing firms. These services are critical to the success of your startup. Often, you need these services before you can afford to hire your own full-time employee in this role. Hence, the part-time or “fractional” employee concept. Many startups use these services in their early stages, until they can afford a full-time employee of their own. The only down-side of the “fractional” services concept may be some awkwardness (real or perceived) if the business services company that sells this service has it’s own venture capital arm. Essentially, the insider they provide your company gives their company an advantage in negotiations about investment or acquisition. This conflict can be mitigated by careful wording of your contract.
Lastly, there are business consultants. These are companies that offer advice about business operations or “warm” introductions to venture capital. These solicitations are the least transparent. Some have internal venture capital operations and others tout connections with external venture capital companies. Many of the solicitations we have received are seeking a salary and a productivity bonus (“finder’s fee”) for any venture capital obtained through their connections. Professional venture capital companies employ individuals who seek out promising startup investments for their company to review. I understand this process and see the value because the employee gets a bonus from their employer (not me) for finding a good investment opportunity. I see more risk in paying a consultant a salary and a finder’s fee if the consultant underperforms and does not close any venture capital deals while under contract with me.
I have noticed a trend that companies are combining these services into a “one-stop shop” where you can buy business services, business consulting and potential venture capital from the same provider. This makes your decision as a founder much more complex. I think the best idea is to prioritize what services your startup needs and deal with the industry leaders in those services. We all need venture capital but we are more likely to get noticed if we have a strong and profitable business. I hope this review is helpful to young startups and can help you clarify why these kind of companies are seeking you out as a client.
