Upfront Fees vs Success Fees (Fund-Raising)
August 3, 2010 2 Comments
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 …..
“I DO NOT CHARGE UPFRONT FEES ….….. BUT IS YOUR BUSINESS GOOD ENOUGH TO BE REPRESENTED BY ME (95% ARE NOT) ?”
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)