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.

Toronto Startup Event List Fall 2012

Getting ready for startup event fatigue? Toronto is an active ecosystem (based on total activity in the Startup Genome database). But there are a lot of upcoming events, here is my inital tracking of Toronto startup events list for fall 2012. The question is which events to attend and which ones to stay heads down and work. An actual guide would breakdown the benefits of each of these events. But I’m being lazy, I’ll add some commentary around each event. Or please feel free to add events and commentary. I’ll update the post.

And for those of you thinking about attending everything, go read Mark Suster’s Be Careful not to become a Conference Ho.

September 2012

October 2012

November 2012

December 2012

Waterloo Region StartupFest

Update: The team at Communitech recognize the gafoo. They are rebranding the event Tektoberfest (which I think is an amazing fun brand that is a fun play on Oktoberfest). Great work by Phil, Iain and a group of people that should be collaborating. 

Update 2: Looks like the Communitech folks have updated their branding. Calling the event Techtoberfest and the previously mentioned Tektoberfest. They’ve also rounded out the line up with more great speakers including Devon Galloway and Michael Litt from Vidyard, Carol Leaman of Axonify. This means you’ll get 2 Hot Sh!t Listers (Devon and Eric) and 2 more incredible CEOs as part of the line up. Shaping up to be a great event.

Techtoberfest, Waterloo Region, Oct 11-13, 2012

Apparently the Communitech team went to the rip, mix and burn school of branding. Founders & Funders – check. StartupFest – check. I guess imitation is the sincerest form of flattery. I gave permission for the Communitech team my support for using Founders & Funders in Waterloo Region. No bitching about that. Not sure how Phil Telio feels about his trademark being reused. I’d be upset. But I digress, maybe serves as evidence that more of the operational money goes directly to entrepreneurs and companies that Communitech helps, because it’s not going into new branding.

It looks like an amazing event!

They have a great line up featuring:

Given the strong history of Entrepreneur Week. And the speakers and types of events lined up, it is set to be a fantastic week.