The financial industry has always had brokers and intermediaries to facilitate transactions and ensure that any deal closes and all sides are happy.
If you’re sitting on one side of a transaction you have to ask whether you 1. would have met the other party in the first instance, 2. negotiated terms so that all parties are happy and 3. keep everyone on a tight and narrow leash so that it doesn’t fall apart.
Usually for private companies, these intermediaries were reserved for more complex transactions (i.e. Series B if not C onwards), but they’ve become commonplace for even pre-seed. One of the reasons is that they’re managing larger networks of angel investors and they have become this opaque layer to a plethora of other investors such as family offices.
The increase in family offices is an interesting observation because while it’s been a good few years since we observed liquidity tightening up to fund businesses in mainstream areas like Venture Capital, there is still a fair amount of money out there, including other obscure investment vehicles. Crucially quite a few are willing to take risks earlier.
If an intermediary can tap into these funds or other sources of investment, shouldn’t a Founder not explore such areas? But what are the risks if you do spend time exploring with an intermediary?
And it can be a frustrating experience because some ‘middlemen’ are wary and slightly paranoid – what if the parties cut me out of my commission? It leads to bad terms and bad communication – key areas for disaster and deals collapsing.
If you do engage with an intermediary, here are my seven factors for Founders:
- How much success fee are they charging? 5% is to me market rate. I’ve seen a few at 6-7%, but I feel this is a bit high. It’s also worth negotiating to cap this for larger rounds.
- Is there an upfront fee to ‘find and pitch’ alongside a success fee? I am not a fan of upfront fees, finding is part of their cost of business.
- Beyond the initial pitch to a potential investor, ensure you are in the room with any further discussion – a classic way to disintermediary you and keep you out of the loop.
- Be wary of many trying to secure jobs on your payroll post raise as ‘Investor Relations’.
- A great intermediary is on top of their communication – but even then make sure they’re telling you actual, useful information and not just nice, warm, fluffy words. It’s worth treating it like a good sales funnel, ensure you’re seeing progress with all prospective investors. If it’s dragging, then the intermediary is not doing their job.
- Make sure whoever the intermediary introduces you to is an investor, has the money, and not another intermediary – it’s not uncommon to end up hopping between two or three all trying to share out a commission.
- Finally, be prepared to write off the time spent and walk away.
My own experience has shown if managed wisely and you find one with a good track record, it could unlock investors you may not have previously been able to reach. But I also have conviction in myself and ensure I follow the principles above – if I smell a fish, it usually means there’s not much going on behind some flowery words.
Please share your experiences, have you had success? Any words of wisdom from others?
JR
Junaid Rahim 