You have raised angel funding – made good progress and now you need a larger cheque to supercharge your growth. You also need the expertise and professional experienced Board a VC investor will bring. Brokers and their terms of engagement are many and varied – so what to do? And are their cheaper alternatives? We recently ran a beauty parade for an early stage company to run a fundraising with VCs so have considered this area carefully.
Do you need a broker? NO if:
1. You have a CFO who has run fundraisings before – who can build a quality financial model and prepare materials and also is adept in deal-making and negotiation AND
2. You have a Board with deep and high-level contacts into many VCs AND 3. Your exec team has the time and expertise to run a fundraising project WHILST keeping the
business on its growth trajectory.
If you cannot say “Yes” to those three questions then most likely you need an advisor/broker in one form or another.
What criteria am I looking out for when picking a broker?
1. A track record of raising capital in your sector at the size you wish. It goes without saying – no point using a broker who has a history of £2-3m capital raisings for cleantech if you are looking for £10m for a SAAS business. Investment bankers are by their nature chameleons and can change sectors quickly (and will talk a good game around doing this - a good banker is a good salesperson) – however past performance is often indicative of future success. Hence pick a broker with deep sectoral expertise in your area.
2. Ability to sell - you will be able to gauge from meeting a broker whether they are good salesfolks or not. Raising capital is a sophisticated sales job – simply put. Perseverance, charm, knowing what the other side is thinking, making a process competitive – all attributes which a good banker has. If they can sell you to hire them – maybe they can sell your company.
3. Ability to present well - I always ask to look at examples of previous financial modelling work and presentations they have made. Most likely under NDA.
What sort of deal to strike?
Retainer – any broker who values themselves will charge a retainer and I would advise paying one. Here’s why: If you don’t - you will get commitment only until a better deal comes their way or things get a little hard and the deal is looking tough to close. They see commitment from you and feel an onus to deliver. You get what you pay for. Success only transactions – if they don’t work quickly and easily – will not work. Retainers for raises of £5- 10m can vary from £5k to £20k for a top-tier broker. £5-10k is acceptable however make sure you set clear deliverables for this retainer. I personally prefer a broker who charges for time spent on preparation in a transparent manner (X for a model, X for a presentation) as opposed to a flat monthly fee.
Terms – A tail fee is typical – try and negotiate it to be as short as possible (by tail-fee I mean that when a broker is let go – they still get success fees on any deal which is done by a party they introduced for a period thereafter – I’ve seen some push for two years – or take a another fee should parties they introduced subsequently invest again in subsequent rounds). Be firm on this 9 -12 months can work.
Fees - 5% seems typical in the market – anything above is extortionate and will make the deal seem in jeopardy from the start i.e the broker thinks it is so hard to do they are charging a huge fee.
There can be more economical alternatives - which we ourselves White Lake offer whereby a fundraise can be run in-house, project managed and use the contacts of the board and thus have less fees overall - success and retainer. This model works if you have the right people executing.
So the above are some simple tips. Always remember - the best brokers/bankers will be in demand and have the best VC relationships and they could essentially will be picking you. The best brokers will not take on high-risk raises projects where they have not high confidence in completing.
Anyway if possible - Start-ups should invest in their core product, not in broker fees.
Authors: John Rowland, Managing Partner; Sierra Choi, Director of Marketing