Fundraising advisors; the good, the bad and the ugly

TLDR

💯 Founders are responsible for fundraising, but should not be expected to do everything themselves; they can lean on their board, existing investors, management teams or external advisors.

️⚖️ ️There is an imbalance of power and knowledge between founders and investors, and advisors can help offset it. ️️

📑 All fundraising advisors, brokers or introducers should be regulated.

⬆ You can assess whether an advisor is ‘value for money’ through founder references, comparing the cost vs the value gained and comparing the cost of upfront alternative support.

💰 As much capital as possible should be used for growth, but if fees are taken out of the investment (e.g. through advisor fees or VCs recharging their legal fees), founders should gross up the investment.

🔗 Some organisations like angel networks, platforms and crowdfunders charge a fee just for just an introduction — which may be acceptable in some scenarios such as to level the playing field for under-represented founders. This is because companies receiving warm introductions are 13 times more likely to reach IC, than those going in cold.

📶 Advisors send positive or negative signals. Only those with a credible track record and strong investor relationships will send a positive signal.

✅ The best founders have the highest opportunity cost of dedicating six months away from sales and becoming professional fundraisers. Working with a reputable and regulated external advisor with a successful track record can improve the chances of raising with preferential terms, and reduce the overall time spent on fundraising.

👀 There are some instances when founders should not look externally for support.

Before we start, two fundraising myths to dispel

The first myth is that fundraising is the number one priority for CEOs.

Successful entrepreneurs will tell you that sales are the number 1 priority (and hiring comes second), not fundraising. Even pre-seed investors now expect to see some early signs of revenue.

The second myth is that founders should do everything themselves when it comes to fundraising.

This myth gets air time on Twitter from those in privileged positions. It should be disregarded and may come from:

• 1% of the 1% of founders who have been lucky enough to receive a dozen VC term sheets and whose advice is based on their own fortunate experiences, and reinforced by their own success.
• ‘Top-tier’ investors who have forgotten how hard it is to raise and who have no reason to care about a founder’s opportunity cost, lack of network, or of lack of knowledge. Why should they? Asymmetric information works in favour of the party with the information. Do they have any incentive to care if you understand whether their terms are onerous or market standard? Do they have any incentive to care if you spend time talking to 1 investor before them or 100?
• Those who have had personal experiences with bad actors who had claimed to be able to help.

In fact, fundraising support can come from many places, including the board of directors or advisors, an operational VC with a dedicated fundraising team, a CFO or management team, or external advisors.

You wouldn’t expect a commercial founder to build the tech, nor a techie to run the sales engine — why should someone be expected to be an expert fundraiser without receiving support from anyone else?

Navigating the founder-investor-advisor dynamics

A founder should lead and be responsible for their raise 💯

Fundraising is a critical task, and the founder (or CEO) should lead the raise. No mentor, coach, advisor, or board member should be responsible or run the process on their behalf. Similarly, advisors should not get in the way of the relationship between the prospective investor and the founder.

At Mountside, we often work with founders behind the scenes rather than be investor-facing on a deal. There might be situations where we get more involved towards the latter part of the deal. For example, when discussing more sensitive areas like bad leaver provisions — a neutral voice can make the conversation easier on both sides.

The power imbalance ⚖️

There is an inherent imbalance of knowledge between founders and investors. Between them, it’s likely that partners at the investment firm will have entered into 100+ deals, whereas the founder will have made 1, 2 or a couple more if they’re lucky.

Not only does this mean that there may be a lack of understanding of the key investment terms, but there will also be a lack of awareness of whether the terms are market standard. Founders should also be wary if investors dissuade them from using experienced advisors to review their ‘market’ terms — their interests are not aligned!

Funding Rounds

It is more widely accepted that later-stage founders should benefit from working with advisors (or brokers), than those at the pre-seed or seed stage. This makes little sense — anyone with experience working with founders will agree that the earlier the stage of the founder, the more guidance they need across all aspects of the raise.

Sadly, this view is due to the plethora of low-quality advisor options. If the majority of early-stage advisors are suspect, it makes sense that generic advice is to dissuade founders from using one, reinforcing the mantra of some investors that ‘founders should do everything themselves’.

One of the main reasons is that, if undertaken at risk, it is a very difficult business to succeed in — 1% of companies receive VC funding, and 10% of seed companies go on to raise series A. If it is not undertaken at risk (e.g. advisors charge an hourly rate), it is easy for founders to be exploited.

All fundraising advisors, brokers, agents and introducers are required to be regulated

This is a personal bugbear; the vast majority of early-stage advisors should be regulated, but are not. The FCA is clear —the following activities must be performed by regulated individuals:

1. 🤝 Investor introductions — when introducing a company to an equity investor, if the advisors’ fee is dependent on the transaction completing, the introduction is regulated. (Note: this is not relevant for family or friends as there is no commercial intent — one would hope)
2. ℹ️ Investment advice — advising a company on the merits of investment terms, where the advice goes further than ‘’generic guidance’ and is payable, is a regulated activity.

Founders must ensure they diligence any financial advisors they instruct by asking for founder references and ensuring they are regulated. The penalties in the UK are severe for those unregulated, conducting the activities described above — an unlimited fine and up to two years imprisonment!

Ultimately, regulated advisors ensure that compliance and KYC procedures are followed, and founders are protected from harmful advice by ensuring firms are sufficiently experienced and ensure strict ethical standards.

Are good financial advisors ‘value for money’?

Founder references ✅

The best way of assessing value is through testimonials and feedback from other founders (and investors!).

We have had glowing feedback from the companies we’ve advised, with many claiming we have been pivotal to the success of their raise.

value:cost multiple 📈

It’s difficult to quantify an average marginal value provided when supporting an entrepreneur’s raise by comparing the time, expense and terms they would have had without an advisor. When founders are diligencing advisors, much like investors, they should ask for specific examples of recent value-add and may compare the value gained by a founder vs the cost of the support.

A recent quantifiable example was where our support led to a value:cost multiple of 15x based on an increase in valuation of 30%, without factoring in any of the other improvement in terms and time efficiences. Note — this assumes a cost to the founder of 1% of the final valuation, based on an incoming 20% stake and a deferred fee of 5% of the investment amount

Perceived value 👀

We see evidence of the value gained by founders in the way that founders pitch to us. Pre-revenue companies are the keenest, and, perhaps surprisingly, Series B and exited founders are just as enthusiastic. This is because they’ve gone through the process already, and they know how difficult it is. They understand the pain points and don’t want to spend the opportunity cost of going through it alone again.

The alternative 📊

Founders could consider paying a significant amount upfront to an FD or equivalent internally. However, it’s hard to find someone who has cultivated investor relationships for the profile of your business, a finger on the pulse on what is market standard, experience in building financial models that pass investors’ due diligence, and experience running a fundraising process.

The deferred fee 🔮

It is likely that deferred fees paid upon a successful raise will be greater than an upfront fee paid by a startup for the equivalent work. This is deliberate — charging a premium for a process that can take up to 9 months is a reasonable way to compensate for working at risk. If founders pay a retainer or hefty upfront fee, the success fee should be reduced.

At Mountside, we delay 100% of the payment for the work we perform until close. We do this because we want to work at risk with the best founders, and reduce selection bias (charging upfront may reduce the quality of the founders we would otherwise work with). This means we need to be selective about the companies we work with and unfortunately, it means turning down the majority we speak to.

The raise-based fee ⬆️

This leaves us with the question of whether it is reasonable for fees to be based on the amount raised. This question is especially relevant for VCs themselves, who take 2% a year of the total fund size from their investors. Does their sourcing and diligence work increase materially if they invest £5m instead of £2m? Few would say so. What about £100m? Same answer. This is often the reason why you’ll see a VC raise bigger and bigger fund sizes — while those who stay at a similar level, not deviating from their strategy, receive a lot of admiration in the industry. It’s also the reason why if you want to get rich now, PE, rather than VC, is the way to go. Fee percentages, rightly or wrongly, are a function of the industry we are in.

At Mountside, we address this imbalance by lowering our fees for later-stage raises to reduce the total amount founders pay and ensure it continues to be reasonable for the value gained and the risk we take.

Paying advisors out of the investment

Some investors claim that all the capital raised should go to the company, yet, according to our latest Term Sheet report, which analysed terms from over 200 VCs, the average VC recharges between 1–2% of the raise to pay their legal fees, to the company they are investing in.

However, it is clear that as much growth capital as possible should be used for, well, growth. If there are fees being taken out of the investment (such as legal, DD, board fees or advisor fees), we recommend founders gross up their ask at the outset to ensure they are unaffected on a net basis, or bring in co-investors. This is the simplest way of addressing this issue and is used by many investors who recharge their fees, to pay for their salaries (instead of charging significant fees to their own investors).

Is it fair to take a fee just for an introduction?

Some people charge a success fee just for an email introduction. Whilst we do not follow that approach at Mountside, there are instances where it is acceptable. It is a service many founders rely on, especially those who do not have a Rolodex of HNWIs, who would struggle to raise alone.

Angel networks, angel platforms and crowdfunders have built up mailing lists of thousands of retail investors, and so charge an introducer fee to pool these funds together and leverage their lists.

Family offices have no public profile, so an introducer may have spent decades building trusted relationships.

Corporate venture capital funds don’t often appear on investor lists, and so are harder to find, and account for 20% of deal volume in Europe.

There is a diversity problem in venture. Take female founders, for example, approximately a third of founders are women, yet funding only goes to 1%. This is partly due to a large part of the market investing in their primary or secondary network. Therefore, warm intros from introducers are solving a key problem to level the playing field.

People often change VC jobs — most junior VCs move on average every 3 years. If you’re not maintaining your network, it soon goes out of date.

VC strategies change every 2 years — even if you have built trusted relationships, many VCs will change their thesis as future funds are raised.

We have a team dedicated to identifying new investors, staying updated on their investment thesis, building strong relationships and understanding the latest market standard. We continually push ourselves in ensuring we have the strongest and largest investor network in Europe. How can we expect founders to stay on top of it?

Cold emails can work, but the average reply rate is 5%. There are plenty of investor lists online which can be used to build an ideal investor target list, but according to the British Business Bank, warm introductions are 13 times more likely to reach IC, than cold outreach. Some investors, such as Mercia, openly say that ‘opportunities that are referred to them by a third party stand a better chance of success’.

Building VC relationships has a one-time use for most founders. As a founder, you may end up working with only one or two of the 100 investors you might approach, many of whom you find out are not relevant, after taking the first meeting.

Even taking all the points above on board, it amuses me when investors warn founders never to pay for an intro because almost all VCs (I don’t use ‘all’ lightly) pay for introductions themselves. I know this, because we receive dozens of requests each day from VCs wanting to pay us for introductions to our investor network. I imagine this is because we introduce VCs to prospective investors at our conferences and workshops. We do not charge for these and we are not placement agents. We run these initiatives in order to build stronger investor relationships at all levels, and better support the founders we work with.

When it comes to Mountside — although part of the value we bring is connections in order to address the issues highlighted above, we are not brokers or introducers. As you’ll see below, our value proposition involves acting as an extension of a startup’s team throughout the raise, much like an interim commercial CFO, rather than just ‘charging for an intro’.

What does end-to-end support at Mountside mean?

For companies raising their Series A, our value proposition is split into 5 areas. For Series B, you might expect Part 1 to be reduced in scope, but often, this is not the case — especially when it comes to the financial model.

1 — Prepare companies to become institutionally investor-ready 📊 by updating their documents, ensuring they are fit for purpose with a clear investor proposition. As a minimum, this includes the pitch deck & investor FAQ made up of the value proposition, market size, go-to-market plan and competitor analysis, a financial model (where we spend a significant proportion of time, often re-building it), valuation benchmarks, and the data room. It also includes perfecting the investment pitch.

Fundraising advisors can provide valuable feedback on your pitch and help you refine your messaging to better resonate with investors.

Jason Calacanis, Angel Investor

Advisors can provide valuable feedback on your pitch and help you refine your messaging to better resonate with investors.

Marc Andreessen, Andreessen Horowitz

2 — Identify the most appropriate funding options 📍 by mapping the investor and lender population based on the profile of the business and the growth aspirations of the management team.

A good broker can save you months of time, money, and multiple headaches. They have connections, knowledge, and experience that you cannot replicate.

David S. Rose, Gust

3 — Introduce relevant investors 💰 by tapping into our network of 1,200 VCs, corporates, family offices and lenders.

Advisors can be helpful in identifying potential investors and helping you get in front of the right people. They can help you understand what investors are looking for and what types of companies they are interested in investing in.

Peter Thiel, Founders Fund

4 — Negotiate the best deal available 🤝 by levelling the playing field and building competitive tensions, leveraging our knowledge of the market. Lawyers do not typically address the key commercial issues, and the reality is that most only get involved when the term sheet is signed.

Fundraising advisors can be incredibly helpful in navigating the fundraising process. They have a deep understanding of the market and can provide valuable feedback on valuation and deal structure. They can also provide guidance on deal terms, help with due diligence, and ensure that the process stays on track.

Brad Feld, Foundry Group

5 — Maximise the chances of a smooth due diligence process 📑 by avoiding common mistakes and speeding up the process between signing the term sheet and receiving the investment.

Other areas of support

More recently, our advice has included a coaching role. It’s lonely at the top, and founders receive very little empathy or gratitude for the work they do. It’s difficult to turn to family and friends as most don’t understand what they’re building, they can’t turn to their employees in fear of looking weak or not in control, and often they can’t turn to their board in fear of conflicts and showing a lack of direction; so many turn to us for a coaching role.

In order to have a significant impact on the ecosystem and work with a larger group of companies, we also run free fundraising accelerators for pre-seed and seed companies, on behalf of our partners, including the British Business Bank, Funding London, Innovate UK and Wayra. We also publish fundraising templates, resources and investor lists.

Advisors — a positive or negative signal?

Whether a signal is positive or negative is a function of the credibility of the introducer and the strength of their relationship. Working with an advisor who is not well respected (which may be due to a poor track record, negative founder references or charging hefty upfront fees) will send a negative signal, and therefore harm the chances of fundraising.

• 📶 Our positive signal — we see over 100 companies per month and select 1 or 2 to work with. This means we select credible, quality companies to work with who go through our investor readiness process. We trust our signal is positive because when we organise investor days, investors attend without knowing the pitching companies. This is the same when we organise LP-GP events; family offices and Limited Partners trust us by attending without knowing the selected VCs.
• 🔗 Our strong investor relationships — we’re known to the majority of investors in Europe due to our USP; we also work with VCs on their own fundraising efforts (we don’t charge for this because our efforts are solely in making useful introductions and we don’t believe in charging for just an email introduction). This enables us to understand and dive into what investors look for with a lot more depth and build much stronger relationships. In fact, our biggest source of deal flow is from seed investors, followed by founders we’ve worked with in the past.

When should a founder not necessarily use an external advisor?

• They have a branded top-tier or ‘operational’ VC with significant follow-on capital, a well-resourced portfolio team dedicated to future fundraisers and are performing within the top 20% of their portfolio. There are about 10 VCs in Europe with the resources to do your next raise justice, which means c. 40 founders are in this fortunate position each year. If you’re in this group, be mindful that incentives may not be aligned between your existing investors and their view on incoming investors. They will have their own objectives on board compositions, investor consents and exit strategy.
• They have an all-star board of directors with significant fundraising experience who are happy to commit months of their lives to open up their (relevant) network, dive into your fundraising materials and can leverage other recent similar deals they’ve been involved in to understand market term sheets. At the early stage, this is rare.
• They are a second or third-time founder who has gone through a fundraising journey in a similar industry and stage, and therefore where funding will come primarily from their existing network. Mistakes will have been learnt, and trusted relationships already developed.

Note — if companies are raising exclusively from US investors — external advisors may be less impactful for earlier rounds of funding given that the market is much more mature; investors are more likely to be ex-entrepreneurs themselves, thereby investing with their gut rather than placing as much reliance on fundraising materials like a 5-year financial model (especially for seed), and well-crafted cold investor emails tend to receive much higher conversion rates. The bigger market helps too!

Conclusion

Founders are responsible for fundraising, but should not be expected to do everything themselves. Companies that are built to last are built as a team. The best founders have the highest opportunity cost of dedicating six months away from sales and becoming professional fundraisers. Working with a reputable and regulated external advisor with a successful track record can improve the chances of raising with preferential terms, and reduce the overall time spent on fundraising.