Startup Finders — the Good, the Bad, and the Myth
When I started working as a early stage banker connecting startups with investors (also known as a VC broker, Finder, Startup Advisor — pick your title), I spent a lot of time studying the industry and figuring out a few things:
- How can I source the best startups most relevant to our network of investors?
- What kind of information do investors want to see first to get intrigued by a deal?
- What’s the best way to get new foreign investors interested in Israel?
- How can my dealflow be on the level that investors will look at in the same way as if it came from other trusted investors?
And many other questions. But the biggest issue for me was this — what can I do to provide the most real value to both the startups and investors we work with?
There’s a lot of talk online about business brokers or “finders” for early stage startups, some of it negative. This surprised me, as we have very positive relations with all types of investors ranging from angels to T1 VC’s and major corporations, and have closed over 20 deals over the past few years. Then I took a closer look and understood the issues, and realized that not all people calling themselves finders are doing justice to either side of the table. This motivated me to put out our perspective and to define what a real early stage banker does versus pretenders out there.
In my humble opinion, here are 5 key points to determine a good or bad broker:
- Real Relationships: Going cold or going warm
A good finder doesn’t just cold email investors a company teaser. You can easily do this yourself and if anything, that will only annoy an investor and hurt your chances with them later on. Real finders have established solid and trusted relationships with investors, so when they reach out on your behalf the investor will see it as a trusted referral. Moreover, the investors they can bring to you are people you don’t have easy access to (such as foreign investors and strategics, not to local well known investors) and are also relevant for your sector and stage. They can also fast track the process of getting you connected with the right decision maker to focus your time and efforts. This translates to saving you valuable time, resources, and possibly even getting better terms.
2. Exclusivity: Not necessary
Be very cautious of a finder who wants an exclusive agreement, which gives them a fee of your capital raise regardless of how much they actually did themselves. With very rare exceptions (unique industry, down round, etc) there is no benefit to a startup and can even cause a deal to collapse in the end.
3. Retainer: Pay to play
Paying a set fee or monthly fee to finders is usually unnecessary. A retainer can be fair if they will be doing serious work that requires a lot of time, such as preparing a deck (from scratch or close to it), business plan, financial projects, etc. But besides that, a finder shouldn’t charge any fees besides the success fee.
4. Advisor: Good advice is hard to find
A good finder should put in their time to really understand your company, market, vision, and be an advocate for you. They should also have some relevant industry experience, and be willing to review your existing materials and offer feedback. When building an approach list, they should work with you to identify which type of investors are most appropriate for your stage and sector — whether it may be angels, VC’s, corporations, or strategic.
5. Experience: Key to Success
The best advisors have done deals before, ideally as brokers but often as entrepreneurs or investors too. Other startups have worked with them and would recommend them, as well as investors. In short, people like working with them and have good things to say. In our hyperconnected startup world, reputation is everything and this isn’t too hard to figure out.
It all boils down to this — is the finder someone who can add real value? Do they only charge a success fee? Do they have a good reputation? If the answer is yes, a finder can be a great resource to work with on your fundraising and enable you to focus on what you want to do — build an amazing company and change the world (or at least that’s the plan, right?).
So what defines a great broker? In one word — value.