Upfront Fees vs Success Fees (Fund-Raising)

I’ve really been infuriated with the whole issue of fund-raising success fees recently. I’m sure this has been an on-going debate for years but it was brought into sharp focus by Jason Calacanis about a year ago in his blog article which blow the ‘pay-to-pitch’ networks out of the water for charging start-ups on the promise of helping them to locate investment but also for undertaking ‘investment readiness’ work on behalf of such businesses, often in the form of developing or re-working business plans. Doug Richard also joined in the debate with his own take on the issue, lambasting what he described as the ‘bottom-feeders of the angel community’ in a series of four articles – a link to the fourth one is here. I agree broadly with both Jason and Doug but I think that a few babies get thrown out with some very dirty bath water. I agree, there are consultants galore and government funded agencies that should know better, fleesing early stage business and providing very little in return. They know that they can probably help companies with the tangible work of making them ‘investment ready’ ( i.e. reworking/developing their business plan etc) but fund-raising activity is described of in the terms of exactly what it is, an inexact science or art. Fund-raising gets hidden in the tangible work of investment readiness preparation, so that it can also be charged for – upfront.

On the other side of the fence are entrepreneurs that are just not ready to have their business checked out by investors and because they hear too many “I’ve been scammed for up-front fees” tales, or fees are ALWAYS bad, they never get closer to investment capital. All this can be seen in glorious never-ending dialogue on one of the longest running linked in debates I have ever been involved in, or ever seen. It’s in a Linked in Group called ‘ENTREPRENEURS-GET FUNDED’ and is entitled “Where are funding companies available that do not charge upfront fee but only success fee?” In just around one month, this forum has been extremely lively, totalling over 130 postings.

I believe that there is a sliding scale for businesses heading towards investment capital and like most things, when you need to draw upon people’s time or effort, that usually means paying somewhere along the line. If you have time, here is how I, rather confrontationally, made my case on the above LinkedIn forum …..


Last month I helped a company get the investment funds they were seeking (£200k) after 3 months of work. I tend to deal mainly with early stage, pre-revenue businesses. Here is an approximate breakdown of what happens with my inbox and the companies that ask me to help them raise finance:

5% – Businesses I chose to work with, who decide that I am also the correct fit to represent them to business angels, VCs and other investing groups. These businesses look really smart in every way when I assess them – investors usually feel the same way about them also. Not perfect propositions but really smart people, with smart ideas, big investor payback, who have tried as much as possible to validate their propositions in some way. In this climate, only the best will get funded.

30% – Business propositions from presentable people that seem to have a reasonable opportunity but I decide to not take a further look because: i) their sector is a sector I cannot make a strong enough decision upon ii) either the executive team, business plan or exit strategy do not seem strong enough. Those in this category have the possibility of getting funded if they make some changes. Most need advice to know where and how to make these changes. The changes will take time and effort and paying someone (probably up-front fees) to bring them to the necessary standard is the most realistic way for them to achieve this standard (I used to do this work for up-front fees but I am no longer interested in this category of work). Those intermediaries not asking for up-front fees (like myself) don’t want to work with such businesses because of the effort and time involved to get them ready. It makes more sense for us to look out for the 5% – as described above; especially as there is a wealth of opportunities / business plans for us to choose from.

65% – The rest all fall into the category: in-experienced, deluded and the non-investable. In short, they are the problems themselves. These are usually individuals / companies that do not realize that they are in this category and have a poor understanding of the drivers involved in the investing landscape. They usually have an aversion to paying fees (sometimes understandably if they have been shafted by a scammer) but they don’t realize they have a long way to go before they will be ‘investment ready.’ They are often seen moaning in forums like this because they can’t get close to investment capital. It is unfortunate but they have a real problem i) because they won’t pay for help to improve their proposition and expect intermediaries to take on the full risk of the fund-raising along with them, they also feel that the investing community should be configured in a different way than it actually is, or ii) because they can’t distinguish between scammers and those that can actually advance them. If you are in this category, or are not sure if you are in this category, how about approaching a ‘free-to-display’ fund-raising or fund crowd-sourcing website? I have a link to a few on my blog here: http://is.gd/dVE3F If you get nowhere, then maybe consider the fact that the investing community is not turned on to your proposition and you need a different approach or strategy.

This article, although higher up the feeding chain and from a VC perspective, touches on the same subject and is well worth a look, here http://www.theequitykicker.com/2012/02/16/kernel-column-advisors-they-dont-help-vcs-but-they-can-help-start-ups/

The following TechCrunch article features a rather limp perspective on the issue and an even more limp response on the subject but still worth a look. Here.

(As always, I appreciate the comments that you leave in this blog so feel free to leave your thoughts)


About Aristos Peters
I work rest and play in the digital space, with particular interest in digital startup companies and their need for seed, angel and VC investment. As a NED, I have worked with several start-ups, taking them through funding rounds and also work on investment acceleration and business growth helping companies to become investment ready. Currently about to launch the startup fundraising app D RISK IT (www.drisk.it).

2 Responses to Upfront Fees vs Success Fees (Fund-Raising)

  1. Ash says:

    Dear Aristos,
    Good article, thank you for sharing. What I get from your article is, you probably spend 80-90% of your time looking for those 5% (investment ready) companies and remaining for 30% category? And probably no time for 65% category?? And which I think is fair in your case. However, what would you recommend for a consultant company like us? We create business plans for companies or people like you who outsource the work. We mainly attract clients through my website (www.biz-aid.com) and online directories. So, we don’t promise them investment, don’t ask for upfront fee but we make sure that the client’s business plan is investment ready and we charge them for that. Helping client to raise funds is not our primary focus, however, few of our clients have asked us to do that recently, so we are in a process to do same for two clients. If we secure funds, then ofcourse, we would make good money through commission. Just not sure, how much time we should dedicate for the current and future clients. Any suggestions/tips?

  2. Hi Ash

    Thanks for the comment, it’s a good one.

    It’s worth distinguishing between the two services of ‘Investment Readiness’ (IR) and ‘Fundraising’ (FR). I don’t like doing IR and leave it to those people like yourselves who do and who are good at it. I believe that it is right that you are charge for this service also. Fundraising is a different animal and as it is impossible to guarantee the outcome of successful funding. The whole funding landscape is a mess. There are the founders who are in startup or early stage mode, they want investment but of course have no or sparse available cash to pay a retainer for either investment readiness or fundraising work. When they do try to ask for help from an individual or group to broker on their behalf, they tend to try and ask several brokers, so they end up trying to hedge their bets. They in effect just use the brokers for investor ‘access’ but are usually in most cases, peddling a half baked deal and need more investment readiness work done on their executive summary (for me this summary is their go/no go test. If they can’t past the simple test of putting together a decent ES then they cannot hope to make it past more strenuous investor grillings which will inevitably follow).

    If you are considering moving into a degree of fundraising – and I think you might be asking how much time should you dedicate to this. Firstly, consider this old article of mine: https://weklik.wordpress.com/2011/03/17/the-metrics-of-fundraising-from-business-angels. Secondly, I would suggest that you pick no more than 1 or 2 fundraising campaign every 6 months. Treat them as speculative and only do them if you have time and spare capacity. I spent 12 months on a $3.5m deal last year and got two investors putting offers on the table. The founder was interested at first but then after a few months turned round and said he wouldn’t take either offer as he didn’t like the valuations being offered. Twelve months on that deal!! It can happen.

    So, below are my top tips in helping to ascertain when to undertake fundraising activity and when not to:

    1) Only do fundraising on your terms. You are the one potentially working for nothing, speculating pro-bono.

    2) Use an unbranded executive summary (ES). What I mean by unbranded is to use an ES that cannot be traced easily back to the company. It should be written in the third person as a factual (non promotional) proposition and with no company branding or way of knowing who they are. The investor can get full disclosure of who the company are, once he/she has expressed interest in a further conversation or a look at the business plan. An unbranded ES keeps you the intermediary or broker in control but it also protects the IP or go-to-market strategy of the company that is fundraising, from getting into the hands of the wrong people (competitors, etc).

    3) Get exclusivity – at least for an agreed time period (3-6 months?). Check that there are no other brokers lurking around. They could circumvent your success fee and cause you to waste time and effort needlessly. If they are prepared to go with 3 or 4 brokerages/consultancies then they don’t really value your time/effort and are only speculating on gaining access but speculating with your time and effort (the broker is shouldering most of the risk and that risk increases the more brokers the founder enlists). There is no fundraising or risk appreciation on their part, signalling that they are amateurs and you will only end up in arguments somewhere down the line, either on the issue of fundraising, fee split (if you are successful) or on some other matter.

    4) Pick winners only. Or at least ones you feel are going to be winners and winners in this context does not necessarily equate to being flyaway successful businesses in the long time but a business that is likely to attract investors and therefore receive investment. Winning at this stage from your brokering perspective is about a successful funding deal, not the future business success.

    5) Wait until all other conversations are closed (especially if they won’t give you exclusivity). Otherwise you put a few months of manpower into a campaign only to learn that an investor has come forward from another brokering source. They get the 5% commission, not you.

    6) Watch out for those that need funding quickly (“We need to be funded in the next 4 weeks”). Some people are happy to take projects like this on but I run take on campaigns not crisis funding. If you need quick funds then go to a corporate finance person. If you are looking for small money (less than $500k), its got to be a pretty amazing deal to be worth bothering with.

    And finally, I think I should add that the app I’ve created for start-ups and early stage businesses might really help you sift through your deals. Perhaps get one of your founders to pull of a report from the app and submit it to you. You’ll then get a pretty good idea as to where their weak areas are. The app can be got from the links in http://www.drisk.it Would you like me to put you on our contact list?
    Best wishes and thanks for a great question.

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