Do you need a financial advisor to raise venture capital?
Pros and cons for startups in emerging ecosystems.
Whenever we get an investment lead from Spain, most of the times it means our conversation will include a financial advisor who will join the calls and seat in the meetings. Unfortunately, these startup investment bankers have become prevalent in the Spanish startup scene. Coming from an ecosystem with an amazing angel investment tradition, it’s even more frustrating.
Yes. Fundraising in emerging ecosystems such as Spain is one of the hardest and most frustrating aspects of scaling a tech company. However, for this investor, bringing an outsider to the process kills part of the joy of our work: the first call, the first jokes, the reaction to push-backs, the faces when a crazy question pops up or the unexpected strength revealed. Our success is based on finding and partnering with the right people. We are built to find you.
Fortunately, as the entrepreneurial scene matures, there are now more alternatives and capital is getting smarter about talent. Here are some of the pros and cons to consider before bringing in external help for raising your next early-stage round.
The upside
- A broker — A financial advisor can provide structure to an otherwise opaque and sometimes incomprehensible VC firm processes. More, an intermediary can create time pressure and take the heat off negotiations providing more space for founders to negotiate better terms.
- A fan — Founders spend their day selling to convince potential clients, partners and future employees. It’s draining enough to sell your vision. The awkwardness of selling yourself makes it even harder. A financial advisor can and should present team members as rockstars or the Latin version of Elon Musk.
- A network — External advisors may bring networks that are difficult to access in different geographies or specific industries. While the VC world is ever more small and flat, relationships built over long periods of time may help advisors provide warm introductions and high-quality conversations.
The downside
- A stranger in the room — Remember that fundraising is a two-way interview process. Will you call this investor during a crisis on a dark night? Do you want to celebrate with her your most meaningful success? Do you want her on the opposite side of a disagreement? You will probably only get a handful of interactions before making this important and personal decision.
- A bad signal— Research has shown that the biggest risk for startups is the financing risk. Your potential financial partner is reminded of this challenge every day as they manage their portfolio. Fundraising should not be seen as a function to outsource but a skill to develop. VCs expect you to prioritize one of the most important decisions of a founding team.
- Bad advice — Most financial advisors I know still don’t get early-stage investing. Despite sharing a business model with our private equity counterparts, the logic and investing process in VC couldn’t be more different. Learning our craft takes years and some of what we do is counter-intuitive to the best investment bankers out there.
The alternatives
- Build a better team — They are called angel investors for a reason. Experienced angel investors are far more informed and credible brokers when a team needs to negotiate terms and navigate the often painful process of raising institutional capital. Successful entrepreneurs and partners in later stage firms are starting to be very active in emerging ecosystems.
- Join a community—Finding those angel investors may be even harder. In my opinion, for founders that lack the networks or basic venture knowledge, seed acceleration programs are great (often free) platforms to get started. Partner with YC, 500, NXTP or Techstars or join MassChallenge or VillageCapital to have access to the resources you need to find the financial backing you need.
- Ask a peer — This is an obvious alternative, but founders do not use it nearly enough. Find one or several peers that can share war stories with you and intro you to investors. This is by far the best source of advice in any ecosystem.
If your angel investors are missing in action and you have already made a commitment with a financial advisor, keep your word but change the strategy. Take control of the process. Keep them away from the meetings. Set quality lead objectives. Have them prepare a data room and respond to initial straightforward questions.
Talk is cheap. So here’s our own track record. In the past 8 years, after investing in 28 startups, we’ve never invested because a financial advisor introduced or helped sign the deal. Never. We were close once but the external adviser was so clueless that the entrepreneur fired him before we started the investment process.
I’m sure there are smart and well-intentioned venture investment bankers cringing while reading this. If you want to work in the early stage space, maybe you should start investing instead. Join or build a VC firm. Become the best angel investor out there. Founders need more angel investors, the VC industry needs your unique point of view.
Before adding an outsider with no skin in the game, think about the pros and cons. If you ask me, I’d rather start our relationship without a third wheel.
