By Steve Baxter, River City Labs
Starting your own company is all the rage and that’s to be celebrated, but here’s a stern warning to all those pursuing this dream – there’s a certain type of individual you have to avoid at all costs.
The consequence of not doing that is simple: you will get duped and they will bleed you dry or make it so your start-up is fundamentally un-investible at a later stage.
I’m taking about so-called ‘corporate’ advisers who claim to help start-ups raise funds. They don’t have the capital themselves but act as a conduit or middleman between the start-up and potential investors.
They rear their ugly heads at start-up events, meet-ups, Facebook groups … anywhere they smell fresh blood – usually in the form of a first-time start-up founder who can’t tell the charlatan that they are.
They’re brash and brazen and speak with such confidence they could sell ice to Eskimos.
Their modus operandi is pretty straightforward: they take a 6 per cent (or more) raising fee with exclusivity (usually four to six months, sometimes longer).
They will claim to have great connections but will not provide any investor names until the start-up signs their exclusive raising agreement.
Recently a first-time start-up founder found themselves in this very ugly predicament. The start-up was still at the idea stage, prior to development of a minimum viable product.
The founder met an adviser who pitched to ‘help’ with their $1 million seed funding drive.
In the first meeting the adviser told the start-up it was ‘normal’ to charge a 6 per cent raising fee with an exclusive agreement. They would, of course, help with legals, term sheets, settlement – all the daunting paperwork that would confuse and cripple many new founders.
Not being a seasoned campaigner, the founder was thankful for the ‘help’ in such unfamiliar territory.
Predictably, not once during the first meeting did the adviser say it would be difficult to raise any funds without an actual product.
There are many people out there who don’t know any better. They believe that they can conquer the world with a single idea. So when someone comes along who can make their dreams a reality, they tend to bite hard and not let go.
In the next meeting the adviser told the founder “we never said we would help you source any investors”, but for a fee they could help with the term sheets.
“We can also help with legals and settlement but we’re not lawyers so that will be separate from our fees,” the founder was told.
Confusion reigned and the founder was left with even more questions than answers.
Once the adviser detected hesitance, they suddenly whipped up an investor “who loves your space”. But remember, you have to “sign the exclusive raising deal before we can tell you who they are”.
The good thing is the founder eventually smelled a rat and realised that the adviser wanted exclusivity for fundraising but wouldn’t bring anyone to the table. The adviser brought nothing to the table except to waste their time.
The more you gouge a start-up for fees (or equity in lieu of fees) at the start of its journey the higher chance you will kill it. You can make a lot of money from start-ups if done right – with a portfolio of incentivised founders and a mature-stage approach to market – but that money is typically made at the back end, when it is acquired or makes it to profitability.
I will not invest in a company with an adviser involved – it will be a straight no for me – period. As a company founder, I want to see your drive, skill and passion, not the adviser’s poor advice, misguided rationales and generally shocking attitude. They view you as a ‘mark’, not a genuine opportunity to help grow and prosper.
Steve Baxter is an entrepreneur, investor, founder of technology start-up hub River City Labs and founding director of start-upAUS. He tweets at @sbxr. Steve is also a ‘shark’ on Shark Tank Australia, with Series 3 airing on Channel Ten on Tuesdays at 8.45pm AEST.
This article was first published by the Australian Financial Review