Startup Fundraising Consultants
Did you know that it took Jeff Bezos (Founder of Amazon) 60 meetings with potential investors to raise $1 million? He raised it from 22 people at approximately $50,000 a person. Amazon could have ended before it got off the ground.
Only one in two-hundred startups succeed in raising venture capital.
As a Founder that has trodden this path many times the thought of enlisting help in raising funds has crossed my mind. This article takes a look at the pros and cons and the tips and traps that need to be considered BEFORE you engage a fundraising consultant.
Before you interview potential fundraising consultants
To prevent wasting everyone’s time and a lot of your own money you will need to consider the following:
- Have you prepared a comprehensive Business Plan?
- Will your Marketing Plan stand up to investor scrutiny?
- Do you have the right corporate structure in place to accept investments?
- Can you describe in detail how you will use the funds?
- Are you ready to apply the funds raised immediately?
- Are you ready to enter the ‘Due Diligence’ phase if an investor shows interest?
If you have answered ‘yes’ to these questions, then read on.
Be aware – Investors expect the CEO to be the fundraiser
Investors expect to be talking to the CEO when fundraising and think something is wrong if this is not the case. They see a ship without a captain:
What benefits does a fundraising consultant bring to the table?
Fundraising consultants are also known as corporate finance advisors, fundraising brokers and placement agents. They will all offer to raise funds in return for some form of remuneration. Competent fundraising consultants can assist in many ways, including:
- Having a track record of previous successful raises.
- Helping you with pre-investor material such as Pitch Decks, videos, Data Rooms and advice on what to expect.
- Hopefully they will have a list of contacts and open doors to investors that individually you would find hard to reach, including:
- High Net Worth individuals
- Venture Capitalists
- Family offices
- Seed funds
- Retail funds
- Corporate investors
- Institutional investors
- Understanding each investor and matching their investment preferences to your company.
- Fundraising Advisors can save you time and energy contacting investors, organising meetings, following up and maintaining momentum whilst you concentrate on the business.
- Your business may be located well away from where investors are and a consultant with presence in the right location may assist in opening doors.
Fundraising consultants are not always effective
Apart from a lack of track record and specific investment knowledge of the sector you operate in there are some other reasons that hiring a fundraising consultant may not be appropriate:
- Many investors prefer to talk directly with the Founder rather than an intermediary.
- Some VCs will refuse to deal with certain fundraising consultants.
- Fundraising consultants main concern is their own income don’t care who the investor is or what terms they are setting.
- Investors realise that part of what they are investing will go directly to the fundraising consultant instead of being invested in the business.
- The wrong fundraising consultant could lose the investor.
What to look out for
The whole process of finding a reputable and successful fundraising consultant can be overwhelming as there seems to be an industry that has emerged around the ‘Startup’ sector, happy to take money from Founders in need of help but with no guarantee of delivery. These can include:
- Former founders who have raised some money for one or two ventures and hold themselves out as experts in the field. That field may be related to a single fundraising exercise in a segment of the market.
- 25-year-old with 20 of experience on telling people how to do things via their website. No practical experience and few contacts.
- Professional looking fundraising websites that on closer examination do not have a track record. You may find that there is only one or two people behind the service.
- Small Venture Capital types of individuals that have accumulated some wealth but not necessarily a lot of experience.
- Can they validate their contact list?
- Does state or federal law require your fundraising consultant to have a licence?
- Is this a full-time job or something they do part-time whilst being involved in other businesses?
- If your business is technical or complicated, do they really understand your proposal?
- Do they have a good knowledge of your sector?
- Are they sector specific or work with anyone?
- What are the sizes of the raises they have completed and in what sector were they?
All will be willing to take your money but before you jump, make sure they can back up their claims and seek references of recent raises.
How much should you expect to pay?
Generally fundraising consultants will charge in one or more ways:
- A lump sum payment on engagement to cover pre-investment preparation work such as Pitch Decks, Information Memorandums etc;
- Individual, task specific charges for say a Pitch Deck or Business Plan,
- A monthly retainer for presentations, meetings etc,
- A success fee based on the capital raised.
A common combination would be a monthly retainer plus a success fee based on the total raised, e.g.
- 10% of the first $1 million, plus
- 9% of the second $1 million, plus
- 8% of the third $1 million, plus
- 7% of the fourth $1 million, plus
- 6% of the fifth $1 million, plus
- 5% of the sixth $1 million, plus
- 4% of the seventh $1 million, plus
- 3% of everything above $8 million.
Regular updates from your fundraising consultant are essential
You have paid a lump sum, or the first monthly retainer and it’s gone quiet. To avoid stress and the ‘not knowing what’s happening’ feel then ask the consultant to set out the terms of reporting and contact as part of their contract. Ask them to set some milestones covering:
- How many investors will they approach every month?
- Identify the sectors of interest those investors are interested in as approaching investors who are not interested in what you are doing is pointless and a waste of money.
- What is their track record in raising funds for businesses in your sector?
- How much have they raised?
- How long did it take?
- What are their expectations surrounding timeframe for your raise?
- What happens if they fail to get meetings with potential investors?
If You don’t get feedback, ask why.
When hiring a fundraising consultant there are some fundamentals to bear in mind:
- Obtain recommendations from other business owners, CEOs, and investors to see whether they will give you recommendations.
- Ask candidates for their client referrals, call these previous clients. and ask direct questions about the consultant’s work style and his or her strengths and weaknesses.
- Ask, ‘How’ they propose to assist you and what type of investors do they have in mind.
- Have your Co-Founder/partner or senior team member/s sit in as a panel when you interview candidates.
- Above all, set very clear objectives around targets, dates, reporting and milestones.
It is highly unlikely that any fundraising consultant will provide any type of guarantee regarding success.