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You are just getting started to fundraise, and you’ve floated your pitch out to an early audience to get feedback. It’s likely someone will recommend hiring an investment banker or agent to help you fundraise. Finding an agent isn’t hard; there are currently over 700 registered Exempt Market Dealers (EMDs) in Ontario alone. Compared to the 75 VC members of the CVCA in all of Canada, the Ontario agents alone dwarf capital providers almost 10 to 1.
If you are raising past a B round, you can stop reading here. First, you likely already know this stuff, and second, you’re in the clear regardless. Using Exempt Market Dealer (EMD)s or Broker-Dealers becomes more acceptable the later and larger the round.
Everyone else, please pay attention.
I could pretty much give you the TLDR as follows: investors strongly dislike taking meetings from agents. You still have to do all the work. Don’t pay someone to fundraise for you.
The not so obvious costs in an agent agreement come in the form of clauses in the contract. In particular, the exclusivity and tail provision clauses.
A good place to start is to provide a quick historical context on why we have so many agents in Canada. They aren’t here for technology investing. They exist as a necessary facilitator for raising capital for natural resource projects. As it happens, the skills of a geologist to go out and find and stake a claim in the Canadian wilderness don’t happen to overlap that much with the ability to raise a few million dollars to drill some holes to confirm new deposits.
Agents continue to play an essential role in the natural resource financing world. However, given the commodities price cycles, there are lean times for agents. That’s when they decide to broaden their pipeline to include non-natural resource companies, including high tech companies.
Before we jump into the reasons not to pay someone to fundraise for you, I’ll do my best to give them the benefit and cover the advantages of hiring an agent.
If you are considering working with an agent, make sure they are licensed. In the US, they will be registered with FINRA as a Broker-Dealer (BD). In Canada, they will be registered with their local securities commission. In Ontario, that would be the OSC, who registers exempt market dealers. If they aren’t licensed, they are fundraising illegally. You both will get into trouble if you transact an investment.
The main benefit of using an agent is the ability to quickly gain access to potential investors with whom the FA has a pre-existing relationship. Typically, an agent will sell the fact that they have a long, curated list of capital providers, and will narrow that list for you and give you a pre-qualified list of investors who will be interested in your startup.
You’ll remember from my last post, How do I connect with VCs, that the first steps in connecting with VCs is to build a list and get meetings. I’m not going to deny it’s pretty tempting to pay to skip those parts.
However, being on the receiving end of these ‘curated’ pitch requests, I can attest that the vast majority aren’t curated at all. I get pitches for oil services companies, real estate opportunities in the middle east, and infrastructure projects in Asia. Hardly curated at all! By the way, all these emails get deleted without hesitation or a reply. That said, there are a small group of agents whose emails I will read. There are a tiny number of good agents out there. That said, I’ve never done a deal brought to me by an agent. Buyer beware.
Regardless if coming from a huckster or the most reputable dealer ever, universally the emails go something like this: “Hey Christian, I’ve got a really interesting company for you to look at. The Founder,
Assuming I take the meeting, their work is done. It’s all up to you now to pitch me, and if the pitch goes well, spend the next few weeks spending a significant amount of your time with us going through pre-diligence, partners meetings, etc. Sure, the best agents will be there to review draft presentations and otherwise provide advice, but the bulk of their work is done.
So what will this all cost you? Typical agent deals are for seven to eight percent of the round raised in some combination of cash and warrants (so four percent cash + four percent warrants, or seven percent all cash, etc.) However, I’ve heard of some horrendous commission structures, such as a 10 percent cash plus 10 percent warrants. Those almost guarantee you won’t raise from sophisticated investors. The signal of desperation of such a deal would be far too palpable to touch.
Founders are the chief salespersons of their company. In early-stage investing, an investment is almost always anchored on the quality of the team.
That’s the most visible price. The not so obvious costs in an agent agreement come in the form of clauses in the contract. In particular, the exclusivity and tail provision clauses. The first is somewhat obvious: you can’t have more than one agent working on your company at once. However, this exclusivity typically also means that if your best friend introduces you to a venture firm, and you close a round with that firm, with no help from your agent, you may still need to pay the agent!
Similarly, the tail provision typically states that any fundraise transacted X months post your engagement is still covered under the agreement. In other words, there is almost no way around not paying an agent once you’ve engaged them. To make matters worse, most agents will ask for a best efforts clause. Which essentially states that they aren’t on the hook for hitting any minimum fundraise in order to get paid. Obviously, this is all negotiable. But honestly, why bother in the first place? After all, as I stated in the TLDR, investors strongly dislike taking meetings from agents.
We dislike taking these meetings for many reasons. The number one reason is we want 100 percent of the capital we provide to go towards building the business. We don’t want four to eight percent of our funds re-directed towards someone who simply provided a list of investors and some email introductions.
More importantly, founders are the chief salespersons of their company. In early-stage investing, an investment is almost always anchored on the quality of the team. If the team can’t even hustle to sell equity in their company, how exactly will they hustle to sell their product or service? Simply put, if they need outside help, it reflects negatively on them. The fundraising process is fundamentally a test of the founding team’s ability to sell. Anyone involved on a short-term paid basis in that process takes away from the team’s ability to shine, and thus, fundraise.
Given all of the above, it’s in your best interest to say no thank you to the offer to connect with an agent. After all, you know how to build a list and hustle for investors yourself.
PS: Since an agent, by definition, will be marketing your deal, your pitch will need a legal disclosure at the start. Having a legal disclosure slide is a negative signal when pitching VCs since we don’t like deals that are marketed. We want companies that have sought us out because we are mutually a great fit for each other. Expect negative comments in a VC pitch if you have a disclosure slide.
As Christian mentioned, agents enable you to skip the initial targeting and outreach portion of building a relationship with VCs. For lots of founders, this offer is simply tempting – it minimizes time spent on the most mundane part of fundraising.
But for many founders, whether first-time entrepreneurs, new immigrants, female founders, or those who otherwise lack potential introductions to VCs, it can feel like a no-win decision – “either I work with a broker and my email gets ignored, or I send a cold outreach email that probably gets ignored too!” This is a legitimate concern — but my advice is still to avoid agents.
Like Christian mentioned, warm introductions are still your best chance at getting serious consideration by a VC. However, great VCs acknowledge that there are systemic barriers that make warm introductions harder to facilitate for some. Christian gave great advice on approaching investors directly at conferences and startup events, but those events are time away from running your business (and for evening events, time away from your family).
VCs are increasingly hosting office hours for underrepresented founders – if you fit that category, apply! Leverage your relationship with one VC to get introductions to others. I frequently get referrals from analysts and associates at other firms (note that the first firm’s pass rationale will get shared, but different firms will evaluate and interpret investment risks differently).
Incubators and accelerators will have an investor relations contact; that person’s exclusive job is to facilitate introductions to VCs. If you’re not part of an incubator or accelerator, consider your mentors or PR contacts. A more senior founder has likely been through the fundraising process and can introduce you to investors they met with, and a journalist who knows you and your business well will have strong relationships with local and sector-relevant investors.
If you have angel investors who have made past investments, they likely have relationships with sources of follow-on capital you can leverage. Ultimately, tech is a small and helpful community that wants to help great companies succeed.