Who can I hire to help me raise funds for my company? I’ve never done this before and am running out of time before my company is out of cash!
I hear the complaints all the time. Entrepreneurs dislike the tedious process of soliciting angel, venture capital and private equity investors. They would rather write code, launch cool websites or talk to customers than solicit potential investors.
Is there another way to raise business capital that is less time-consuming and frustrating? Yes, but there are risks to know about.
In the venture finance community there is a broad range of individuals and firms that specialize in helping promising companies raise equity funds from investors. Some offer excellent services; while others don’t or simply can’t.
At one end of the service spectrum are unlicensed business consultants who lure all-to-trusting entrepreneurs with promises of fast dollars, sky-high valuations and complete autonomy over the strategic direction of a company. They say they “know everyone” and promise to “do all the work” provided entrepreneurs pay upfront fees.
At the other end of the spectrum are investment bankers and business consultants who understand effective deal making. These well-connected intermediaries generally don’t risk their reputations by taking on client assignments that are unlikely to close in a successful way.
At their best, qualified intermediaries can save entrepreneurs considerable time in developing a list of qualified potential funding sources. I stress the word “qualified” because any intermediary can come up with a list of wealthy individuals, angel investment clubs or venture capital funds. Real expertise comes from knowing the appetite and expectations of investors before making phone calls on an entrepreneur’s behalf.
Effective intermediaries also coach entrepreneurs before investor meetings and help keep an entrepreneur’s emotions in check when investors ask hard questions. They earn respect within the investment community because they take the time to read all company documents and “scrub the numbers” for projection errors before releasing to targeted investors.
It’s also important to appreciate that there is not too much standing in the way of anyone going into the business of helping entrepreneurs raise capital for their companies. It’s not uncommon these days for underemployed accountants, lawyers and stock brokers to enter the field.
At the federal level, the Financial Industry Regulatory Authority or “FINRA” has specific licensing requirements for individuals who act as intermediaries on fundraising transactions in which securities are sold to investors. Unfortunately, these rules are rarely enforced for small, private company financings.
Obviously, you have to be cautious. If you hire poorly qualified intermediaries who don’t give investors a good first impression, then you won’t likely succeed in raising funds for your business on the best terms possible.
Here are seven tips for selecting brokers, investment bankers and other representatives to help you raise business funding.
- Compare talent.
Meet with at least three intermediaries before making a decision. A first meeting should not be a billable event. A good intermediary should ask you challenging questions about your business and its competition. This way, the intermediary can access key factors that will increase or decrease your chance of raising funds on the best terms possible. Great intermediaries ask the same questions that investors ask.
- Hire industry experience.
Choose intermediaries who specialize in your type of transaction and have closed a deal “in the space” within the last 18 months. If you are seeking venture capital fund investors, only work with intermediaries who have closed one or more transactions with venture capital funds. Now more than ever, entrepreneurs have to select fundraising support to match their company’s needs.
- Don’t make fast decisions.
Do not hire any intermediary who pressures you to “sign up now.” Run out the door if the intermediary says he or she is about to have a meeting with a wealthy investor and needs your signature before talking about your company. Reputable intermediaries don’t behave this way.
- Call references.
Encourage the intermediary to talk about recent fundraising activities. Pay attention to the details. Write down the names of the client companies and when the money was raised. Then ask if you can contact the CEOs of the noted companies for references. If the intermediary hesitates, slow down and compare other options.
- Avoid big talkers.
Be suspicious of any intermediary who estimates deal pricing or valuation terms during a first meeting. The intermediary doesn’t yet know enough about your business to make any professional representations. Also avoid intermediaries who approach negotiations by just “shooting high.” While it’s nice to think about running a company with a super premium valuation, the most active investors in the venture community avoid investing in companies that are run by “unrealistic” entrepreneurs who are not knowledgeable about deal pricing issues.
- Turn away two-timers.
Ask prospective intermediaries about other client obligations. If the intermediary is too busy, you might not get the attention you deserve. Also make sure that the intermediary is not pitching other clients to the same funding sources.
- Read the fine print.
Don’t sign agreements that call for a period of exclusivity longer than nine months to one year. Entrepreneurs should also have the flexibility to cancel agreements. If you do not understand the agreement terminology, ask a securities lawyer to explain it to you before you sign on the dotted line.
Best Fundraising Recommendation
Even if you hire a knowledgeable intermediary, only you can raise money for your company. It makes sense too.
While intermediaries can use their contacts and expertise to set up meetings, ultimately investors will make their final decisions based on the company’s management team and prospects for growth. Investors are counting on you to put their money to work wisely, not the intermediary.