Investment Agents – Good or Bad?

Over the past year, I’ve regularly gotten questions via email on venture capital and entrepreneurship from readers of this blog.  I always try to respond.  A number of these questions were easily bloggable but for some reason I fell into a default mode of responding to the email rather than writing a thoughtful post.  I’ve decided that – going forward – I’d try to be more diligent about posting my responses to these questions (which I encourage) as well as commenting on questions in comments (I was very inconsistent about that this year.)  One can always improve, right?

The question I woke up to today was “I browsed your site today looking for a clue on how VC regard entrepreneurs who have engaged an investment agent to assist them with raising capital. It’s a decision I’m considering, because getting an agent to represent us will free up more of my time to focus on execution. My fear though is that an agent will either get in the way of a deal, or just be viewed negatively by VC (agents will probably work harder than entrepreneurs to raise the valuation by encouraging competition among VC for the deal etc).”

To answer this question, I have to segment this into “early stage VCs” and “later stage investors (including VCs)”.  Many early stage VCs – especially those that are in saturated geographies and see a lot of deal flow – don’t pay much attention to deals that are promoted by an “investment agent.”  I know a number of folks who simply “hit delete” on an email (the virtual equivalent to tossing the physical PPM – the document most agents insist on putting together – in the trash.)  In the early stages, the entrepreneur is by far the best fundraiser for his company and there is a knee jerk negative reaction by many VCs against early stage deals that “require” an agent.  At the early stage, an entrepreneur is much better served by finding an advisor (or set of advisors) or angel investor that has good VC connections and fundraising experience who can get actively involved in the company as advisor, board member, consultant, or even chairman.

Later stage companies and larger capital raises are a different story.  The universe of later stage investors is very dynamic – consisting of corporate (strategic) investors, high net worth individuals, private equity firms, and hedge funds – in addition to later stage VC firms.  Many firms enter and exit the market regularly for a variety of reasons (e.g. a number of hedge funds have recently started doing what traditionally look like late stage / mezzanine VC deals).  An agent who is active at raising later stage capital will typically have some relationships with folks currently in the market, can run the drill of identifying the primary suspects for the entrepreneur, and can help manage what is typically a more complicated and less structured financing process (e.g. there often isn’t a clear lead investor in a later stage deal.)

As with anyone that you engage to help you with your company, doing your own due diligence and background check on the agent you are considering using is critical.  The ratio of charlatans to qualified agents is probably 100:1 – the vast majority of folks that claim to be able to help companies raise capital are pretty useless.  The diligence process is easy – ask for a complete list of successful and unsuccessful deals the agent has done in the past 12 months and then dig in to the details of the list, talking to the principals involved in the transaction (including the lead investors that agent brought to the table) to see how much impact the agent had on the deal.

Finally, don’t make the false assumption that an agent will “free up more of your time to focus on execution.”  This isn’t going to happen – if the agent is good he will help with the process, but the entrepreneur will still be on the front line of the fundraising activity. Any new investor is going to want to hear directly from you. For the period of time that you are raising capital, this should be your primary mission in life (to raise the money you need to continue to run your business) – no one will (or can) do it better than the entrepreneur.  Your lawyers, agent, and others will help, but the burden of the financing will almost always be yours.

  • http://w-uh.com Ole Eichhorn

    Brad –

    My company recently completed a fund raising round (B, after four years, so “middle to later stage”), and we engaged an investment agent to help. We found the statement “an agent will free up more of your time to focus on execution” to be absolutely true. The agent was wonderfully helpful in making contacts and working through the early part of each conversation to quality the potential investors. Of course we were still heavily involved in presenting the company and the final negotiations, but the agent definitely did save us time. I agree with your 100:1 ratio, finding a good agent is important. The three main characteristics we looked for were 1) integrity, 2) familiarity with our space, 3) contacts / track record. In our case one of our board members recommended the agent, so we knew (1), (2), and (3).

    • Vorick Picou

      Dear Ole,

      Who was your agent, I can be reached @v_picou@hotmail.com

  • Scott Maxwell

    Brad,
    Just to support your point on the later stage, as an expansion stage (a.k.a., “later stage”) VC I look at every deal that Placement Agents bring me. I have never examined the hit ratio, but do agree that the better agents bring more value to the equation by filtering out the lower quality opportunities.

    Also, since they generally get paid based on the deal size, the better agents go “up market” (to larger companies with larger deal sized) leaving the less qualified agents at the early stage.

  • Virgilio

    I have done a few entrepreneurial ventures myself and I’ve learned that my neck and my money are always to be sliced in first place… then we’ll see. Agent or no agent, the initial commitment and the interest of the project are the two most important factors.
    VC

  • http://www.burningdoor.com/lineofsite steve

    note to self: “charlatan” is a great word I need to work into my vocabulary more often.

  • http://www.nik.com.au Nik Cubrilovic

    I would like to speak about some of my experience as an entrepreneur. I receive many solicitations from ‘angel investors’ who turn out to be nothing more than agents looking to score. As an entrepreneur, you can easily filter these out and not waste your time (like I have many times) by asking straight up which other companies they are involved with as an investor, and if they are serious about investing their own money (and ask if they have before). The funding agent is a very shady business and chances are that an agent who approaches you will not be worth the time. They often attempt to back themselves up by talking about their business experience (often unrelated to your own field), ‘contacts’ (their names they don’t wish to reveal until they have a contract with you � in other words they don�t exist) and references (some sucker entrepreneur and a couple of their old mates who are analysts). Don’t get sucked in, don’t waste your time.

    Go the route of building a board and attracting advisors who will give your business *credibility* – these people should believe in the business and take on risk and will open up networks of investors and VC’s. It takes longer to do it this way and doesn’t sound as promising as what an agent will tell you but it is the proper and much better way.

    I am writting about the startup process on my own blog and the issue of investment agents has been an itch i have wanted to scratch for months.

  • softwareentrepreneur

    Okay, so I think this thread is missing the three most important drawbacks about investment agents/consultants for early-stage startups. Pitching is a great learning opportunity for entrepreneurs, it is a demonstration of the founder’s ability to convey value and the agent/consultants fees reduce capital efficiency.

    First and foremost the process of speaking with investors is a tremendous learning experience. Consider this, you’re the founder of the latest and greatest web 2.0 company and a friend of yours was able to setup meeting to talk shop with someone who is currently on the board of LinkedIn and was formerly and SVP at Excite and a BCG consultant with an MBA from Stanford, you’d take meeting right? …And you’d carefully listen to everything he had to say sucking every last piece of advice out him that you could. So this guy’s name could be David Sze and just because you’re pitching your startup to him and Greylock ventures, not attempting to learn as much as you possibly can in the hour that you have would be ludicrous. If you’ve done your homework on the investor before presenting, you should only be pitching to VCs that invest in your sector and stage. Hence, any investor you pitch to should be knowledgeable about your market and therefore worth your time to listen to. If you don’t believe the VC can offer you any advice, don’t pitch to him, because success will translate into having a board member that you don’t respect. Furthermore, even when the VC asks skeptical questions and/or decides not to invest, they are providing valuable data points about how the business could be improved.

    The second major drawback is that using an agent/consultant to write or deliver your pitch suggests that the founders do not know how to convey the value their product delivers. Let’s face it, the best two ways to get an investors attention are by demonstrating customer traction and building a great team. If you can’t convey the value of your product, how are you going to get customers or convince anyone to work with you?

    The last major drawback is that agents/consultants are expensive. It’s common for these service providers to ask for a retainer, a success fee and warrants. In fact one consultant gave me a proposal seeking $10K per month retainer, 7% of the cash they raised and 10% of common stock warrants. In my opinion anyone of those forms of compensation was too much. Some entrepreneurs will accept these deals because they feel they have no other option. But consider what this type of compensation means. $10K per month and 10% of your common stock is not too far off the going rate for CEOs at early-stage startups. What entrepreneur would rather have a consultant than a full-time CEO? And 7% of the money you just raised walking out the door doesn’t sound very capital efficient either.

    The bad news for CEOs that don’t want to raise money is that they probably aren’t qualified to be CEO. The good news is that there are resources out there for those willing to learn. Here is what I recommend:

    Technology Venture Corporation is federally funded and provides coaching and introductions to investors at no charge to startups. (http://www.techventures.org/)

    The Silicon Valley Association of Startup Entrepreneurs (http://www.svase.org/) and the Software Development Forum (http://www.sdforum.com/) both offer events that help entrepreneurs learn how to raise capital and facilitate interaction with VCs.

  • http://www.interactivegaming.com Mark

    We are a early to middle stage company and are looking to raise capital. We are exploring the idea of finding some reputable placement agents to assist. Seeing as how some of you have already gone through this process, I was hoping you could recommend some placement agents to contact.

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