Jon: All right. Welcome to the Venture Capital podcast. Today we are going to talk about the pros and cons of professional fundraisers. Peter, I don't know if people know what a professional fundraiser is. There's technically the official professional fundraiser and there's the professional unprofessional fundraiser that I'm sure the SEC would have issues with. Yeah, So let's head okay.
Jon: What are your thoughts on professional fundraisers? And let's talk about the ones that have their series four or nine eight. What is it? No, no, no, no messing up. I'm totally messing up. I am brain farting.
Peter: So there's different series.
Peter: Series seven. There we.
Jon: Go. There you go. Came back to me. Be proud of it.
Peter: But then they also need to be part of a broker dealer crew. They need to have their broker to dealer license.
Jon: So what are your thoughts on and maybe it depends on the stage, but what is it, the VC industry as a whole? What are the thoughts on this process?
Peter: So usually you call it like a banked deal, right? You got an investment banker and you're going to pay them fee, right? For every dollar that they raise. And you have to have that broker dealer license in order to do that, get paid kind of a fee for for funds raised.
Jon: Isn't this typically a position of people in the private equity and growth stage like in growth market capital?
Peter: Yeah. I mean, you can see it all over the place, right? Like there are people that raise money at the seed stage with with investment bankers all the way up to pre IPO and beyond. Right. Yeah. Used to be the purview was for investment bankers was more like when you went public and then after you went public and you wanted to raise more money as a publicly traded company you do investment bankers help you do that either selling more shares, or doing a pipe or what have you.
Peter: But as it's taken longer for these companies to go public and a lot of that growth has occurred when they're private, more and more investment banks have moved into the private markets.
Jon: But they're going top down are like, is the professional legal broker dealer, is this a common a common occurrence.
Peter: I would say is becoming more common. But No. Four series series, a seed series, I know that's not very common. And if it is and if if you need to have an investment banker, a professional fundraiser to raise your seed round or your series A, that's usually like a huge red flag because it's like, I don't know this.
Peter: There's so much money in VC these days and VCs are so hungry for the next, like big great thing that like they're chasing down deals on their own and it's like if you need an investment banker to sell your deal, then you probably don't have anything that compelling because if you had something really compelling like VCs would kind of be knocking your door down.
Jon: Okay. So generally, it seems like you're lukewarm on them for later stage. Early stage for early stage.
Peter: I'm lukewarm for later stage. I think they can have a place. Okay. Although again, there's a little bit of like if you're a really great later stage deal or company, like.
Jon: Why would you need it?
Peter: Why would you need them now? There are some instances where they can be super valuable. So one of them is maybe your team isn't like amazing at fundraising, right? And so it can be really helpful to bring in a professional fundraiser to help you through that process. Right? It could be that you just lack the relationships, right? And so they can open up a lot of doors and that can be helpful, right?
Jon: It could be you're an introverted CTO and you just want to build productivity.
Peter: Maybe you're an introverted CTO, although you'd be surprised how many introverted CTOs have no problem fundraising because they actually build really cool, compelling product. They get species excited. Okay, It could be that like you operate within a specialized industry and getting access to the right VCs is, you know, can be challenging. And so maybe you want to bring them in or maybe in some cases like FTP partners, they focus on fintech deals and they're really good at fintech deals and they bring a certain measure of clout when they're helping portfolio or when they're helping companies in the fintech arena raise money.
Peter: Right? Okay. Same thing with like Catalyst. Catalyst is another good example of a fund, areas of an investment bank that's very well-respected when it comes to tech deals. So it can be helpful when you have the right investment bank for the right reasons. But I would say it's super common to have a deal bank like have an investment banker.
Jon: Okay, let's keep talking about the like the legal ones and then we'll talk about the illegal unprofessional ones or the the backdoor ones. Now, how much are they typically charging for to be like.
Peter: Anywhere from like 1 to 4% of total raised?
Peter: I like rule of thumb is like to.
Jon: Rule them as like do.
Peter: Yeah smaller the company the lower the raise the higher the percentage.
Jon: Raise $1 million they keep 2 million. Okay. Or 1 to 4 somewhere in there. Yeah. Okay. And to become one it's the series seven search task, which I hear is a beast of a test. And you have to be associated with a brokerage. Yeah, a broker dealer.
Peter: A broker dealer? Yep. Okay. And I don't know all the ins and outs of that. I'm not a broker dealer. I've never, you know. Okay, so what? Not legal advice.
Jon: Let's talk about the unprofessional ones or the illegal ones. Okay? Because I feel like this.
Peter: Well, I mean, there's legal and illegal, and then there's also professional and professional. look like my friend. Okay, Raise, like, 40 million bucks.
Peter: For a company, not illegal because he worked there and that was his job, but it's to help raise money.
Peter: He wasn't the CEO, but.
Jon: He was supposed to help. Did he get it? Could be illegal because correct me if I'm wrong, you can't incentivize them on like a percentage of the raise. It's like you can't you can't hire a CEO with the intent of saying, hey, this CEO has a huge network and we are going to compensate you differently depending on the size of the raise.
Peter: Well, they didn't hire him purely for that. That was just one of his responsibilities. And honestly, I don't know how he was compensated at the end of the day. And I don't know all the legalities of of it, but I'm I'm pretty sure that if they are part of the company, they can be compensated for dollars raised in the company.
Peter: The difference is they can't be outside of the company.
Jon: Okay. I've heard that even with the CEO, maybe things have changed because I think this might come from ten year old information. So maybe I should have added this part is that with a CEO you can bring him in for raising. You can't give them a percentage or more equity or like based upon like the size or the.
Peter: That's probably true. Yeah. So again, I could be wrong.
Jon: So but I guess but, but you could have a vesting schedule. Hey, we're coming in. We want you to raise you didn't raise. You're not vesting. You didn't raise with an investor.
Peter: And you're fired. But if you stick around, then you'll get a nice big salary. I don't know. That's probably gray area. Maybe we should bring in an attorney to actually pontificate on this.
Jon: We'll do that in a later round.
Jon: Is this is it very common to have people in the, you know, who aren't broker dealers to want some type of compensation for helping you to race?
Peter: yeah, of course. Everybody wants everybody wants to get their cut right.
Jon: Okay. How is that looked at upon or frown? So, for example, like when I've seen angels, they'll be like, Hey, make me an advisor or a mentor. I feel like that's a negative signal when you want to get an actual series or seed round because people will look through that. Is that a big deal or is that.
Peter: Well, I think I think, you know, explain more what you're referring to.
Jon: So in my case, a few times in my life someone said, Hey, John, this is a great idea. You should go for funding. I'm not putting money in myself, but give me a percentage of the company and I will help you do this. And I've always just looked at that as a negative sign. Like if you're not willing to put in hold cold, hard cash, then a VC is going to see that as a signal as you're not that committed and you're and then therefore, how valuable is your recommendation going to be?
Peter: Yeah, but I don't know that like VCs necessarily look at it and say, this is a bad signal. I think they're just neutral on it. They're neutral like it's way stronger if you get somebody that actually kicks in money, right? Because then it's like, you actually are a believer of this, right? And if they don't, it's kind of like, it's cool that like they're willing to kind of advise you and help you, but I'm not going to I'm not going to put a lot of weight on it either way.
Peter: Right? It's like, you know, so very cool. Great. Like, whatever. If they're going to add like, real value and this is probably a whole other a whole discussion of like, how do you think about advisors and their role within your startup? But I mean, my quick high level thoughts is if they are going to add real value to your organization, even if it's not in dollars, like then I don't have a problem paying them with equity.
Peter: Right? I think that's totally reasonable. But you just need to be like very, very precise on the value that they're going to bring because so often, like entrepreneurs will meet with advisors and like, bring me on and I'll like make some intros and I'll help you fundraise and I'll give you advice. And they kind of don't do any of that.
Peter: And you gave them some equity. And like at the end of the day, the only value they added was like a picture on your pitch book and your your pitch deck. Like that's not real value. So I'm in the school of thought of like bring the advisors on, hold their feet to the fire and be like, If you do this, this and this, I'll reward you with some equity.
Jon: Okay. And then you just put it clearly in their contract. Again, make sure this is reviewed by your legal counsel. We're not giving you legal counsel or advice.
Peter: Yeah, Yeah. I mean, it could be like under a vesting schedule or whatever it might be.
Jon: Yeah, Well, awesome. Well, there any points you'd like to add on this on this concept of should you hire a professional fundraiser and what the pros and cons are.
Peter: Yeah, I mean, I think, I think we hit on a lot of the big ones. I generally it's going to it's going to be a somewhat negative flag right. That doesn't necessarily mean you shouldn't do it. It's just you need to know like it's going to be a bit of a negative flag and you should be really thoughtful about the reasons why you are doing and the trade offs there.
Jon: I think the best time is if you can like let's say you're raising a $20 million round. Yeah, you get the first 25, 30, 50% committed, then it might be easier to have someone come fill it up.
Peter: But yeah, maybe. But even then, like the hardest thing and around is getting a lead investor, getting somebody that has conviction, they're willing to write that check and take the board, see and price the round and like, you know, take that risk. Once somebody does that, usually there are plenty of people in the wings willing to step up and fill out the rest of the round.
Peter: I hear what you're saying. And sometimes that could be helpful. But generally, like the part that's the hardest that you arguably need the most help with is getting that lead investor right.
Jon: And that's maybe a good podcast.
Peter: Peter That's where it's like struggles a little bit. Like that's where like a lead investor is going to look at a bank deal and be like, like, why did they have to get a banker? Like, where, where's the hair on this one? Right, Okay.
Jon: And there's and there's $2 million right off the top of their investment.
Peter: Right. And exactly. It's like, yeah, we're going to put in 100 million bucks and 2% of it, like right after that's gone. Although, like, you know, like one of our portfolio companies are using bankers. I think in their case it makes a lot of sense. And for them it's like, yeah, it's like 2%. But the whole management team is having to work quite as hard.
Peter: And so they're able to dedicate more time. And it's like, well, you know, maybe $2 million is worth their time. I'll be able to focus on the business and growing the business instead of out fundraising. But they're a growth stage company. They're raising a very large nine figure round like it's a different situation and in a lot of ways.
Peter: And they're also in a nuanced industry. And so, yeah, I kind of get it now. Did they really have to have a investment bank helped them? Probably not. But in that case, I think it was valuable. So.
Jon: All right. Well, thanks, Peter, for being on this podcast. Make sure you like subscribe, check us out on YouTube. Spotify, Apple Music links will be below if you're on YouTube, so or in the show notes. All right. Thanks, guys.
