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Are There Venture Capital Brokers?

Question: Is there any such thing as a VC broker? Someone who would have the VC connections and industry knowledge needed to properly negotiate a good deal for a startup?

While company management has expertise at running a company, this is not the same skill as knowing the ins and outs of the various forms of funding and how to negotiate a good deal for a startup. It’s probably a better idea for the entrepreneur to spend their time managing instead of finding and negotiating with VCs. I’d be willing to take on a “consulting fee” on the condition that they help match me up with the right VCs who fit my needs best and help to negotiate a good deal.

Our Take: There are VC brokers called “finders” that help bridge the gap between startup company managers and VCs. That being said, we rarely see them in our practice. 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.

Good VCs have plenty of proprietary deal flow, so they aren’t relying on brokers to show them deals. Therefore, many brokers are only going to have access to funds that are deal flow deficient.

As for helping you negotiate a fair deal, you should rely on your lawyers, not your broker. Brokers only get paid if the deal closes, while your lawyers get paid regardless and will have no potential conflicts in protecting your interests. A high quality venture lawyer will know the ins and outs of a fair deal and advise you properly. If you want our take on what makes for a fair deal, check out our term sheet series.

One caveat to all of this: With a more mature start up, it’s not uncommon for a placement agent / investment bank to help round up capital for a larger sized round. These are usually expansion capital rounds that intend to get the company to a liquidity event.

January 17th, 2007 by     Categories: Fundraising    
  • http://www.parand.com/say/ Parand

    My advice is to stay away from brokers – the VC is investing in you, so you have to connect with the VC. You can’t just concentrate on managing, you have to work hard to form a bond and communication channel with your VC. In a lot of ways you’re interviewing the VC as much as they’re interviewing you, so you have to be directly involved.
    Also, going with a broker guarantees that no top tier VC will talk to you.
    If you feel you need help, try to find an experienced and connected individual to act as an adviser the the company. The right person will help you in finding investors and forming the deal, as well in moving the company forward on a continued basis after the investment.

  • Jamie Davis

    Jason-
    While I agree that your lawyer should help you negotiate the terms of your deal, I disagree with the spirit of your answer that entrepreneurs should not bring in outside assistance in raising capital.
    First, the questioner is right, there is a definite skill set related to raising money from writing a business plan, to creating a pro-forma model, to building a presentation, to developing a strategy to approach investors. While you could hire a CFO who has been there, done that, that is probably much less efficient that hiring an outside consultant who you can stop paying after the deal is done.
    Second, company management really does need to be focused on building the business and creating momentum. Raising money is a full time job from scheduling meetings to preparing documents to responding to follow up requests from investors. If a CEO is focused on these issues, he can’t be building tech, out making sales, etc. – the measuring sticks that ultimately lead investors to offer a term sheet.
    Third, many leading venture firms purposely insulate themselves from entrepreneurs and only review business plans that come through referrals. An outside consultant would bring a referral network of his own as well as a strategy to gain intros into “top tier” VCs.
    Jamie

  • Jason

    I still think it is best of the CEO to being raising money. You are correct that running the business suffers a bit when the company fundraises, however no outside person knows the company as well as the CEO and making pitches to VCs is more credible coming from the CEO. Maybe most important, VCs don’t want their money spent on fundraising consultants as evidenced by nearly all term sheets and financing documents specifically calling out this fact. The NVCA model documents have language with make the company warrant that is has no finder fees attached to the deal.

  • http://leighhimel.blogspot.com Leigh

    I would add to Jason’s comment that the process of raising money itself helps you to craft your positioning and messaging along the way. The valuable insights you will get from every single person you talk to (and especially those who throw tomatoes at you) will go a long way to starting your marketing plans which will drive your sales which drives your term sheet…etc.

  • http://www.transcm.com Adam Steen

    I find one thing that is interesting about VC in Iowa is the lack of information that start-ups to mature stage businesses receive. Far too often we see companies trying to get financial help, when in reality they can benefit much more from strategic relationships. The ability to create proprietary deal flow through access to expert relationships and opportunity recognition is something that we find is needed.

  • http://ryanmapes.blogspot.com Ryan Mapes

    You mentioned in your post that “Brokers only get paid if the deal closes”. Due to the nature of early stage funding, only a small fraction of companies ever get funded (some say nearly 1 in 1000). With that said, it would be difficult for any broker to make ends meet by working solely on a commission basis. Nowadays, brokers tend to charge an upfront fee to shop an entrepreneur around to investors. And, they’ll take another healthy chunk if the deal closes. That upfront fee deters many entrepreneurs from using a broker since the broker is protected from much of the risk.

  • peter

    Can’t agree.
    If VCs asks for 20% shares for 10M, should the founders accept it or not?
    I think it’s difficult for most founders pricing their companies. This is why we need a broker maybe financial advisor more exactly. He can assist companies of valuation nego and finding the best investors if he really knows much investors.
    My opinion, whether the company should find a broker is decided by the value added possibly by broker.

  • Baby VC

    Ok, so let’s say that a VC broker is willing to take a small percentage (3%) of the startup stock — that way, the broker is taking the risk, too. Have you seen arrangements like those?