9 Things You Should Know about Dealing with Venture-Capital Brokers|
by David & Lorrie Goldsmith
You want to buy a new company, expand operations, acquire a business, or raise capital. You've decided to go for venture capital funding versus a bank loan for a multitude of reasons from the risks involved to the amount you need to carry out your plan.
Do you know as much as you'd like about gaining capital? Most people don't. Their expertise is in their business, not in capital funding. Here are ways to protect yourself from vultures, deals you can't afford, and the nightmares of both.
Some quick explanations:
A venture capitalist (VC) is a person, group of people, company, or group of companies with money to invest in your business. A VC broker represents you (or possibly a VC) and arranges the parties to create a deal. This article is about working with the broker.
Since many brokers are ethical, why such a negative slant? Over two months, two of our consulting clients nearly lost their shirts dealing with brokers. One broker tried to quadruple dip on a VC deal by taking a commission, bringing in another broker (who needed a commission), taking excessive points on growth targets, and adding interest fees into a contract making the deal impossible. Had our Boston-based client signed with his current and (estimated) future numbers, his decade-old business would have perished.
Another broker wanted a client in Connecticut to sign a broker-exclusivity contract, forcing our client to pay commissions on any type of financing, regardless of whether the deal originated through the broker or not. If an SBA loan or unrelated VC came through, our client would pay $400,000 in unearned commissions.
(With each client, the broker used four or more of the nine strategies below that would be harmful to your fulfilling your capital needs.)
Every deal has its own merits and challenges. Regardless, nine general tips to consider are:
Acquiring capital to fund future projects is exciting and daunting. Although common sense will guide you to avoid pitfalls and seize opportunities, you won't know everything about this area. Therefore, gaining outside help from experts in this area is wise no matter how many times you've done it. After all, you're strongest doing what you do best: leading and managing your organization.
Copyright David and Lorrie Goldsmith. All Rights Reserved.
David and Lorrie Goldsmith are managing partners of their own consulting group. Their firm offers consulting and speaking services internationally. David was named by Successful Meetings Magazine as one of the "26 Hottest Speakers in the Industry." Jeff Gitomer say’s "David Goldsmith is unique in that he can see a 30,000 feet view of business and then delivers the hand-to-hand tools for combat."
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