Every startup and small business ends up meeting, at some point, a person who is a professional door opener. In the past few weeks, my company, iotum, has met a number of people claiming to be able to use their professional networks to help us raise money, or close business. I’m always wary of these guys. They’re usually expensive, and want to be paid whether there is a successful result or not. Usually they’re asking for a retainer of some kind, plus a commission on business.
After the latest, I called around to some friends in the business, and asked for their reactions, which mostly confirmed my own.
A VC friend said that he didn’t see intermediaries adding value. It was pretty black and white. This jives with what I’ve heard from other VC’s as well. If an investor is going to put money into a business, they’re not interested in seeing that money used to retire old debts. They want to see it put to work building the business.
As the entrepreneur, it’s actually not in your interest either to have someone else raising your money. This early stage of the relationship between you and a potential investor is critical to building your relationship. At some point, the investor is likely to be a board member. You need to be building that relationship from the start, which you can’t do through an intermediary.
Some of the folks I called were more enthusiastic about using intermediaries for business development work. Depending on the individual, this is effectively contracting out your sales function to someone with a strong rolodex, and sales ability. The key to success is to define the engagement around the best prospects in that rolodex. That’s a win-win for both parties. The only cautionary note is to be aware before going into the relationship of your capacity to service the customer you’re courting. Winning a really big deal can be a double edged sword if you can’t service that customer properly.
How to handle the expensive fees? Pay for results. Increase the commission offered, and reduce or eliminate the retainer. If the rolodex and relationships are as strong as they’re being represented to you, the aggressive individual will jump at the opportunity to earn more money.