Brad Feld

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Investment Agents – Good or Bad?

Dec 30, 2005

Over the past year, I’ve regularly gotten questions via email on venture capital and entrepreneurship from readers of this blog.  I always try to respond.  A number of these questions were easily bloggable but for some reason I fell into a default mode of responding to the email rather than writing a thoughtful post.  I’ve decided that – going forward – I’d try to be more diligent about posting my responses to these questions (which I encourage) as well as commenting on questions in comments (I was very inconsistent about that this year.)  One can always improve, right?

The question I woke up to today was “I browsed your site today looking for a clue on how VC regard entrepreneurs who have engaged an investment agent to assist them with raising capital. It’s a decision I’m considering, because getting an agent to represent us will free up more of my time to focus on execution. My fear though is that an agent will either get in the way of a deal, or just be viewed negatively by VC (agents will probably work harder than entrepreneurs to raise the valuation by encouraging competition among VC for the deal etc).”

To answer this question, I have to segment this into “early stage VCs” and “later stage investors (including VCs)”.  Many early stage VCs – especially those that are in saturated geographies and see a lot of deal flow – don’t pay much attention to deals that are promoted by an “investment agent.”  I know a number of folks who simply “hit delete” on an email (the virtual equivalent to tossing the physical PPM – the document most agents insist on putting together – in the trash.)  In the early stages, the entrepreneur is by far the best fundraiser for his company and there is a knee jerk negative reaction by many VCs against early stage deals that “require” an agent.  At the early stage, an entrepreneur is much better served by finding an advisor (or set of advisors) or angel investor that has good VC connections and fundraising experience who can get actively involved in the company as advisor, board member, consultant, or even chairman.

Later stage companies and larger capital raises are a different story.  The universe of later stage investors is very dynamic – consisting of corporate (strategic) investors, high net worth individuals, private equity firms, and hedge funds – in addition to later stage VC firms.  Many firms enter and exit the market regularly for a variety of reasons (e.g. a number of hedge funds have recently started doing what traditionally look like late stage / mezzanine VC deals).  An agent who is active at raising later stage capital will typically have some relationships with folks currently in the market, can run the drill of identifying the primary suspects for the entrepreneur, and can help manage what is typically a more complicated and less structured financing process (e.g. there often isn’t a clear lead investor in a later stage deal.)

As with anyone that you engage to help you with your company, doing your own due diligence and background check on the agent you are considering using is critical.  The ratio of charlatans to qualified agents is probably 100:1 – the vast majority of folks that claim to be able to help companies raise capital are pretty useless.  The diligence process is easy – ask for a complete list of successful and unsuccessful deals the agent has done in the past 12 months and then dig in to the details of the list, talking to the principals involved in the transaction (including the lead investors that agent brought to the table) to see how much impact the agent had on the deal.

Finally, don’t make the false assumption that an agent will “free up more of your time to focus on execution.”  This isn’t going to happen – if the agent is good he will help with the process, but the entrepreneur will still be on the front line of the fundraising activity. Any new investor is going to want to hear directly from you. For the period of time that you are raising capital, this should be your primary mission in life (to raise the money you need to continue to run your business) – no one will (or can) do it better than the entrepreneur.  Your lawyers, agent, and others will help, but the burden of the financing will almost always be yours.