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Are People Who Claim To Be “VC Brokers” Legit?

Question: We are looking early stage funding for our startup and came across some people claiming to be “VC Broker”. Is there such a concept in the investing world?

It’s highly unlikely that they are legit. I’ve never heard the specific term “VC broker” before and generally don’t think much of people who represent to early stage companies that they “can raise money from VCs for you for a fee.”

There is definitely a category of consultants that prey on early stage companies. These are people who offer to “do something for you for a fee.” You should approach all of these conversations with skepticism if the person wants to charge you money for this.

If they represent themselves as being a conduit to VC financing and you want to explore more, the first thing you should do is ask them for a comprehensive list of all of the people and contact information with whom they have done work for in the previous two years. You should then systematically contact each of these people and find out how things went. In most cases, the mere act of doing this will flush out all of the nonsense.

Interesting, there was a similar question asked in 2007 – see the post Are There Venture Capital Brokers? for a somewhat broader treatment of the topic. There is also a good post up on The Smart Startup site titled Beware of Venture Capital Brokers.

Finally, there is, not surprisingly, a site called VC Brokers. Ironically, the link to “Entrepreneurs” is blank and throws a 404 page not found error.

August 30th, 2011 by     Categories: Advisors     Tags: , ,
  • Guest

    Don’t forget that those raising money for a % of money raised need to be registered with the SEC.  You can quickly search the SEC database to find their history and if they are registered. 

    • http://www.feld.com bfeld

      Very true, but I know of many who represent themselves as such but aren’t registered. I think most “consultants” don’t bother registering.

      • Usadventure

        To be registered one needs to be sponsored by an FNRA firm and pass a simple exam.  It is the sponsorship that is difficult.  The system is setup to benefit Wall Street, which has no interest in startups.

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  • http://www.stirlingmercantile.com David

    It’s interesting to see this point of view, especially on sites that help entrepreneurs with the process of fundraising.

    Most entrepreneurs need help with the process. Thats why these blogs are so popular. The presentation, the value proposition, the post money cap table… The term sheet. Anyone can find the VCs today, but who is the right person in the firm?

    Experienced advisors can help, so can angels, serial entrepreneurs, VCs and even investment bankers. Most bankers can’t justify working on early stage deals, but some, like me, do because the deals are more exciting than growth stage deals, where bankers are far more typical.

    Ironically growth stage CEOs need the help less, since they generally have more experience, resources and teams.

    • http://www.feld.com bfeld

      I agree strongly that “Experienced advisors can help, so can angels, serial entrepreneurs, VCs and even investment bankers.” However, I differentiate between “advisors who charge a fee” and “mentors” at an early stage (we talk about this in the book Venture Deals).

      Mentors are amazing and who are the people who help the early / seed stage entrepreneur. My experience with TechStars and other accelerators has just reinforced this point. The mentors engage deeply, help companies, help the entrepreneurs, and expect nothing specific in return. The payback to them is often huge, and not just in karma points.

      My issue is with “advisors who charge a fee.” Dear young inexperienced entrepreneur who has no money. I will charge you money and/or equity to connect you with people who will invest in your company. Sure – every now and then a credible person does this, but most of the time it’s not credible.

      • Usadventure

        I recently experienced the following in Boulder. An “advisor” tempted the entrepreneur with a potential angel investment of up to $1M.  When it came down to the discussion a contract was placed in front of the entrepreneur where the “advisor” would be the lead on all investments and receive a 10% fee on all money raised, whether the advisor brought the investor or not.  Of course, no mention of the $1M investment the advisor was to make was in the agreement. 

        • http://www.feld.com bfeld

          Yuck. I hate this kind of behavior. I’d love to hear the name of the “advisor” for future reference – if you are comfortable send it to me in an email at brad@feld.com.

  • Anonymous

    I’d make two observations:

    1) It’s very difficult for such a “broker” to get paid.  If they work for equity, they need a whole lot of deals and a whole lot of patience… so the ROI on their time would be awful.  If they work for cash (typically a percentage of the deal since the company does not have cash for a retainer… or they would not be raising cash!), there is a strong hesitancy from experienced investors: why would they want to put cash in when you know X% of it will immediately leave the company?  Given this, experienced advisers — the ones you want — will *not* ask for compensation because they know doing so will not pay off.  And, as you said Brad, they often get a huge return in other ways.  Thus, “brokers” who see that as their business are almost necessarily on shaky ground to start.

    2) It’s very difficult for a brokered deal to happen.  If a company is hot — great team, great potential market — they don’t need help from a broker.  If a company is not, no help from a broker will get reputable investment.  It’s the same argument that Jason Calacanis made against “pay to pitch” outfits: if you’re on the right track, you don’t need to pay to pitch… and if you’re not, no amount of (paid) pitching is going to get you a deal… so anyone asking you to pay to pitch is on shaky ground at best.

  • zark2001

    Every VC investment agreement states unequivocally that it will not pay to a broker or third party for the investment. The rationale being that every dollar invested must go into the operations.  So I would wonder whether such VC brokerage agreement is enforceable and the broker would get the funds at the closing.  With regard to SEC licensing requirement, not all investment deals require SEC licensing.  SEC rules and regulations had been promulgated to protect small investors. I have known of startups hiring licensed brokers in-house to raise capital, doing what such brokers normally do, and in such case, they do need licensed brokers.  I question whether the licensing would apply while approaching VC funds or institutional investors.

    • http://www.feld.com bfeld

      You are correct – at the early stage most VCs will refuse to have dollars go out to someone that “helped” fundraise. This results in the “advisor” asking for equity, which the VCs also aren’t willing to pay out of their side of the equation. As a result, the equity cost / dilution – if any is paid – comes out of the entrepreneur on a pre-money basis.

  • Gomi

    Corporate Strategy or Corporate Finance Consulting (CFC) firms usually works for middle-sized to big companies, supporting them in their M&A operations and other financial needs. Due to the increase and expansion of Venture Capital firms all over the world, and the increase of innovation policy in every countries, there is every day new startups founded in the market. In several countries, people don’t have the experience of Angels / VC fund raising, and they contact CFC to help them to raise funds. Some CFCs refuse to work for startups because a startup can not pay them an up-front fees, others accept based on success fees, when fund raising is done. 
    You article is important because there is a lot of scammers who try to stole naive entrepreneurs seeking funds for their business. But you can not generalize, because your article is based on the point of view of a US-based VC, and the Venture Capital industry in USA has 10 years advance compared to other countries, including European countries. As a Consultant in Strategy (based in France), when a startup project excite me, I accept to follow the project and bring my support without any up-front fees. Sometimes I can follow a startup more than 6 months! I support the project holder by mentoring (asking them 1000 questions!), by advice to the writing of their business documents (Elevator Pitch, Executive Summary and BP), and of course, I try to identify potential investors and connect the startup to my business network (Angles or VCs). I don’t consider myself as a “VC-broker”, but I think I deserve a fee when the fund raising is done.  
    The other point that I would like to bring my thoughts is “references”. Neither entrepreneurs nor Investors wish to talk about a GoBetween who has contributed to the deal. For the entrepreneur, to admit having a Go-between means that he is not able to do this job by himself, that he is not skilled in basic corporate finance, and he does not have leadership and communication capacities to prepare a convincing pitch! And for investor, the reason is quite similar, accepting that a deal has presented by a go-between, means that he doesn’t have a proactive knowledge of the market. It’s all about ego !   

    • http://www.feld.com bfeld

      It’s a fair comment that my perspective only applies to the US – I don’t have enough experience in the rest of the world to have a point of view.

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