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Should I Outsource My Fundraising?

Q: I’m the founder of a small internet start-up. Among my duties are editing and posting content daily, creating media partnerships, and bolstering our growth with creation of widgets, facebook apps, etc, but I’m also doing all of the fund-raising which feels like it should be my full-time job…if I could. I’m finding it hard to do everything and so my fund-raising is not going very well/quickly. My question for you is: as an early stage company looking to raise a seed round of under $500k ASAP to help us grow, what are your thoughts about outsourcing fund-raising to a place like Vfinance so I can focus on running the business? Are there any drawbacks?

A: (Brad) This is a bad idea.  You should not do it.  Even though fundraising – especially for an early stage company – can turn into a full time job, it’s an important one for the founders to do. 

You need to treat fundraising as a priority.  Presumably the reason you are raising $500k is to be able to hire a few people to help you leverage your time better as you are trying to get your business up and running.  If you don’t put enough energy into this, you fall into a classic chicken and egg problem where you don’t have the money to build out your team, but you don’t have enough time to go raise the money because you are busy doing everything because you don’t have the team.

Take a deep breath and realize that fundraising has to become the most important thing you are doing at this stage.  Find an early investor or advisor that knows you, likes you, and has credibility and hopefully a network of other investors and advisors.  Ask this person to help you with introductions to other angel investors.  Manage these introductions like a sales process – once you have a pipeline of potential investors spend the most time with the ones that appear to be most interested.  At the earliest stage they are investing as much in you as they are in the business and idea, so make sure you are on the front line of this effort.

Start every day off with this.  Fundraising should be the first thing you spend time on each day until you get it done.  Once you take 100% responsibility for it and make it your priority, it’ll get easier.

December 17th, 2007 by     Categories: Fundraising    
  • http://www.haslaw.com Dimitry Herman

    (In case you do decide to get some help with your fund raising process,) you should think about a few additional issues:
    - be careful to understand whether your advisor in this process is licensed to provide this type of service. There are lots of “finders” and other consultants that help startups find capital, write their business plan, work on their pitch, etc. In my experience, while a small portion of those folks is very good, the vast majority is not helpful and can actually set you back in a number of ways. Many tend not to be licensed/registered as broker-dealers, which can create issues in your next financing when tough questions get asked about this issue. While it is not uncommon for startups to risk going down this path and to structure these deals as “consulting” arrangements, rather than as placement fees, there is more scrutiny these days over these arrangements.
    - make sure that you appropriately limit the scope of the engagement. Assuming they are licensed and act as a true placement agent, finders should only be paid on results, not on giving you a copy of the NVCA directory and claiming title to everything in it. Try to insist on regular reports, try to carve out your existing leads, and the right to approve new ones that you want to approach. If they are not licensed, it may be better to limit their scope only to help with the process, and to pay them a true consulting fee for services that is not contingent on the deal. Certainly, if you pay in cash (which I realize you probably don’t have yet), that will be the cheapest way to go.
    From a business standpoint, my experience is most early stage vcs do not want to see a big chunk of capital go out the door to pay a finder. I am sure other followers of this site may chime in on this. While a Series B or later round may often include a placement agent, an agency in an seed/first round can be a real turnoff to your investors. If your agent is established and has its own network of investors that have a record of doing similar deals, then that may work. However, if the plan is just to make a better/warmer introduction to VCs than you can make at this stage, that’s probably not a great prospect.
    Good luck.

  • http://www.alacrablog.com Steve

    Having observed what happens when you outsource the fundraising, this is absolutely the worst thing you can do.

  • Chapter 11

    This is a really really bad idea. Most of the people who claim to help entrepreneurs raise money are, in my experience, parasites. Most likely they are lying about their rolodex, and if they do somehow bring in a good prospect, their primary incentive is to take a piece of the round. Investors don’t want to see their money go to a broker.
    I made this mistake. The guy claimed to be talking to many people. He never made more than one or two calls. The company failed soon after we discovered this. I lost my house, wrecked family, etc. He’s still out there leaching off people delivering, as far as I can tell, zero value.
    Brad’s right. You need to do this yourself, otherwise it won’t get done. And I repeat, most of the people who claim to help entrepreneurs with fundraising are ethically challenged scum.

  • anonymous

    I think practically as it stands, it makes very little sense for a founder to go with one of these types of advisors. That being said, I think logically, it makes very little sense for a founder NOT to go with such an advisor; the job of a founder is to develop and release a product/service, not go out and look for funding. This is an absolutely extraneous endeavor for a start-up entrepreneur, in the scope of his concept and idea, ESPECIALLY at the seed-stage; it is an absolute waste of time for a founder to worry about this type of an issue when the primary concern is (and in this stage should always be) successful product deployment. Time and time again, I have seen CEOs waste precious time on raising financing, especially in their first round. Unfortunately however, the current market of advisors and start-up consultants makes it virtually impossible to go any other route.
    The issue that needs to be addressed is how to make this market for seed-stage consulting and deal advisory more institutionalized and efficient. Right now, if I want to raise money I have a slew of ex-bankers to choose from; the problem with these guys: many are sole individuals really only looking to turn a quick profit; many are dishonest and deceptive; their interests are not always aligned with the entrepreneur’s; they often cannot properly help with valuing the company, especially if they are particularly detached from the technology (especially at that stage); etc etc.
    Now, on the opposite end, what are the potential problems with not receiving advisory: not shopping around to enough VCs; not getting the best financial terms; working with bad VCs and not knowing it; foregoing the potential to sell your company as is, altogether (if this is what you want, but don’t think you can acheive); etc etc
    The solution is institutionalizing and innovating this space: create ACTUAL established advisory firms that are younger, more motivated, more honest, and more in tune with the technology that these start-ups are creating. I am personally in the process of establishing such a firm; all of us are very young former bankers and entrepreneurs. We have already garnered interest from start-ups in the nyc area, all of whom have given us feedback that we are “a refreshing alternative” to the typical “suits” that they meet at conferences, meetups, etc. We are hoping to bring some innovation and growth to this subspace of seed-stage digital media financial advisory. If implemented properly, we believe such a firm can be an enormous benefit to seed-stage companies that are looking for financing or acquisition.
    Still in “stealth” mode; we would love to hear feedback on our concept from anyone who is interested. Email us at digital.media.advisory@gmail.com

  • http://www.TheLegalist.com Roman

    I have to agree with the last comment and disagree with Brad. The job of the founder is to develop the product. That is especially true when the founder is an engineer. Often enough engineers are not good business people and/or fund raisers. That’s why they became engineers to begin with.
    The reality of tech start-ups is a skewed one. Venture funding is poured into a business that would not be viable without that initial infusion of money. This skewed reality gives techies the illusion that their venture is a real business. However, in the ‘real world’ (that is in non high-tech businesses) a business has to survive on its own merits with old fashion revenues, attractive products, a customer base and of course profits. In the ‘real world’ a technical founder usually teams up with a business person and together they create a viable team and a viable business. Somehow internet techies fail to see their own limitations as business people. Even those who are good business people get caught in the process of fund raising and as a result neglect their venture, which in turn sours the fund raising efforts. See the problem?
    A smart founder (meaning those that are doing it the second or third time around) know that the answer is to team up with business folks either as partners or service providers, who then augment and improve the venture’s prospects.
    And if a techie founder cannot find willing business people to jump on board then that in itself should raise questions as to the viability of the venture.
    My mom always taught me to stick to what I know. That’s why I do not program and that’s why a programmer should not fund raise.
    Roman R. Fichman, Esq.
    http://www.TheLegalist.com

  • DBM

    I’ve made similar posts before – but I both agree and disagree with Brad on this. I don’t think that a CEO of a potentially successful start up should need to spend 24/7 on the fundraising process – especially if they don’t know how. How to find the right firms to approach, how to make the presentation – and although we all know that different traits are important in CEOs at different stages of a company’s life cycle (the ultimate article being Noam Wasserman’s famous HBR “Rich or King”) – being a great fundraiser is not always the most important thing. There are many CEOs who are great at what they do and not so great at raising capital. They may be great at selling the company’s product, but not the company as an investment.
    That being said, I agree that many VCs don’t like seeing their money go to intermediaries as a fee – although we work very hard on this and in most cases the match would not have been made without the intro. What VCs don’t see is how hard we work with the companies before we even set out the door – to refine expectations and management (i.e. part time CFO), do due diligence, talk to management at any hour of the day or night to work on planning with them – we do quite a bit for that fee.
    All of that being said though, for small rounds of under 1mm it is better (my opinion) to try the friends and family route with an advisor of some sort to help turn the sales presentation into an investment presentation, to help introduce and direct to the right VCs, etc.