I'm having trouble raising money. Should I pay a well-connected third party to make introductions and help me raise funds?
So you've been pounding the pavement trying to raise money for your venture—talking with friends and family and using your contacts to get introductions to , accelerators and VCs. You know that if you can just get that initial capital you can build a winning company, but so far no one is willing to take a risk on you. Instead, you keep hearing thing like, “I'd be interested once you get more traction,” or “It's a great idea, but I think you need to prove the business model out a bit first.”
How do you get more traction or prove the model if you can't get the money? It's a frustrating chicken-and-egg problem. And what's even more frustrating is that you know your venture would be better served if you were spending your time focused on the business itself rather than chasing money.
So, why not just pay someone to help you raise money?
There's a guy you know who has a ton of contacts. He offers to make introductions to the , VCs and others he knows to help you raise your round. In , he will be paid a commission—a flat fee, a percentage of what is raised, or some equity (or a combination).
Good idea, right? After all, even though it will cost you some money, you'll be able to raise the round and keep the company going.
For most seed- and venture-stage companies, using a finder or to help you raise capital is a bad idea.
First of all, in most cases the people offering to help won't be registered -. them. I bet they aren't.
Without going into all of the technical details, if the person isn't a registered -, then it is actually illegal for him or her to help you raise money this way. And while that person is the one violating the law, there can be serious negative consequences to your company as well. Most importantly, those who invest in the company through that person's introduction could have rescission rights, which means that they can force you to undo the transaction and give them their money back. Yikes.
Not only is that a problem from the perspective of the company directly, but it could also easily be enough to scare off future investors who don't want to see their dollars used to unwind the investment of earlier investors.
Put simply—funding your company in violation of these rules could make the company unfundable in the future. Ironic, isn't it?
Now lots of people out there will tell you not to worry about it. They will say that it's OK—they are just "finders," not , and so don't have to be registered. Or they will say that they do it all the time for other companies, so you shouldn't worry about it. Well, don't listen to them. The finder exemption (again, I won’t bore you with the technical stuff) is very narrow and will likely not apply. And like your mother always said: “Just because others do it doesn't mean you should.”
Listen to your mother.
Second, even if the person or entity you're working with is a registered -, most professional early-stage investors don't like investing in companies that need to pay a third party to raise capital. Why? First of all, they want their money to fund the business going forward—not to pay a third party a commission for helping raise the round of capital.
Early-stage investors may also not favor for other reasons. I heard one well-respected VC say that he wouldn't even review a business plan submitted by a because he (A) doesn't think filter their outreach enough and (B) views using a as a sign of ineptitude on the part of the management team, since it suggests that they can't network into capital through their own connections. We can debate the merit of those assessments or how widely they are shared by others, but they give you a sense of the types of views that are out there.
Investment bankers who put together for later-stage companies have value in certain situations. But typically that type of arrangement is more common and more often viewed as beneficial when the company is more mature and needs to access a different source or stage of capital (e.g., strategic money or private equity). For - and venture-stage companies, you're generally better off taking your lumps and persevering in your own networking efforts to find the capital you need.