30 West 3rd

Very Early Stage Technology Investing

Intermediaries and Early Stage Investing

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Early stage companies attract all manner of people who promote their skills in helping raise capital.  Some are legitimate and can help, others are not.  To avoid problems, an entrepreneur should be aware of the realities of working with intermediaries.

First, at the risk of offending colleagues and acquaintances who are intermediaries, it is usually a mistake for an early stage company seeking professional venture/angel capital to engage an investment banker.  It is an immediate turn off to those investors, and they won’t pay the fees out of proceeds.  I would prefer the company/entrepreneur engage an experienced advisor/mentor who can give them advice and counsel for equity or an hourly fee.

An entrepreneur with an idea worthy of venture investment should be looking for more than money from those investors.  You will want to know and interact directly with the angels/venture partners.  Build a relationship based on trust, respect, and candor.  As an investor, I want to get to know the founder(s) and management team.  I want the team to have the confidence that no one can better represent and advocate for the opportunity.

Raising capital yourself also demonstrates the courage, diligence, and persistence that will lead to success in building the early stage business.  While advisers/mentors can be helpful, in the end the founders are going to have slog it out.  You should not leave the capital raising process to others.  Own it and learn from it at the beginning.  You’ll be doing it again and again.

So what role do intermediaries play?  True investment bankers shop deals to known networks of investors who rely on the banker’s diligence or reputation.  It is nearly impossible for an investment banker to thrive representing early stage companies.  Check references, both investors and companies they’ve represented.  Make sure the deal is structured and valued at market.  A round done at uneconomic terms will get corrected eventually, usually at great cost in time and angst.

Market rates for book prep and shopping the deal is a modest 5-10k monthly retainer (cap it and limit it to 90 days) and 5% of proceeds.  Some bankers sweeten the proceeds with another 5% of proceeds warrant position.  Simple referrals/finders fees where you use your own materials are 1-2%.  If you do the math on a series of $2mm raises, you’ll see why it’s hard for bankers to make serious money working on early stage deals.

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Written by Mike Venerable

July 9, 2009 at 3:19 am

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