Jul 22 2007

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
solution.