Generally if a founder has outsourced their venture capital fundraising efforts to someone else many investors can find this a red flag. This is in reference to early stage companies (pre-seed to Series A) in the Australian ecosystem.
Why is it a red flag having someone front investors on your behalf?
- Investment is in the founder: Investors at the early stage are investing in you, the founder and what you’re building. It’s not an investment in someone selling on your behalf who are likely to leave once fundraising is done. Having direct access enables an investor to understand more easily who you are and hear about your vision, mission and strategy.
- A vested interest in who your investors are will be beneficial in the long term: The relationship you will have with an investor once they’re on your cap table often outlives the average marriage. It’s best to be mindful and conscious of who you are bringing onto the journey and why. Query what value and support they will provide to you and the company going forward.
- Time and information delays can kill deals: It’s highly unlikely this person will have the same level of knowledge about you and your business. This mismatch may result in more time elapsing because of questions going back and forth. These kinds of delays can result in losing momentum and continued progress.
- Raised funds diverted from growing the company: Typically, the arrangement with these kinds of consultants/advisors is a percentage of the funds (often referred to as a “success fee”) they help you raise is paid to them. Depending on the size of your raise in absolute terms, this can be a significant portion of the fundraise — ie. Raised funds not going towards your growth plans.
I’ve heard many arguments put forward by early stage founders as to why they’ve decided to go down this path. I’ve included some comments and resources for each of the following commonly quoted statements.
“I don’t have the time and I just need the money”
Good news, you’re not alone! You’ve joined an illustrious group of founders and business owners who are…