Founders — Hiring a Banker Can Derail Your Fundraise!
You’re looking to raise the early rounds of external capital for your startup.
Life is tough. You’ve got limited resources. A product to build. Talent to attract and hire. Product market fit to find. Early customers to convince. Negative cash flows to manage. Lack of sleep to deal with.
And capital to raise.
Finding someone who’d go out and do it for you seems so very compelling. You barely have bandwidth enough to run the company, never-mind finding and schmoozing investors..
If there were someone who’d build your deck, model your financials, research the right investors, get you into meetings with them and then help you follow up and close a deal — life would be simpler. They could focus on helping capitalise the company, and you could focus on doing what you do best — building!
You’d pay them a success fee (percentage of the amount raised) and everyone goes home happy.
Nope. Not correct.
In-fact its one of the easiest ways of derailing your raise before it begins.
Let me help you hear it from the VCs, for better perspective.
There are several reasons bankers aren’t the right fit for raising early stage capital:
- VCs prefer being reached directly by Founders — being able to find and reach out to and finally be compelling enough to get VCs interested in investing, conveys to them the same level of “strive and hustle” a Founder would need while building the company, hiring the best teams, finding customers, navigating tough situations, etc — they want you to come to them directly and tell your story and build a one on one relationship. Here is a post by Hunter Walk — Founder & Partner of Homebrew (www.homebrew.co), a leading Silicon Valley venture firm, saying exactly that
- Conveys the entrepreneur has been around the block and no one will fund him/her — read this from Anirudh Damani, a leading Indian VC seeing a meteoric rise through and of his portfolio
- Conveys the entrepreneur is desperate
- Conveys the entrepreneur doesn’t know how to negotiate
- Doesn’t build trust with investors as bankers are blackbelts at making bad deals look good
- Read this post from the legendary Mark Suster outlining several reasons why he’d almost always shun banker introduced deals
Not being a banker hater here…
I am not against working with investment bankers. Most of my customers are bankers and I’ve worked with and learnt from some of the best ones in the world.
They’re just not a good fit for early stage deals..
And here’s why..
The bulk of banker compensation works on “success fees” — which are a percentage of the deal value they close.
The good and talented bankers are therefore trying to originate and execute “big bite transactions” — the bigger the better
It takes 3–9 months (sometimes more) to close a deal.
2–3 closures a year is a good year from a banker’s point of view.
For these 2–3 closures, they typically have 10–15 deals “running”
They know all their deals aren’t going to close and they will walk away from most deals 3–6 months down the journey
Deals that are harder to close, will see them walk away first
The average successful close (especially so in the early stage world), is a function of 40–50 meetings — very few bankers will make that kind of effort on a $3M deal, for instance
If they don’t see “close-ability” in the first few meetings with investors, they will prioritise other more “closable” deals
Their whole game is to maximise the total amount being closed in a year.
So for sub $10M raises, you’d rarely find a top notch banker willing to make the effort.
The effort/reward ratio just doesn’t work for them on small raises.
Bankers who are indeed willing to work on early deals, will push for higher deal value and consequently higher valuations — which itself puts an entrepreneur in a tricky position from a next round and eventual exit standpoint
Here’s another one from the great Jason Lemkin about you needing to deliver at least a 10x of amount raised exit for you to make any significant money
Here’s one from me about should you be raising capital in the first place?
A banker who is good for you isn’t just an introducer/broker — they’re an advisor.
They’re someone who’s supposed to show you the ropes and help with advise on what’s best for you in the long run.
At early stages, the advise you need is:
- Should you be raising in the first place — always a yes if you ask a banker. Its like asking a barber if you need a haircut
- How much should you be raising and at what valuation — always “the more the better” as far as the banker’s interests are concerned
- How to meet investors — that’s what we’re here for comes the advise — as unwelcome on early deals a banker might be :(
- What does this term sheet mean for me — its best to accept it and close, is the advise if there aren’t other term sheets on the immediate horizon
The advise you therefore get, when consulting a banker to raise early capital, is biased and often not with your best interests in mind
So, what should a founder do?
- If you must, work with a consultant in helping create your financial models and even a deck, if its not something you have the bandwidth to do yourself or internally within your team
- To meet investors, use a combination of warm introductions (lawyers, fellow entrepreneurs, etc) and reaching out to them direct
I’ve tried making it easier to reach out to investors direct, through Marquee Equity — an investor access tool I run
We basically match your deal with the investment criteria and past investment history of investors and use tech to help you reach out direct to the most relevant ones and get meetings going.
We work with hundreds of startups globally as well as startup incubators, investment banks, law firms, accounting firms and some venture firms to help with follow on financing for their portfolio companies.
If you’re raising early stage capital and want access to VCs/angel groups, in addition to the warm introductions you’re working on — hit us up and we can brainstorm about which VCs would work best for you.
Happy to talk :)
You can find me on firstname.lastname@example.org and I’d love to get on a call to discuss your fund raising plans and how I could be of help.
I’d be happy to talk even if you’re not raising capital and would just like to speak to a fellow entrepreneur and exchange war stories :)
All the very best to you.