Raising a round of investment is a daunting experience. Most entrepreneurs will, at some stage, ask themselves a question: would I be better served hiring a broker to lead the fundraising? It is certainly a sensible question to ask.
Good brokers offer market insights and expertise, add skills that may be missing on your team, and have the experience needed to close a successful funding round. An added benefit is that they can do much of the heavy lifting (such as preparing detailed investor materials) which frees up the executive team.
Bad brokers, on the other hand, can be detrimental to your efforts. In the worst-case scenario, they can deter investors from engaging with you at all.
Here are the top ten ways brokers can jeopardize your early-stage funding round.
Poor quality outreach. Messages from brokers littered with typos and other errors are an immediate pass. So too are approaches where they have not done their research – hitting up a seed-stage investor with an offer to invest in a $50m Series C goes straight to trash. These mistakes occur frequently. Remember, it is not just the approach for your round, but their reputation in the market that determines how likely a VC is to open, read, and seriously consider the message.
Spray and pray approach. Good brokers take a high-touch approach and typically work on a limited number of mandates each year. From an investors’ perspective, this translates into fewer opportunities with higher quality (actual or perceived). Brokers who take on any deal they can get their hands on, are referred to as ‘spray and pray’ or a ‘volume shop’. Since the investor knows that they are focused on quantity rather than quality, their messages are likely to be ignored.
Inappropriate follow up. A pushy broker who follows up less than 24 hours after their initial email can be irritating. It can also send a negative signal that the round is struggling and they are desperate for investors. Never a good look.
Creating a shopped deal. Investors talk among themselves a lot. Particularly at the early stages, it is far more collaborative than many people realize. A broker who overexposes a deal by sending it to too many investors creates the impression that it has been shopped around the market and nobody is interested. It can be extremely hard to undo that unfavorable first impression. Worse still is the broker who sends a deal where the investor has already said no directly to the founder. Embarrassing.
Lurking. Brokers who join the initial pitch meeting with founders and say nothing are distracting. It makes an investor question why they are there – do they not trust their client to run the meeting? It also raises questions about the founder’s attitudes to time and capital efficiency that they let somebody who is effectively a part of their team engage in such an unproductive activity.
More lurking. If brokers keep showing up at second-round meetings and further into the process – and continue to add no value – the concern about the founder’s judgment grows louder. It may even kill the deal.
Controlling communication. To build a relationship between VC and founder, open and frequent communication is key. Brokers who insist on acting as an intermediary (beyond the initial introduction) can cause a crucial loss of momentum and prevent the necessary depth of relationship developing.
Playing games. Managing a tight process with a well-researched group of interested investors to drive competitive tension is what you are paying a broker for. Exaggerating claims, making up other investors, insisting on unrealistic timelines and similar behavior is not. A broker’s reputation reflects on you.
Unprofessional behavior. A broker is viewed by investors as an extension of your team. If they show up late, dress inappropriately (relative to your team or industry), or make inappropriate comments this, like their reputation, all reflects on you.
Misalignment with the founders. Brokers tend to optimize for a quick close so they can earn their success fee. Founders may view the round very differently, perhaps optimizing for a combination of investors that they believe will deliver the most value for their company, rather than valuation or an absolute dollar amount. This can lead to a sub-optimal outcome for the company.
Treat the engagement of a broker with the same rigor you would when hiring a co-founder or senior executive.
Get to know them well, ensure that you are aligned on the approach to the round, and do extensive reference checks.
Establish what the market rate for their services is and be wary about deviating too far from it – overpaying will reflect badly on your ability to negotiate commercial deals; underpaying may lead to an inferior service.
A little work upfront to identify a broker with a great track record who can add value to your round will pay back many times over when you get that all-important round of funding closed.