Within the span of a week this August came two excellent opinion pieces from VCs about whether entrepreneurs should mandate an intermediary to help them raise their early stage financing. The first is from Hunter Walk of Homebrew (Don’t Send a Banker to Do a Founder’s Job). Then John Henderson of White Star Capital wrote a nice follow-up (It’s about more than just money). The gist of both posts is that fundraising at the early stage should not be outsourced to an intermediary, but I recommend reading each to see their full rationale.
I am asked the question about whether to hire a fundraiser from good entrepreneurs a lot (the good ones are inquisitive and usually have the foresight to solicit advice before granting a mandate). I fully agree with Hunter’s and John’s positions, certainly concerning seed and series A fundraising rounds. Perhaps one of the all-time most incisive views on the topic I enjoy the most is Paul Jozefak’s Don’t Ever Use Fundraising Advisors. Furthermore, I submit that there is a French wrinkle to this debate too.
In France, the fundraising agent industry is flourishing. They serve a valuable purpose. This is due to the unique dynamic of the French VC market, which comprises several tax advantaged retail VC funds and mandates (fund vehicles whose investors are numerous small individual taxpayers that receive a tax deduction for investing). Often, the core objective of these vehicles is capital preservation over capital gains generation. (Some people sometimes even cynically suggest that the unstated core strategy of such vehicles is generation of management fees rather than investment performance, but that’s another debate).
Such vehicles that derive funds from tax breaks must comply with numerous contraints and ratios imposed by the government in order to preserve their tax-incentives. None of these legal obligations relate to investment performance; they deal mainly with deploying capital within a specific time period, into eligible companies, with various minimum and maximum thresholds over the life of the fund. As a result, managers of such funds may be tempted by the shortcut offered by a placement agent who can ensure the project ticks all the right compliance boxes. The abundance of fundraisers in the French market gives testament to the demand for such services.
In my dozen years of VC investing in France, I cannot recall investing in a single opportunity brought by a fundraising agent. I am less concerned about ticking all the tax compliance boxes than I am about generating a high return for the investors in my fund. I believe that a high return will only come from investing in entrepreneurs with the ambition to grow into dominance of their markets, however they may be defined. Market dominance requires selling and hustle. Mark Suster would argue that only VCs who are playing defense would be interested in deals brought by fundraisers. And as John Henderson put it,
“As an investor, if I’m to believe that you’ll go from 5 geeks in a garage to the next Spotify, you’ll need to be able to sell the hell out of your company to future employees, to customers and to all kinds of other stakeholders. Fundraising requires that same kind of hustle.”
Some company founders aspire to only modest scale for their businesses, and this can be a perfectly legitimate objective. Such a model, however, is not compatible with a VC model seeking outsize returns to generate capital gains performance.
If your ambition is limited in scale, such as merely running a lifestyle business, or even simply raising funds from investors who won’t push you to new heights of professional achievement, then outsourcing your fundraising to an intermediary could be a neat time saver. For the more ambitious though, I recommend you embrace the hustle.