98. Startup Fundraising Facilitators 🐍 Surviving the Pit of Serpents!
If you're a founder and reading a site like this, you probably have noticed fundraising is hard.
Raising money from investors is a long, arduous process, so many founders seek help.
In response, a whole cadre of people specializing in that sprang up, often called fundraising facilitators. The problem is that most of them appear to be ineffective at best and harmful at worst.
In this article, I cover how these people operate, some rules around fundraising facilitators, and some red flags to watch out for.
This article is part of our series on fundraising. You can find all the other articles HERE.
Fundraising facilitators go by many names, including Fundraising Facilitators, Fundraising Finders, Fundraising Consultants, and Placement Agents.
I have seen and worked with these people from both sides of the table. As an advisor, I’ve worked alongside founders trying to use them to accelerate their pre-seed and seed rounds. As an investor, they constantly contact me to look at their latest deals.
I even dealt with a fraudulent agent who damaged my company through their unscrupulous activities.
While planning this episode, I contacted many startup community members, including some fundraising facilitators, asking what fraction of these services they thought were ineffective or harmful. The consensus was that about 90% of these people produce zero or negative value for the companies they service.
They are usually, but certainly not always, worse than doing everything yourself.
Unfortunately, founders are easy prey for the unscrupulous. They are often desperate to find funding because of the startup paradox, which I discussed in this episode. You need money to create an MVP, but you need a finished MVP to raise money.
How Fundraising Facilitators Work
There are two broad categories of fundraising facilitators: Fee for Service, and Success Fee.
Fee for Service
With Fee for Service providers, you pay regardless of the outcome. They are classic contractors doing work for hire. They provide two primary kinds of services.
First, they can help you prepare to fundraise. They may help you with your pitch deck, financial projections, graphics, materials, or whatever else you need. If someone used my paid advising for help with fundraising, I would fall into this category. While some providers might be more skilled and experienced than others, few will cause any harm.
If you lack the artistic skills to take your deck to the next aesthetic level, hiring a graphical designer can be a great decision. Consultants and advisors can help you hone your message and polish your pitch.
Beware of asking consultants to design your deck from scratch. In my experience, they always miss the point and magic of your company and create something professional and pretty but generic and hollow.
Second, you can pay them to send your pitch out to their mailing list of potential investors. There are some strict limitations on what they can do beyond that.
They can’t provide due diligence reports or actively endorse you as a good investment. They are limited to simply putting your company and offer in front of these people.
They will usually tell you they have a close relationship with an extensive list of highly motivated and active investors looking for just your kind of company.
Sitting on the investor side of the table, that has not been my experience at all.
People constantly ask me if I would be interested in seeing more deal flow of a particular broad category of startups. I often say yes because I know how to reject companies quickly or delete emails if I am busy.
Then the firehose starts. They send me endless companies, most of which are terrible. I glance at most of them so they provide value to the founder. However, the idea that they have a carefully curated list of motivated investors excited to see each new company they send out is pure fantasy.
Another possible issue with these providers is that once you pay them, they have no stake in your success.
Success Fees
Many founders prefer to work with fundraising agents on a success fee basis because the agent only gets paid if they successfully raise the next round.
This aligns your interests nicely.
However, there are many regulations surrounding this kind of activity in the US. Most importantly, the agent must be registered with the Financial Industry Regulatory Authority (FINRA) as a broker-dealer.
Many people will approach you to help with fundraising on a success fee basis without being a registered broker-dealer. That can create use problems for you down the line.
In a few years, if your company is struggling, your investors might want their money back. If they can show your agents were not registered, they have that right. Such a demand could destroy your company.
Additionally, it can cause massive problems during due diligence. If an investor suspects you might have had success fee based help with fundraising from an unregistered person, they will run (not walk) away.
Sometimes fundraising facilitators will try to get around this by offering you a refund if they don’t succeed, suggesting that this is not really a success fee. The SEC would beg to differ. Any agreement where your payment is contingent on their success (however structured) is a success fee and comes with all the same rules and restrictions.
So, if you are going to engage with someone for a success fee, make sure you get proof of their registration and that they can legally do this work for you.
However, you might have trouble finding a quality fundraising agent if you are raising a pre-seed or seed round. Most companies working for success fees want to support much larger deals. If you only raise $500k, their 10% success fee would be $50k. They would much rather take a slide of a $10m deal. It is almost as much work to raise $500k as $10m but with a much smaller return. It’s almost suspicious if they are willing to take on such a small round.
This leads to another problem with success fees. The fundraising agent/facilitator is highly motivated to inflate your valuation. Economically, they are better off putting an extremely high valuation on all their deals and seeing almost all of them fail than succeeding at all of them at reasonable valuations.
The inflated valuation makes you less likely to close your round, and if you do, it can cause you problems down the road for the reasons I discussed in this episode.
I have seen cases where a company just finishing their MVP gets a $20m valuation from their agent. From my perspective, that is completely ridiculous.
Of course, the round takes forever because no investor thinks the company is worth that. Investors who might have backed you at a reasonable valuation will walk away from this deal.
And there is not much you can do about it because most success fee contracts are exclusive. They might claim they can do the deal in six months but ask you to sign a two-year contract.
Even if you have the option to bring in investors at a more reasonable valuation, you still owe the broker their cut for doing nothing.
As soon as they see no interest at their preferred valuation, they can just sit back and let you do the work while still making something.
Remember that none of these kinds of fundraising facilitators have a legal fiduciary duty to put your interests first. Get to know their reputation. Talk to other founders they have helped (particularly ones they have not given you as references).
Another problem with success fees is that investors, particularly VCs, hate them. They want to see every penny they give you go directly to growing your company. If someone has a 10% success fee, then only $0.90 of every dollar goes to growth, and the rest gets siphoned off to a third party with no benefit to the investor.
Red Flags
So, what are some of the red flags that you should look for when considering using a fundraising facilitator?
Long term Exclusivity
Exclusivity is standard, particularly with Fee for Service contracts. The big problems happen when the duration is long or decoupled from performance.
You should be able to cancel the contract if they are not performing and only pay on any deals they bring to the table.
Even during the exclusivity, the agreement should carve out existing investors and any potential investors you are already talking to.
Suppose you are raising $1m in this round and already have soft-circled commitments for $250k. You need the agent to fill out the other $750k, but that is all they should be paid for. They did not do any work for the $250k, so you should owe anything on that.
The moment they stop actively working to bring in funding, you must be able to terminate the contraction. If you can’t shut down the agreement, they could claim payment on any round you close during the exclusivity. I have seen contracts where that lasts for two years! That gives the fundraiser a free ride on all your work, even for rounds you had not contemplated when you signed the agreement.
Spamming Investors
When the fundraising facilitator spams investors, it reflects poorly on you and your company.
Question the service provider on their conversion rate on the emails they send. What is their relationship with the investors? How actively do they respond to these solicitations?
Some consultants send me a constant stream of crap, to the point where I have a negative impression of any company they send.
I get the impression that they don’t vet their companies. They will try to fundraise for anyone with cash to pay them.
In turn, that suggests that the companies are desperate and could not find more reputable firms to work with them.
The startup is probably desperate for a reason. They are not fundable and are currently over a barrel.
That might not be true of many of the companies, but that is my impression, and a negative impression is all the damage it takes for me to give a quick no.
Look for fundraising facilitators who are selective in picking companies to represent. They should be doing their own due diligence on you. They should ask hard questions and dig down to ensure you are a strong investment candidate with a polished pitch.
If they are not doing that, they are taking anyone and simply spamming their lists in a “spray and prey” strategy. You don’t want any part of that.
Absurd Valuations
If you have been working with quality advisors or talking directly to numerous angel investors, you should have a good general sense of your startup’s value.
As a company with a finished MVP and very early revenues, you might hear a range of valuations between $2m and $6m.
If a fundraising facilitator or agent suggests that you should be asking for $20m, beware.
These kinds of numbers can be attractive and exciting. You may be thrilled to hear that someone thinks your company is that amazing.
Just remember, they don’t necessarily have your best interests in mind.
They may give you that number to get you to work with them. They might be using it to maximize their payout if they succeed.
In either case, an unrealistic valuation makes it much harder to raise any capital and will put off investors who might have been interested under more reasonable terms.
Additionally, if you succeed at raising funds at this crazy valuation, that can cause significant problems, too.
Bottom Feeders
Fundraisers who will work with anyone.
If they don’t push on you and ask hard questions, they are probably not doing that with anyone else.
You are now part of the sludge at the bottom of the barrel, along with the least promising companies out there.
Investors know that smell and avoid it.
Always try to associate up. Like owning the smallest house in the best neighborhood, you want to be the worst company in a gold-plated portfolio.
You want to bask in the reflected light of the other companies, not deal with the fleas in the dog kennel.
If you are struggling to raise capital and feeling desperate, I encourage you to look at this article on the Fundraising Paradox. You are probably in the middle of that, and the article has some thoughts on how to get out of it without compromising yourself or selling out.
And until next time, ciao.
