This is an article that I wrote in 2006 that may be of benefit to you:
Choosing a Finder When Raising Capital
If you’re having trouble getting investors, maybe a professional capital finder is your best fund raising option.
If there’s one thing entrepreneurs hate it is asking others to invest in their company. It takes time; it’s embarrassing and sometimes humiliating; it takes focus from running their business; and, for most, it isn’t a skill set that they are blessed with. Successful fund raising requires:
Great writing skills
Superb salesmanship
A million dollar rolodex
Excellent closing skills
Patience and persistence
Let’s face it, the typical small-business owner is often lacking in most of these talents. So when the need for some serious cash to accelerate your business arises, what do you do? Generally, the first thing everyone does is to try raising the cash on their own. But you can only take so many unreturned phone calls, missed appointments, broken promises, lies and pure, out-and-out rejections.
At some point, you may be tempted to hire a professional “finder.” Technically, a finder is someone who purports to be an expert at helping entrepreneurs raise money or rather the sources that will invest the money.
Finders have a mixed reputation in the industry because they’re substantially unregulated and have a history of over promising and under delivering.
So what exactly do finder’s offer?
What do they charge?
How can you tell a good one from a bad one?
The answers are not all that clear. First, the value proposition is quite simple–they’ll help you find money. If your cash is running low, this can be a most tempting offer, especially if you’re desperate. And herein lays the first caution: Be wary of seeking a finder when you’re desperate.
You’ll most likely make the wrong decision and pay dearly for it.
There are some very good, unlicensed finders out there. Being licensed adds a huge expense and regulatory burden that many finders would prefer to avoid. So when you’re on the hunt, the first questions you need to ask are:
1. Are you licensed? If not, why not?
2. What’s your track record of success?
3. How do you collect your fees if you’re not licensed?
The next area of concern should be in how the finder charges for their service. Generally, finders will want a retainer fee plus a success fee paid if and when they raise the money. Now, if the finder is good, such a structure isn’t a problem. But here’s where this group earns their poor reputation. The non-principled finder charges a retainer fee because they know it’s the only money they’ll be able to collect. The principled finder will charge a retainer fee both as an indication of the entrepreneur’s commitment to the process and because it will take some digging before they can determine if the deal is fundable. If the deal turns out to have holes, they want to be compensated for their time. In exchange, the entrepreneur will know why, in the finder’s opinion, the deal isn’t fundable at this time.
Typically, a finder will charge a modest retainer of $6,000 to $10,000 a month for a pre-set period of 3 to 4 months. Their success fee can range from a low of 5 percent of the total amount money raised to a high of 10 percent. If they never raise the money, they never get paid any more than their retainer. Some will credit their retainer against the success fee, but that only helps if the goal is reached.
When negotiating fees with a finder, it’s important to ask the following questions:
1. Exactly what fee will I be charged? Will it vary depending on how much money is raised?
2. How will the fee be paid–that is, how much in cash and how much in stock? If there’s stock involved, at what price/share?
3. If someone else helps me find the same investor, how will you split your fees?
4. If the investor refuses to pay your fee, what do we do?
If you’re an entrepreneur looking for capital, take the time to ask the right questions and do your homework before hiring any finder. I can assure you that your extra work will pay off in the end.