I read an interesting blog post recently titled, Why Early-Stage VCs Should Be Careful About Intros from Bankers (update: he has since back peddled on the title). The author, Mark Suster, posits that entrepreneurs should carry the full weight of executing a successful capital raise and steer clear of “bankers.” Below are a few key issues that came out of the article.
“Bankers” are known to fight hard for their clients. Mark notes the typical, “We’re expecting 3 other offers, so move fast” and “You’ll have to top “x” price to win this deal” can be annoying to investors. It’s true that bankers have access to various capital sources – hedge funds, family offices, etc. – and will use this as a bargaining chip for entrepreneurs. This is a good thing.
One key issue that was not mentioned in the article, is the one sided valuation. When a “banker” type is not involved, the investor has full control over the valuation. An investor could tell an entrepreneur that their company is worth only a fraction of its true value and the entrepreneur has no way of knowing if it is or isn’t. This brings me to one of the most important reasons to have a “banker” type on your team. A “banker” will pull the data you need to back up a healthy valuation. Most early-stage entrepreneurs do not have time or money to research acquisitions and financing rounds to pull together valuation data.
Another point that Mark makes:
“And given how easy it is to meet VCs through introductions I also wonder what’s wrong with your startup teams that given the unprecedented amount of transparency and access now in our industry – why they chose to hire a banker.”
I agree, wholeheartedly, that it is easy for entrepreneurs to meet investors these days. If an entrepreneur is not willing to do any of the work needed to find investors, this is a huge read flag. Any entrepreneur who expects to hand off 100% of the process to a “banker” is not a true entrepreneur. A true entrepreneur is willing to do everything they can to get the deal done, yet smart enough to get assistance to carry the load.
How to Find Investors breaks down the process of finding investors. If an entrepreneur wants to raise money fast, they should be willing to network to ensure that they are casting the widest net possible. When an entrepreneur believes passionately in his or her vision and shares it with their network, they will attract the right investors.
The Rock Star you need to recruit is you.
There is nothing wrong with recruiting a “banker” type to help you research the market, build a financial model, defend your valuation, and assist you with your investor selection and investor pitch. But in the end, the investor is evaluating you as a person. Can you lead your team? Do you have conviction in your ideas while remaining open to new ideas? Do you enthusiastically accept criticism and view it as an opportunity to learn and grow? If you answered yes to all of these questions, you are the Rock Star that you need.
This post originally appeared on Atelier Advisors. Lili Balfour is the founder and CEO of the SoMa-based financial advisory firm, Atelier Advisors, creator of Lean Finance for Startups and Finance Boot Camp for Entrepreneurs. All AlleyWatch readers are automatically eligible for a 50% discount on either of the courses using the preceding links.
Image credit: CC by Goetz Kluge