in Angel Investors

Brokers, Smokers and Midnight Tokers

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In the past couple of days, I have seen a few emails from what could be best called funding brokers. They “facilitate” deals between early stage companies and potential investors. All for a consulting fee, usually for a percentage of the amount of funding raised. They have connections to high net worth angel investors and relationships with venture capitalists. Typically the fees and the engagement are model on investment banking particularly as related to later stage M&A deals.

It’s not a surprise. It’s a well established model. The Lehman model (we all know how well Lehman Brothers worked out for the rest of us) is 5% on the first $1MM raised, 4% on the second $1MM, 3% on the third $1MM, and 1% for capital above $4MM. It changes with equity versus debt financing, reducing to a 0.5-2% fee on debt rounds.

And particularly in later stage deals and M&A it is probably more accepted (acceptable?). In the transaction there are 3 potential parties:

  • Startup
  • Funder
  • Broker/Finder

Typically the person contracting the broker pays the fees. This means that it’s either the VC paying the fee, but if you are the startup it means that you’re paying the fee. And that fee is either increasing your dilution or decreasing the amount of the round. You can look at it as just paying fees like you pay your accountant or lawyer.But why, oh, why are you willing to give up chunks of your company this early to do things you are capable of doing yourself.

What does a VC think about brokers/finders?

Jason Mendelson published his take on “finders” back in 2007:

“Most venture firms don’t like the idea of brokers being involved and most venture financing documents have a clause that the company warrants that there are no brokers involved. Remember, the company’s money that is paying the broker is, in fact, the VC’s money that they invest in you.”

Jason continues “good VCs have plenty of proprietary deal flow, so they aren’t relying on brokers to show them deals”. If you can’t get in front the right investors, you are probably doing it wrong. There are a very limited set of high tech, emerging business model, high potential growth investors in Canada. Need a ‘show me the money’ list? There are other ways to raise your profile as a startup and get in front of investors. Andy Yang wrote a great piece about getting the most out of AngelList as a startup. If these channels aren’t working for you, you might want to go back and ask yourself is it the funders or is it me? What do I need to do to make my company more attractive to potential investors? Customer development? Product development? Etc.

How do you spell MBA?

We love to heckle MBAs, mostly because we’re all jealous that we don’t have one. But is it a requirement to raise funding.

“On the other hand, skills i bet won’t be important as much in the future:

  • having (only) a big rolodex or (offline) network
  • having a traditional MBA or investment banking background

Both of these are still important, but will become commoditized and marginalized by the availability of such information from online systems for social networks & reputation, and by the relentless advance of access to capital from a variety of channels.” – Dave McClure

No one is arguing that brokers shouldn’t get paid. The model is relevant. People work hard to build trust, reputation, networks and knowledge. With later stage deals the relationship, private placements, increased valuations, connections with CEOs and funders, it makes sense. But as Dave McClure rightly points out the value of the specific skills are changing. Particularly at the very earliest stage.

There is a great discussion on OnStartups about the finder’s fees. You can see the tension between entrepreneurs and investment bankers.

Social Anti-Proof

I don’t like finder’s fees for early investment rounds. Whether you call that seed and series A, I don’t know. I just don’t like seeing that capital taken out of the hands of the entrepreneur from operations. So just don’t do it.

As the company matures, the existing investment banking model doesn’t feel wrong. Many of the relationships, matchmaking, guidance feels like something you pay for, only after the deal closes. I feel like really early stage companies that have hired a broker must be broken, i.e., there must be something fundamentally wrong with the  team, the market, the advisors, etc. if they are unable that might explain why they are having difficulty raising an early round.

So it’s very wrong early. Ok later.

  • http://startupcfo.ca/ Mark MacLeod

    I never take meetings with companies that come through agents. Maybe I’m missing something hot with this policy. But I doubt it

  • http://www.facebook.com/andrew.sider Andrew Sider

    Founders – prove your hustle and get your own fundraising meetings! 

    I come across this situation too much: I received an inbound email from an agent yesterday and recently advised a startup I invested in to stop using an agent (I didn’t meet them through the agent).  
    Fundraising is such a critical piece of your business and it’s essential the founders lead it.  It’s not just about raising the dollars, it’s about being the best person in the world to get others excited about your vision, and refining your company’s identity throughout the fundraising process. From what I’ve seen, agents try to add value through investor contacts and pretty excel sheets.  Given the democratization of investor relationships via platforms like AngelList/Twitter and the reality that investors like @startupcfo:disqus don’t take meetings with agents nor invest based on pretty excel models alone, the agent model is clearly broken.  

  • Gerard Buckley

    This is why we @jaguarcapital take engagements on as a Trusted Adviser and not as a performance based agent. There is too much energy and time that must go into getting a company financed and it is tough to base a contract on referrals because that contact list will wear thin in a hurry 

  • http://www.jonasbrandon.com Jonas

    No place for intermediaries out of the gate. Taints a deal no question. Negative indicator aside, the fees attached to seed financings are de minimis, why supposedly financially savvy intermediates attempt to make a go of it is unclear.

    Later stage is a different story all together.

  • http://twitter.com/exhomedesign ralf möller

    I am of the same opinion as you do, if you consider that the man can say the same respect as you
    Spiegelschrank

  • http://twitter.com/adjoycapital Adam Joyce

    Does the same philosophy apply to customer acquisition?

  • http://davidcrow.ca/ davidcrow

    Lead generation models are ok, they depend on the stage of corporate development and the type of customers. It’s about understanding the growth and what happens when the economics change (ala Zynga). Read Adam Nash’s Series on Customer Acquisition http://blog.adamnash.com/2012/03/28/product-leaders-user-acquisition-series/

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