Fundraising can be hard work and the opportunity to raise investment can come in many ways and from many places. Occasionally, those places charge a fee for the right to pitch and sometimes those fees are worth it and many times they are not. I keep coming across situations where startups (including the ones we're backing) have been given the opportunity to gain investment in exchange for a fee. There are several permutations how this situation can arise and it's not always a bad idea but these situations should be considered carefully. Recently, here in Europe, Tech.EU has kicked off a debate on whether WebSummit and other similar investment focused events are worth the money. This is what I tell our founders:
1) Special Purpose Vehicles (SPV) type deals
This type of investment is when an individual or organisation, that isn't managing a fund, get several investors (typically wealthy individuals) to club together and invest as a group in a deal.
I've heard of some European VCs using this type of structure to bring in additional capital from outside their fund into a specific deal. More often, I find Accelerators forming such groups to follow on in their startups. These are both good circumstances; it's great signalling when a VC or accelerator want to raise money just to invest in you.
On the rise, however, are individuals or companies that do this as their business. In these structures, sometimes the cost of forming the investment is passed on to the startups (typically 3-5%). (Full disclosure: We have a good relationship with U-Start, who invest in startups through an SPV structure)
Generally, you should consider some of these SPV deals as to co-invest alongside your lead investor. General points to consider:
Cost. This isn't always a bad thing but when the cost is passed on to the startup consider its merits before moving ahead. If the charge is in line or a marginally more than taking investment from an institutional investor (where it's typical for some investment cost such as legal fees to be passed on) be pragmatic about it. Of course, where the investment costs you more, try to keep their share of the deal as low as possible.
Control. Pay close attention to how the SPV is structured. Who retains the control over the shares, i.e. shareholder voting power or board seats. We would suggest you get one party to manage all the shares of the SPV, just like a VC does for their LP's money. I would go as far as to say avoid situations where each investor manages their own shareholding. Beware though, if the SPV broker is managing, still build a good relationship with the most powerful investor as he/she probably still calls the shots. Once you know how it's structured, and you're comfortable with them being a part of your business- then consider their investment.
Due diligence. Getting the wrong shareholder is often just as lethal if not worse than not getting money at all! I've seen startups spend over a year trying to get the wrong investor bought out. It's a distraction at best, and can spell the end at worst. Just as they will look at your startup and ask you all sorts of hard questions, do the same with them. It will be harder to piece together how this group or most of this group acts as a shareholder. That should not prevent you from trying or going directly to them to find out more information. When startups give us an equally tough time wanting to know every little bit about us, how we invest and act- we love it. I take no offence, and like the fact you're doing it as it reassures me that you'll find good co-investors for the current or future rounds! So don't be afraid to ask the tough questions
2) Investment brokers
These are individuals or organisations that help get you investment from a network of investors (individually rather than a group). They also typically charge you, the startup, a fee for this service (I keep coming across fees in the range of 3%-5% of invested capital). My advice to startups is to use them strategically. Don't start your round through them, but as you would directly. However, if you are targeting specific VCs, corporates, angels or other strategic investor that is outside your network and your hustle doesn't seem to be getting you any closer, then use the broker. A specific value add investor will probably (or hopefully!) be worth the fee they charge.
One further point: always read the small print! One of our startups inadvertently signed a deal which committed them to paying a commission on all the money they raised, regardless of whether it was through the broker or not.
3) Pay to Pitch "Groups"
There are entities which often present themselves as angel groups, when, in reality they are coordinators of an event where you pitch to angels or other investors. On the face of it there is nothing wrong with this... until they want to charge you a fee for the privilege. My view is that you treat these events like you would a conference that you're attending to meet a specific investor (I deal with this in the next section). Don't be afraid to be cute about it and try to get a meeting first with the investor before or after the event if they want to meet you so you don't have to pay the fees. I would typically advise you to avoid paying for the right to pitch. Investors want good deals and there are other ways to get to them without paying for the privilege. If the only way you can get an investors time is by paying for it, then I suspect there is work you need to be doing before raising money.
Firstly, conferences are expensive to put on, and are businesses themselves. Deal with it. Now, I couldn't agree more with Mark Suster's "Don't be a conference ho" article. That, don't be that! So now, what conferences should you attend? Simple, the ones where your customers are. Those are the ones you should invest the most in. Do the rounds, speak to your competitors, clients etc. to work out which is the best to attend. You'll hear of the good ones, and people will moan about the crap ones. But be there to build your brand, meet prospects and sell!
Tech conferences. The truth is that there is a place for them. But personally, I don't go to many and I don't think startups should either. Think carefully about what you want out of this. There is value in being there to meet other startups and spend time networking with other founders. You learn the dirt on VCs, hear that your problems aren't that uncommon and you'll probably even find other startups to collaborate with somehow. So research the conferences to find the ones where you know you'll get real value from the networking and socialising.
If you're looking to meet VCs, it gets harder. Most VCs do try to be helpful and want to meet startups they are interested in and it is true that some deals happen as a result of conferences. However, VCs are usually very popular and it's very easy to miss the opportunity to see them. Picking smaller more focused conferences where your target investors will be can increase your chances of meeting and getting time with them. Of course, please also make sure to reach out and try to set up a meeting for the conference before you even get there. I was at WebSummit and received requests from startups to meet for weeks before getting there. I did my best to arrange time to meet with the startups in areas I'm looking at. A founder I know has "gone" to WebSummit to meet investors but has yet to pay the conference fees. If you're not convinced by conference fees, you know what city they're in, feel free to score a sponsored party invite instead or set up breakfast or drink meetings in the city with the investors when they are likely to be between things. If they want to meet you, they'll make it happen too.