StartupNorth

Category: Investors

  • Founders & Funders: Nov 18, 2014

    It’s that time again – to bringing together the people that start emerging technology businesses and the people that fund them, early.

    Who should attend?

    Uhm, yeah. Founders & Funders.

    Founders

    You are a founder of a emerging technology company or a technology-enabled company. You are actively raising a round of capital or starting to think about raising your next round. Feels like we’re leaning to Seed and Series A – basically if you’re name is Tobi or Ryan most investors know who you are 😉

    Funders

    Space for funders will be limited. We have room for approximately 60 people. And we like to keep the ratio of 3:1 founders to funders. This means we roughly have room for 15 funders. We’re going to be picky, the target will be Seed and Series A.

    Why should you attend?

    Relatively small and intimate gathering of other emerging technology company founders and the people that fund them. The funder mix ranges from individuals that write first and very small cheques to larger institutional funds.

    • Social event – no formal pitches
    • Community is the framework – chance to talk to other founders about the current fundraising climate

    What to expect?

    It is a chance to have a bite to eat and a drink with other founders and investors that are actively investing in Toronto companies. It’s a chance to figure what has worked for others, to figure out which investors you want to spend more time with, and just connect.

    How do I attend?

    Submissions will end on Nov 10.

  • Syndicating Canada

    In 2013, Angel List launched its syndicates feature, a way for angel investors to pool their funds. By turning syndicates into a turn-key process, Angel List has made this fundraising option broadly available and drastically lowered the barrier to entry for individual investors. Unfortunately, this feature is only available to startups that have a US entity as part of their structure. Can we kick off the process of having more syndicates in Canada?
    (more…)

  • The Odds are You’re Going to Fail

    Now now chief, I'm in the zone
    Stay focused! We have this on the wall at GoInstant. Source Mike Mitchell

    I mean that in the most constructive way possible!

    You’re unlikely to recruit founders, raise money, gain traction, earn revenue, get acquired or go public. You’re very likely to fail.

    Here’s How Bad Your Odds Of Success Are

    To beat these odds, you need to be doing everything you can to find an edge, especially pre-funding or pre-revenue.

    Here are 3 of the most common questions I disappointingly ask early stage startups:

    1. You’re not full-time?

    It’s insulting to ask an investor for money if you’re not full-time on your startup.

    You need to be way beyond the one-foot-in stage before raising a round. If you don’t believe in the idea enough to go all-in, why should investors, customers or your team believe it?

    Full-time is the bare minimum. Large companies are working 40 hours a week, with way more resources. How can you accomplish more each day than them? You need to work longer. You can’t expect balance in your life, especially when the team is small. You need complete obsession over work.

    Assume there is competition working on the exact same idea. Even if you don’t know about them, imagine them. They are small startups, medium sized companies, and large enterprises. They are working relentlessly. They could launch faster. They could launch bigger. Let the threat drive you forward.

    Work weekends, work evenings, pull all nighters. Obsess over it.

    2. Where’s your demo?

    You need a demo, and it needs to be amazing.

    If you get feedback on that demo, consider it then implement it right away. Stay up all night and work on it. There should be at least two of you; the CEO demoing during the day and the CTO working all night to implement. Iterate, iterate, iterate, as fast as possible.

    The important thing here is momentum. You need serious momentum. You need an unstoppable train. Your momentum will attract your team, investors, and customers.

    3. You have side projects?

    Side projects will distract and kill your startup.

    You should be working with obsessive focus on one idea and one idea only. Facebook was almost killed by Zuckerberg’s side project.

    Side-projects are great for creativity. Many developers have side projects that they use to keep their skills sharp. Many companies have R&D labs or a percentage of hack time. Early stage startups are not the place for side projects.

    Write all your ideas down, then get back to focus. Constantly consider priority. What is the most important thing you could be doing right now to move customer or investor relationships forward? Your entire company should be thinking this way.

    You need every edge you can get

    Your only edge is to find an edge everywhere. Long hours, momentum, focus.

    It’s not sustainable, and that’s a good thing. If you can’t make it work then you fail fast. Pivot or fold and try again! If you CAN make it work you can hire enough people to bring back a healthy work-life balance.

    Set goals for your team in short intervals. We will achieve X by Y date or we will [pivot, fold, etc].

    Remember, beating the odds isn’t easy, but there are many ways to find an edge.

  • A Public Service Announcement

    I keep seeing entrepreneurs that complain to me after the fact that they took an investment with bum terms. It comes in many different ways, usually something like, “here’s my cap table what do you think?” or “I have this term sheet what do you think of the terms?”. The terms are usually appalling. But the entrepreneurs asking don’t know this until it is too late, they signed the documents, they spent the money, and now they want advice raising the next round.

    https://twitter.com/rhh/status/344232460533518337

    It looks like I’m not alone. If you can’t figure out this is war. This is information warfare. I forget that I work with a lot of great investors. They look for deals that work for them, their portfolio, for their investments and the potential investments. But I long ago realized that my interests and the interests of existing investors or potential investors were not always in my interest, particularly when things start to go bad. I wish all investors were as honest as Brad Feld with their desired investment rights. But there are bad investors out there. They look to use an information asymmetry to gain greater advantage over uninformed entrepreneurs. It allows them to buy large ownership percentages at reduced rates with additional rights that are not always in the favor of entrepreneurs. They tell entrepreneurs that it is ok, their capital brings additional non-dilutive government capital and the entrepreneur will have the cash to grow. They are trying to maximize their returns by exploiting the information asymmetry.

    And I don’t like seeing people being exploited.

    Clark Stanley's Snake Oil Linments

    It is not the first time that someone has used both simple and sophisticated tactics to take advantage of people. Part of the creation of the Securities Exchange Commission to allow, in this case, the US government to bring civil actions ” against individuals or companies alleged to have committed accounting fraud, provided false information, or engaged in insider trading or other violations of the securities law.” Before the enactment of the commission, consumers were protected by “blue sky” laws, but Investment Bankers Association told its members as early as 1915 that they could “ignore” blue sky laws by making securities offerings across state lines through the mail. Many investors are money grubbing capitalists and that’s the way I like it. But as an entrepreneur the only person looking out for you is you. So rather than  leave yourself ignorant and uninformed it is your responsibility to reduce the information asymmetry. After all, it is your company and…

    Knowing is half the battle

    The person that is responsible for your success and the success of your company is YOU!

    So stop blaming bad investors. Stop blaming lawyers. Stop blaming others. You need to take proactive steps to reduce the information asymmetry

    1. Get educated
    2. Due diligence on your investors
    3. Participate and share

    1. Get educated

    Fifteen years ago, this information was very difficult to access. The first book that I read about venture capital was High-tech Ventures: The Guide For Entrepreneurial Success that was written in 1991. Part way in to my second venture (I was employee number 6 for the record) John Nesheim released High Tech Start Up, Revised And Updated: The Complete Handbook For Creating Successful New High Tech Companies in 2000. This was my early education about venture capital, high potential growth companies. But most of the lessons came from the school of hard knocks. But things have changed. There are a tonne of resources available to entrepreneurs.  Here is a short list:

    This is your business. You are taking outside funding. You need to understand what is happening in the process and why.

    2. Due diligence on investors

    The investor is doing diligence on you and your company. They are going to talk to your previous investors, your employees, your customers and maybe your prospects. They will take to people in their circle of trust to learn about the market, expected performance metrics, and your reputation. It is incredibly important theyunderstand the risks and accretive milestones before presenting you to their investment committee.

    “I will not let my investors screw me” – Scott Edward Walker

    You must do your own due diligence on the investor before taking any money. This is going to be a partner in your company. It has often been described as a work marriage. You should need/want to understand more about this person, the firm they work for, and how they treat their existing companies and CEOs. Go for dinner, have a glass of wine, talk about your company, and figure out if you can work with this person for the next few years. Talk to other CEOs that they’ve invested at a similar stage as your company. Talk to the ones that succeeded, to the ones that failed. Talk to the people that the investor sends to you to do diligence. There are so many tools to expose social relationships that didn’t exist: LinkedIn will allow you to send InMails to past CEOs; Clarity allows you to connect with a lot of entrepreneurs and mentors that have a connection with the investor; AngelList is a great tool for discovery but it is also becoming a great way to see investments and help you in your diligence.

    “the diligence factor was that I knew them, but had never taken money from them. It’s hard to know how people are going to react when they are at risk of losing money because of something you are directly responsible for until you are actually at that point.” – Brandon Watson

    3. Participate and share

    The above resources are amazing. However, I often learn best from the examples of others. I learned a lot from Mark Organ at Influitive. Mark shared stories about the good and the bad decisions he made in the early days at Eloqua. You learn a lot when you share a hotel room on the road as grown ups.

    There are formal meetups like Founders & Funders. But seriously in order to have the trust, you need to get out of the office and the formalities of these events. The conversations come over a poker game. But you’ve got to put yourself out there, be vulnerable, and find people that can teach you something.

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    I believe so much in this that I’m renovating my house. I want a big kitchen for family dinner. All of my startups will be getting an invitation to Sunday night dinner. Why? Because I’m betting my family’s future on them, and I want them to be a part of the family.  This includes the ones that I’ve invested in already and any of the companies that I’m looking at investing. I want them to hang out. I want them to help each other. Share metrics and tactics. I want them to tell you that I’m slow to invest. I’m slow even after I’ve said yes (but I hope they understand that it is because sometimes I have to do some consulting work to have investment dollars). (Now I just need the renovations to finish).

    Feeling screwed?

    I’m starting to think about publishing shitty term sheets, depending on the risks our lawyer identifies, with investor names. I’m not sure public shaming is right model, and my lawyer might tell me it is not. But I think that we need to elevate the conversation we as entrepreneurs are having with each other and our investors.

    I’ll be publishing prospective term sheets in the next few days.

    Reach out if you want to share.

     

  • Atlantic Canadian Founders Deserve Better Than FAN (First Angel Network)

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    Recently, I have had the pleasure of travelling to the East Coast and working with founders. I have seen the amazing companies and the founders across the region. Moncton, Halifax, Saint John, St. John’s and Charlottetown (among the varied cities). There are amazing companies like LeadSift (disclosure: I work for OMERS Ventures who is an investor in LeadSift), GoInstant, Verafin, Clarity.fm, Lymbix (disclosure: I sit on the Board of Directors), Introhive, InNetwork, Compilr and others.

    The region is bristling with great founders, great ideas and a lot of untapped talent. It also holds some amazing secrets like Toon Nagtegaal (LinkedIn) who runs a (also ACOA funded) program for startups that I have been lucky enough to be invited to co-teach (disclosure: this is a paid consulting gig). There are amazing people and companies across the Atlantic Region. It’s only a matter of time until there is another HUGE exit.

    However, the region also is a small community that has it’s own culture and politics. Those small town politics have allowed nepotism and crony capitalism to seep in and it has allowed terrible deal structures to be put upon unsuspecting founders and companies. This pisses me off!

    When we started StartupNorth we promised ourselves we would always stick up for founders and startups when it mattered. We continue to  support, educate and connect startups and founders with other founders, with capital, with new ideas and educational resources. We need to identify the BULLSHIT that is being allow to pass in Atlantic Canada as supporting entrepreneurs so that the amazing investors that are there don’t have to compete with a backwards and ill-conceived entity.

    First Angel Netowrk

    Who? I’m talking about First Angel Network (FAN). Why? Here is an example of the full deal they present to entrepreneurs:

    1. Startups apply to pitch the non-profit FAN which is funded and supported by ACOA and others.
      • Most of this funding goes to pay salaries as well as to cover travel expenses.
    2. If a startup is selected to pitch FAN, the startup must agree to pay $3000 to the non-profit  FAN.
    3. Startups MUST also sign a “Consulting Agreement” with a for-profit consulting company owned by Ross Finlay and Brian Lowe.
      • You can NOT pitch the non-profit UNLESS you sign the consulting agreement with the for-profit company.
    4. Startups then pitch the non-profit and if successful get a deal done
    5. If a deal is done, the consulting agreement gives the for-profit shell company and FAN organizers 8% of the total proceeds of the transaction
      • 4% in stock directly to Ross Finlay and Brian Lowe (not the consulting company, directly to the individuals)
      • 4% in cash to the consulting company

    This is so wrong! On so many different levels. This is worse than pay to pitch.

    Crony Capitalism

    The thing that pisses me off the most is that the most nefarious part of the process, the consulting company and payouts to individuals, is not listed on the FAN Funding Process page. We have individuals who collect a salary that is partially (if not completely) funded by a government agency (ACOA). First Angel Network Association received at least $1,123,411.00 in funding between 2006-2011 (nothing reported for 2012). That is an average of $224,682.20/year in funding, and that is just what we could source publicly.

    Getting paid by a government agency to source your own deals. Seriously, if you thought management fees were high, what about tax dollars going towards salaries of investors. They are using federal funding to source their own deals and cover expenses and salaries. Something is wrong here. Then they charge entrepreneurs for the privilege of their investment. Which someone already paid them to source. The cost of this capital is incredibly expensive to entrepreneurs taking this investment and to the region.

    Atlantic Canadian entrepreneurs and startups deserve better than this.

    Do Not Pay to Pitch

    Startups should not pay angels or angel networks to pitch. Jason Calacanis wrote the definitive piece on why startups should not pay angel investors to pitch.

    “It’s low-class, inappropriate and predatory for a rich person to ask an entrepreneur to PAY THEM for 15 minutes of their time. Seriously, what is the cost to the party hearing the pitch? If you answered “nothing” or “the cost of two cups of coffee” you win the prize!”

    Jason eloquently describes why this doesn’t work. It is a imbalance between cash poor startups and rich investors. The imbalance is made worst by. We have been running Founders & Funder$ events. There is no imbalance. Everyone pays the same. Founders. Funders. We try to curate the audience to ensure that only founders actively raising money attend. We also invite a limited number of funders that are actively doing deals (criteria change based on angel investor versus institutional investors). We want everyone to be on equal footing.

    And there are a lot of startups and founders that will argue that Jonas, Jevon and I have strong track records (well at least Jonas & Jevon do) and even stronger networks:

    “Now, before you go saying “Jason is connected and he has access to angels” remember that I hustled my way into this industry from nothing. I networked at free conferences and figured out a way to get on the radar of uber-angels like Ted Leonsis, Fred Wilson and Mark Cuban. They paid attention to me because I had good ideas. If my ideas had sucked, they would have ignored me. Period.”

    Our goal has been to help connect and educate founders and startups. We continue to believe that it is not government agencies, or venture capitalists, or angel networks that will build the next generation of successful Canadian companies. It is the founders and the employees of these startups. It’s the big ideas and the big execution that result from the efforts of dedicated people. They are the ones who deserve a great deal, not some middle man.

    What can you do?

    1. Do not pay to pitch. Avoid groups like First Angel Network like the plague.
    2. Tell the people who fund FAN and other angel groups who have a pay to pitch model that you believe they should cut off funding.
    3. If you know an angel investor within an angel networks that make you pay to pitch like FAN, tell them what a bad deal they are getting and offer to connect them to great founders.
    4. Help fellow entrepreneurs by making introductions to qualified angels directly
    5. Explain to your peers that an investment by networks which make you pay to pitch, such as FAN, can only be considered as a means of last resort, and taking this money will affect your future funding opportunities negatively.
    6. List your startup on AngelList, our StartupIndex, Techvibes index and other places to get exposure FOR FREE to great investors

    Atlantic Canada is generating some of the highest returns in the country right now for angel investors. The community is small but very focused on big outcomes and it is really showing. I think it’s time to cut ties with this old model and to start giving the founders in Atlantic Canada a deal worth taking.

  • Aim for your next valuation

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    AttributionNo Derivative Works Some rights reserved by Alex Schwab

    “Ain’t no need to watch where I’m goin’; just need to know where I’ve been.” Mater in Pixar’s Cars

    This is wrong. But it is the behaviour that a lot of founders execute on after raising money.

    I’ve been thinking a lot about Venture Math, Valuation and Accretive Milestones and whiners. I was struck at how many entrepreneurs seem to be working towards the post-money valuation of their last round of financing. I think this is wrong. You should aim high. Higher than the post-money of your last round. You should be acting like the pre-money for your next round. That is the only way you will drive the necessary milestones for the next raise.

    Skip Level

    Let’s make a few assumptions.

    You are raising $1MM on a $4MM pre-money valuation. This gives you a post-money valuation of $5MM. If you subscribe to 2x valuation as the floor for the next round. This means that you need to start behaving like your company is worth at a minimum $10mm. That’s right, a minimum of 2x your post valuation. You should be targeting >2.5x, so in our example you need to start acting like a company that is valued at $12.5MM.

    Your behaviour and decisions need to reflect milestones necessary to raise your next round of capital. Not the round you just closed.

    “The art of raising a round it to raise enough money to get to a significant milestone, and not too much money taking too much dilution too soon. So how do you define the milestones.” – David Crow

    This is incredibly difficult. Because the balance is crucial to the long term success of the company, getting it wrong and you’ve raised too much money you will be diluted, but you might have enough money to change direction and try again. If you aren’t behaving like the end point has changed, the company will be executing on goals that are too small to raise the next round.

    Don’t aim for the Net Present Value milestones. You’ve already raised money to achieve those. Start setting milestones for your future value. And start delivering against those.

  • Mission Accomplished – StartupVisa Canada

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    Remember back in 2011 when I was xenophobic and wasn’t supporting Startup Visa? To the credit fo the incredible StartupVisa Canada Initiativea team, which I was lucky enough to join and support, the Federal Government is launching a new class of immigration visa with the participation of CVCA and NACO. Check out Christine Dobby’s summary from the press conference (it’s where all my statistics and data are from). Go read Boris Wertz’s story about Summify founders and the impetus for Startup Visa Canada.

    “We believe startups to be the driving force behind job creation and prosperity,” says executive director Richard Rémillard. “We need to be pro-active in attracting foreign entrepreneurs.”

    The new visa is replacing the old “entrepreneur class” visa, which required the applicant/immigrant to hire one person for one year. In 2011, the federal government issued approximately 700 of the old entrepreneur class visa. The government is making 2,750 visas, issued to immigrants based on selection and funding by venture capital investors. Immigrants receive immediate permanent resident status. Looks like a pilot program with a 5 year lifespan, with the opportunity to make permanent depending on uptake.

    Thinking by Zach Aysan (zachaysan)) on 500px.com
    Thinking by Zach Aysan

    My issues back in 2011 and previously, were not with the intent of the program. But in the proposed implementation details. One of the biggest assets, in my not so humble opinion, is the population diversity, with 46% of Toronto’s pouplation being foreign born. It is the creative tension between differing viewpoints that makes Canada an amazing place. The implementation of startup visa makes Canada an even more attractive place to recruit foreign born scientists, engineers and now entrepreneurs. I love it!

  • Fundraising, Valuation and Accretive Milestones

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    I keep having a similar conversation with early stage entrepreneurs about fundraising and valuation. “Do you think a $1.5MM valuation is good?” “How much should I be raising?’ Well, it depends.

    I’m finding more and more, the conversation about valuation is one that resembles not being able to see the forest because of the trees. Early stage entrepreneurs tend to fixate on valuation and assume product is the biggest risk at the seed stage thus defining product launch metrics as key metrics. Often, valuation and risk mitigation are tied together. And the milestones or traction metrics required to mitigate risk can help establish valuation. 

    Valuation

    Fortunately, valuation is a topic that others have covered. Nivi and Naval, on VentureHacks, have provided incredible insight into early stage fundraising over the past 5 or 6 years. The advice is often summarized, “as much as possible is especially wise for founders who aren’t experienced at developing and executing operating plans”. The translation means that founders see rounds of seed stage companies raising $4.2MM at what must be a huge valuation.

     “‘As much as possible while keeping your dilution under 20%, preferably under 15%, and, even better, under 10%.’ ” – Nivi

    You can make some basic assumptions about the valuation. Most seed stage companies should be looking keep dilution in the 15-20% range. The specifics will be determined in fundraising but you can start to do some back of the napkin estimates:

    You start to see a range for how much a company will raise at what valuation. The numbers aren’t set in stone but they provide a framework for estimating the amount valuation. As Nivi points out the difference between a seed round and “a Series A which might have 30%-55% dilution. (20%-40% of the dilution goes to investors and 10%-15% goes to the option pool)”. The more you raise early, the more dilution you can expect. The goal becomes managing the different risks associated with startup. You also see why raising debt early, which allows companies and entrepreneurs to delay valuation until certain accretive milestones, is attractive.

    “The worst thing a seed-stage company can do is raise too little money and only reach part way to a milestone.” – Chris Dixon

    So given the back of the napkin dilution terms, what are the milestones that you will need to hit in order to raise the next round.

    Raising the next round

    So you’ve raised a round, how much should you raise at the next round?

    I like the rule of thumb that Chris Dixon uses. “I would say a successful Series A is one where good VCs invest at a pre-money that is at least twice the post-money of the seed round.” The expectation is that companies are roughly going to double their valuation at each raise. This isn’t to say that a 2x increase in value is your target, it’s the minimum, the floor. The art of raising a round it to raise enough money to get to a significant milestone, and not too much money taking too much dilution too soon. So how do you define the milestones. The milestones

    “partly determined by market conditions and partly by the nature of your startup. Knowing market conditions means knowing which VCs are currently aggressively investing, at what valuations, in what sectors, and how various milestones are being perceived.” – Chris Dixon

    So part of the market conditions, i.e., raising money in Canada is different than raising money than in Silicon Valley, New York , Tel Aviv. You are measured against your peers, and this might be defined by geography of the company or the VC. Being connected with other companies, advisors and investors can help provide insight in to the fundraising environment. The second part is determined by the nature of your startup, but generally expressed as measures of traction. We’ve talked a lot about getting traction and what traction looks like to a VC.

    “The biggest mistake founders make is thinking that building a product by itself will be perceived as an accretive milestone. Building a product is only accretive in cases where there is significant technical risk – e.g. you are building a new search engine or semiconductor.” Chris Dixon

    Entrepreneurs tend to focus on the product early. This is usually because the product is something that entrepreneurs can directly affect. But the product risk, is may not be the  biggest risk that entrepreneurs need to mitigate early. The trick is figuring out which risk you need to eliminate to satisfy potential investors. And you can try to figure this out yourself, but I like to see entrepreneurs engage investors and other founders to get their opinion. The discussion usually is a combination of what other startups are seeing in the market place as milestones from investors (yay, market place data). Then you can work backwards the necessary resources and burn rate to reach those milestones.

    Thoughts?

    Additional Reading

  • Less boardrooms, more dinner tables.

    People have become really good at pitching. The art has turned in to a bit of a science and if you do ever find yourself in front of a room of people it is par for the course for you to “nail it”. The pitch, it seems, is dead media.

    It’s time to stop obsessing with your pitch and start building relationships.

    If you are going to raise financing for your new product then you need to learn what it means to build relationships.

    tumblr_ldfuxecoUp1qbbu2w

    We started Founders and Funders on the basis that you would never want to accept investment from someone you couldn’t eat a meal with. What better way to find out than to eat a meal with them? It works incredibly well.

    You need to find ways to end up at more dinner tables and in less boardrooms.

    Also: Eat with your mouth closed ya filthy animal.

    Funny story. When I was raising an angel round for my latest company I met a fairly prominent investor for lunch. I ordered a $15 sandwich combo. He got two doubles of Grey Goose, the Rib Eye, and a glass of wine. Then dessert! The shithead then stuck me with the bill! I kid you not. He then got in his car and drove off, I contemplated calling in the DUI. The hell if I was going to let him invest in my company. It was worth the $120 it took to figure it out.

    I tell every entrepreneur that story, and I name names!

    Then there was the time I met with Steve Anderson at a crowded bar. You should consider an invitation to meet an investor at a bar or restaurant a golden ticket. Steve came in, he was starving. I was a bit nervous so I didn’t eat much but we shared some appetizers. He was cool as shit and I knew I wanted him in my round before that meeting was over. Having a coffee and being forced to sit in a corner of a busy bar helps you get almost every “is this guy/girl legit? can I talk to him/her without needing to watch myself?” sort of stuff out of the way.

    I met another investor at a Yogurt shop (he gave a fake name and told them my name was Mike). Another one in a Tiki bar and another in a co-working space.

    Get out of the boardroom. Loosen up. Your pitch sucks but your product is cool, and you are even cooler.

  • 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.