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Pay to Pitch?

Should entrepreneurs pay third parties to help raise money? This is a perennial question in the venture world. It comes down to two things:

• Will the investment in outside help pay off?
• Will investors see paying for help as a negative factor?

There are different kinds of fund-raising help. The main ones are: “investment bankers”, agents, and finders who help you find and engage investors, and fund-raising venues (conferences and the like) where entrepreneurs pay to attend in order to meet investors.

Bankers can be helpful. They can refine your story and materials, and they often have current information on which investors are active and what they like to invest in. Then know many investors and provide introductions with varying degrees of warmth. They are often good at managing the process with multiple investors (which can be a big drain for executives) to get them to the finish line close to the same time and maximize perceived competition for the investment.

The banker value add is biggest for a later stage company trying to raise a large amount of money from multiple investors including strategic investors. For a small, early-stage raise the banker value add is less, however, some bankers specialize in this market and add value as coaches and match-makers.

What about the stigma of working with a banker? One of my investor friends likes to say that “the best and worst deals have bankers attached”. He means that the best later-stage companies use bankers to create an auction, and desperate companies hire bankers out of hope that they will help.

There’s a grain of truth here, and some bankers behave differently than others. The best bankers are selective in whom they choose to represent and which investors they approach. Most of their compensation comes from success fees. So their involvement indicates to investors who know them that they believe the deal is fundable and appropriate for the investor. Other bankers SPAM inappropriate investors with formulaic PPMs, and one can guess that their minimum fee is high enough that it motivates them to go through the motions even if they prove ineffective.

So if you decide to use a banker, choose one with a reputation for focus, value added, investor relationships, and determination to get the deal done, and keep the minimum fee down so incentives are aligned. While investors are dismissive of bankers, most investors pay attention to deals that some bankers bring.

I think investment conferences are more useful for networking and PR than targeted fund-raising. I know of a few investments that started with a meeting at a conference, but it’s a small percentage of the total. Most investments result from introductions of one kind or another. Investors like to think they find companies with special, unrecognized value; finding a company via a pitch to a large group of investors at a conference does not fit that image.

Like bankers, conferences vary a lot. Some charge modest fees to entrepreneurs and are attended by lots of investors; meetings of the regional venture capital associations often fit this model. The investors are there to network and will attend a good number of pitches. In other cases the entrepreneur fees are high, and the investors pop in and out for panel appearances that advance their own PR agendas. So caveat emptor here.

And likewise beware of the “top companies” lists that conference organizers create. If the conference is sponsored by a publication that has brand value, inclusion could have some value. Mostly, however, investors don’t take these rankings seriously, especially if it’s known/suspected that the conference organizer is getting paid for the listing.

So, how do you get meetings with investors? My suggestions (not comprehensive) are:

• Read their web sites. Decide if you like what you see. Learn what they will invest in. Look for recent new portfolio company investments to verify that they are active. Choose the ones who offer the best fit.

• Look for referrals to members of the team from a former portfolio company executive, lawyer, accountant, or other investor: like any other selling situation, a personal recommendation makes a big difference.

• Consider working with an intermediary that has credibility with investors because they do a good job of selecting fundable deals and matching them to investors likely to have appetite.

• Write a good first meeting presentation or 2-pager (see my earlier post on how to do that) and send it, preferably to the person to whom you have an introduction. If you have no introduction, look at the web site; it will tell you how to submit a plan.

• If you can’t afford a trip to Boston or San Francisco, do a first meeting via video-conference; Skype is surprisingly good (and free).

• Follow up with energy and courtesy if you don’t hear back within two weeks.

And good luck!