An Investment Bankers’ View On Brokers in Early Stage Fundraising

(Brad): I got an email from Donna Murdoch at The Keystone Equities Group in Philadelphia taking me to task for the post Jason wrote on 1/17/07 titled Are There Venture Capital Brokers?  Donna – who I do not know – didn’t like our perspective and suggested a different point of view.  I encouraged her to write a point-counterpoint type of post for AsktheVC which follows.  Donna – thanks for taking the time to express your perspective.

From Donna Murdoch at The Keystone Equities Group

I’m in Philadelphia and  I stumbled across an article in Ask the VC today – which didn’t agree with the use of brokers or consultants for early stage funding. I would like to pose a contrary point of view. Yes, I am an Investment Banker.  But I still love the true start ups and earlier stage companies, where an entrepreneur’s enthusiasm provides a rush of endorphins.

I was surprised to read the article saying that VCs turn our deals away because of what we do.  We do a lot of M&A and work with expansion stage companies – but we do also raise money for earlier stage companies.  How would they know how to do it?

Maybe in Silicon Valley, where everybody and their friends are starting companies.  But in areas like Philadelphia – where most people have JOBS…..they have absolutely no idea how to do it or what funds even exist outside of the 2-3 everybody here knows so well.

These entrepreneurs need to get themselves ready for a capital raise and just don’t know how – how far along in the beta do we need to be?  What should my PowerPoint look like?  Do these projections look realistic?  And how do they know where to go, what VC firms might exist, let alone be interested in their business and focus?

Point being – while you might be right in “Ask the VC” about companies in areas where start ups are the norm – and where Rock Stars prevail – in geographic locations where they are looked at with raised eyebrows for taking risk and it is often their first time – there is no peer group to consult.  Sometimes “consultants” (Investment Bankers like us) might be the only option.

Most likely the presentation the VC hears from a Banker will be clear and concise, and they can assume they are only being called because the potential deal is a good fit.  Does one who knows how to build a community based alternative energy website or power generation asset management software tool –  also need to know how to follow the 10/20/30 rule?  (maybe they do – I am just posing the question, not answering it).   Considering the fact
that raising early stage capital is a one time thing (usually), should so much time be spent learning a whole new business?  Perhaps they need the support, expertise and connections that aren’t as readily available in some communities.

My personal feeling is that if you can find a small firm with knowledgeable professionals like us – who have a good comprehensive knowledge of your industry and feel the heartbeat underneath it – why not spend the time and effort on the development of your company, rather than embark on a brand new learning track. It could be a good

  • Entrepreneurs in Philadelphia might want to try one of the many investor angel groups in the area. These angel groups will likely have many individuals that have raised capital in the past and are willing to help-and-possibly invest. The vast majority of angel groups do not charge a fee…
    LORE Associates
    Mid-Atlantic Angel Group
    Minority Angel Investor Network
    Angel Capital association
    and others…
    Entrepreneurs must do their homework…..!

  • Suggesting that startups don’t need brokers and bankers to raise capital is akin to the many bloggers that stated that startups don’t need a business plan or a strategy. Eventually reason prevails and it will again on this issue.
    Some startups have great networks for capital raising and some need help. Some bankers have good relationships with VCs and their client overviews get read and meetings granted. Maybe it’s an east coast phenomenen, but the VCs here do not appear to discriminate based on who sends the company summary. They do, however, negotiate hard on the fees paid the banker because, as you say, it’s their money.

  • I’m not sure it is a coastal thing as much as it is a network thing. Raising money is not easy. Too often inventors, founders, and the rest are not very capable fund raisers. So they need some help. Granted, in Silicon Valley and Boston there are large numbers of people with money raising experience. Some will even help for equity, but most want some form of payment for the service they provide.
    The big problem is that most companies go out for VC money too early. Add to that the emergence of angel groups that want to be VCs, complete with arduous demands and overblown egos, and you have a very difficult time raising money even early on. What has almost disappeared is the individual angel who nurtures the weak start-up until it is ready for something more. Kind of like the old patronage system that supported many artists and explorers.
    I see many entrepreneurs as Modern Magellans setting off to discover new lands and passages. They know how to sail their ship close to shore, but they don’t know how to navigate in the open water. The experienced angel or repeat entrepreneur can help them with these new challenges. I guess I would trust someone who has been there and done that more than someone who does banking for a living.
    Yes, you need a plan. Yes, you need money. What you don’t need is a partner who plans to be involved only for the money.

  • Donna Murdoch

    Conceptually Angels might be a good idea for help, or for investment. But similar to my post about peer groups not having the experience useful to help in fundraising in certain geographic areas – many of the members of Angel groups here are people who had jobs or positions in existing large companies and they had options granted – and ended up having a liquidation event because they were there at the right time. They are not necessarily people who ever went out and started a company or raised funds themselves. In this area, my example is by far the majority. Wonderful as investors! But in most cases they are not people who have ever started a company, funded one, took a risk, or bootstrapped until funding (there are exceptions of course)

  • David Locke

    How will a banker help make a deal that they themselves wouldn’t make?
    If you go to a bank, they want underwriting. You need an underwriter, because banks don’t take risks. They don’t lose money.
    Once such underwriter existed back in the boom. Reading the Wired article on that underwriter made it real clear to me that I wouldn’t use one.
    VCs take more risks. You can think of VCs and bankers as belonging to different cultures much like the clients and customers that the startup will sell to over its life. VCs and bankers are different enough that you can say they really have no particular in when they talk to each other. It’s about the same as geeks and mass market consumers. Sure, they can say hello. Then, what?
    The problem with a business plan presented to a VC is that it’s fiction. If you do that to a banker, you go to jail for fraud. In a startup, a plan means expectations, and the business will go where it will plan or no plan. If you stay on plan, you go out of business. The business plan is supposed to come afer the executive summary. The business plan can wait until the VC gets you a business guy to help you with the business plan. That business guy wouldn’t be a banker.

  • Just us

    Donna Murdoch fromu00a0The Keystone Equities Groupu00a0 …. u00a0 u00a0A bed-hopping inside-trader who cut a deal with the feds has helped convict a second lover of stock fraud. u00a0That man, lawyer James Gansman, who leaked to Murdoch secrets about corporate takeovers, was sentenced to a year behind bars after Murdoch sold him out and testified at his 2009 trial.Murdoch was also carrying on an affair with a former Ernst & Young partner she met on the same saucy Web site. u00a0Read more:u00a0 more:u00a0