Today, at #CampusEdu on Startup Fund Raising, wasn’t the first time I’ve heard investors warn about being swindled by people who act like investors up front, but in reality are connectors who help you polish your offering and connect you to the real investors.
It’s valuable advice.
Founders are under pressure when raising funding, and a friendly, supportive facilitator can be a welcome presence. Specially, when he’s misrepresenting himself as an investor. The misrepresentation hurts more when either the promised funding gets delayed, or disappears, but even more when the facilitator takes a hefty cut before passing the funds on the startup, disrupting runway and plans.
On the other hand, the ‘connectors’ are not entirely to blame. Two factors, described below, actually create a valid market for them to cater to:
- A disproportionately large proportion of capital available for investing in startups is in the West – primarily US & Western Europe. This presents a handicap for startups in developing world – South Asia, East Africa, Latin America, and SE Asia – limiting most of them to a small clique of domestic investors, at least for the early stage raises.
- Must investment funds prefer funding startups that they get introduced to from existing contacts – founders, investors, LPs, etc. If a startup founder isn’t already connected to these networks, getting good and proper introductions can be a high hurdle. A great product, with outstanding metrics, and/or team does still get funded, but for many good-enough startups this may just be another glass ceiling to crack heads against / hustle around.
This mix of geographical and social barriers creates an opportunity for a kind of individual to facilitate fundraising for startups. And nothing good comes for free.
The problem here, it seems to me, is not that there are facilitators in the market, but that they are misrepresenting themselves as investors to gain credibility.
The solution, in my opinion, seems to be to legitimise them.
If the investors accept that there’ll always be segments of the market that could have really promising startups who may be struggling to each them for one of the reasons above, or others, there’s a way forward:
- Publish a list of accredited facilitators that the investment fund works with.
Just the way companies work with accredited recruiters or advertising agencies. Except, make the list public, so potential investees can see it and reassure themselves that they’re not being taken for a ride by the facilitator.
- Lay down a set of rules, partly public, about facilitator codes of conduct – %age fees, confidentiality, misrepresentation, etc.
Even better if the industry can agree on a set of rules, and make them a standard.
- Do not work with, or accept meetings from, facilitators outside your (or industry’s) accredited set.
This helps bring the facilitator networks out in the open, makes their terms of engagement clear, and gives founders the confidence to engage them without them having to misrepresent themselves.
It’s an idea.
Not really post script:
On the contrary, engaging formal facilitators might rub some of the small angel investors the wrong way, and they may stop forwarding investment opportunities to a fund.
On the pro, professionalising the role of facilitators will help them standardise, and expand, their offerings – reducing some of the burden (distraction?) that fundraising puts on the founders, and releasing them to focus more on the core business.