Beware the sharks among corporate advisers, who promise a lot but go on to milk you of much-needed capital.
Hang around a few start-up events and you’ll meet someone who will pitch to become your “corporate adviser”. This person will most likely be male, aged 40 to 60, dressed in a nice suit and impressive. He’ll know everyone at the conference. I encountered one when I launched my business in 2012. He seemed enamoured of my idea and suggested we meet for coffee. I assumed he was a prospective investor. A moment later, as we started talking terms, he sprang his surprise. He wanted to sell his services. For a modest fee and some equity, he could help me raise $1 million. I said, “Yes.”
Two months later, he had introduced me to a few folks, none of whom invested, and he became busy with other opportunities. I’d spent $10,000 on a fancy presentation and hadn’t raised any capital. Worse, I’d agreed to pay a commission regardless of who invested so I still received a large bill when I eventually raised funds through my own efforts. Five years on, I’ve worked with a range of corporate advisers and some have proved more helpful than the character I met back then. Here’s some of what I’ve learnt:
Steer clear early on
Daniel Petre of top-tier fund AirTree recommends start-ups avoid using corporate advisers to raise capital. He often won’t take a meeting with an entrepreneur who’s come through a middleman because they get in the way, offering unhelpful advice. “Usually, an introduction from one of these guys is a sign that something is wrong.”
Petre prefers entrepreneurs to approach his firm directly. “People think they need a corporate adviser to access good [venture capitalists]. Not true. We don’t hide in an ivory tower. We respond to every email or call and see at least 20 companies a week.” And he wouldn’t spend money preparing the presentation. “We don’t want to see a fancy, 60-page pitch deck. We want an upfront, honest discussion with the founder about the problem they’re solving and why they’re better than the competition.” He adds, “There’s no role for corporate advisers in start-up land. They’ll take $100K to $150K on a raise, which is a terrible way to spend our investment. A good entrepreneur will want to put all their resources towards building the company.”
Despite my early mishap, I’ve found more use for corporate advisers as our business has grown. Jonathan Warrand of Greenwich Capital Partners recommends entrepreneurs contact his firm once their company is generating revenue and is growing at 10 per cent to 30 per cent every month. He says, “Advisers such as ourselves can assist with the management strategy and corporate governance as well as capital raising. These disciplines are important as companies grow. “There’s a difference between introducers and full-service corporate advisers who have deep knowledge of the market and a defined capital raising approach.”
When I have engaged a corporate adviser, I’ve been careful to avoid paying too much. Most advisers will propose an upfront fee to craft the pitch deck and perform due diligence, plus a commission of 4 per cent to 10 per cent of whatever is raised. As Petre points out, good entrepreneurs know how to tell their stories. It’s usually possible to avoid an upfront fee. And never agree to pay a commission on funds that don’t come from their introductions.
They may ask for a period of exclusivity to raise the capital and insist this is essential to motivate their team. It’s true it can look bad when multiple advisers pitch a company to the same investors. It’s also bad when the adviser you signed up with isn’t delivering and you’re stuck with an exclusivity clause.I’ve found the most important factor in a successful capital raising is momentum. The advisory team will be motivated when investors are piling in and their clients might miss out. They’ll often agree to drop the exclusivity period if they can be confident you’ll manage the process well.
Fundraising is hard, lonely and distracting. It takes a huge amount of time to source investors, plan meetings, answer questions, negotiate terms and draw up paperwork. When someone says, “Your business is great. I can raise money for you and you won’t have to do anything,” it’s a compelling proposition. I’ve learnt that different stages of business and different types of businesses need different approaches. But, with or without a corporate adviser, the founder has to sell the vision, drive the process and take responsibility for the outcome.