Published April 23, 2012
Raising money for a business is one of the most hated and avoided tasks among startup entrepreneurs and small business owners. It’s understandable too, because the process of cold calling strangers and asking for cash is time-consuming, intimidating and stressful.
Is there another way to get the job done?
In the venture finance community there is a broad range of individuals and firms that specialize in helping promising companies obtain debt or equity financing. Some offer excellent services; while others just prey upon naïve, wishful thinking entrepreneurs who say they “know everyone” and will “do all the work” provided entrepreneurs pay non-refundable upfront fees.
More respectable service providers include investment banking professionals who understand the nuances of effective deal making. These well-connected intermediaries generally don’t risk their reputations by taking on assignments that are unlikely to end up in a successful transaction.
At their best, 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 fundraising 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.
Most entrepreneurs are not aware 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. The regulations are largely directed for enforcement purposes to retail oriented brokers who sell securities of publicly-traded companies.
There are a few states that attempt to regulate fundraising representation by requiring individuals to obtain a real estate license before representing privately-held companies. However, the skills required to sell residential real estate are quite different than what is needed to help entrepreneurs in manufacturing, high technology and service industries to negotiate sophisticated stock transactions with investors.
Obviously, entrepreneurs have to be cautious. Here are seven tips for screening intermediaries:
No. 1: Compare talent. Meet with at least three candidates to compare expertise and experience. A good intermediary should ask you challenging questions about your business and its competition too. Don’t rule out an intermediary for asking the same questions that investors will ask.
No. 2: Don’t make fast decisions. Don’t 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.
No. 3: Check out deal 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 supposedly raised. Call the company CEOs to confirm transaction details and client satisfaction.
No. 4: 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 assessment of how prospective investors will likely value or price a prospective transaction.
No. 5: 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 doesn’t pitch two clients to the same funding source.
No. 6: Read the fine print. If you do not understand the language within a proposed agreement, ask a securities lawyer to explain the terms and conditions to you. Resist signing agreements with long term exclusivity conditions.
No. 7: Acid test. 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 funding, choose an intermediary that has closed at least one transaction with a VC during the last two years. Match expertise to your funding requirements and goals.
No one will ever watch out for your business better than you. Investors know this too, that’s why they ultimately will size up your business potential by what you say, rather than what an intermediary says.
Susan Schreter is a 20-year veteran of the venture finance community and a university educator in entrepreneurship. Her work is dedicated to improving startup longevity in rural, urban and suburban America. She is the founder of www.takecommand.org, a community service organization that offers the largest centralized database of startup and small business funding sources in the U.S. Follow Susan on Twitter @TakeCommand.