Get an Independent Advisor to Keep Everyone Honest
There are many hands in the pot during the investment process. Even when you hire a finder, broker or advisor who uses their relationships to bring investors to the table, it is hard to get a sense of who is working for who. These advisors you hire in the investment process – such as brokers – have an interest in the process and may not have your best interest at heart. Having an independent advisor can keep everyone in the process honest.
When you’re under stress and lack the money you need, you often don’t realize everything that is occurring with your investment process. Typically, companies raising any significant money will hire a third party, often called a broker, who has experience raising capital and has relationships with funding sources such as angels, venture capital and private equity firms, family foundations and companies with investment funds.
Why do you need a third party?
When you hire these individuals, you are hiring them for both their experience and their relationships. These resources will leverage existing relationships and bring investment parties to the table to consider your company.
Through the investment process, you will work closely with your broker. Brokers often become a confidant. Ideally, you would be able to be completely transparent with this individual about your own thoughts, the company, and the company’s valuation. You would discuss the state of the business. You would confide in them how worn out you are. You would share that the business is running on fumes. You would share your thoughts on valuation. You will work side by side with this individual and it would be great to be able to confide in them, especially during the long investment process.
There is a catch. Even though you hire the broker to work for you, the broker’s relationship with the investment sources they bring to the table can be more important to the broker than the broker’s relationship with you. This applies to:
- Investors. Your broker can bring investors to the table because they have worked together—sometimes over multiple years on multiple deals. It’s simple math. To the broker, these investors represent multiple past and present deals and you represent one deal. As a result, despite being hired by you, the broker’s loyalty is often more to investors than to you. Unfortunately, if your broker has a loyalty to potential investors, your information may be inappropriately shared with these investors. Imagine an investor being told, “The company is running on fumes and will settle for a lower valuation” or “John is worn out and will likely reduce his demands if you push.”
- Executives. A similar situation may arise if you choose to hire executives who have relationships with investment firms. To an entrepreneur, this seems like a terrific solution. Imagine if you could kill two birds with one stone— bring in a seasoned executive and capital in one fell swoop. However, like the broker, if an executive brings investors to the table, the relationship between the executive and the investment firm is a long-standing one. Don’t get me wrong, sometimes this can work. It can, however, put you in an uncomfortable position of having an executive and investor that are more aligned with each other than they are with you or the success of the business.
Find an Advisor With No Interest
How do you deal with this? When you are ready to raise capital, develop a relationship with an advisor who can guide you, but does not bring potential investors or executives to the table. You want this individual to be devoid of the conflicts of interest faced by the broker or the executive. This individual should be able to give you sound, impartial advice. In addition, when brokers and executives bring investors to the table, they will understand there is an independent party evaluating and providing guidance to you. Tell this person your desired valuation. Cry to this person. Tell this person how worn out you are. Confide in this person. When they have no motivation to use a specific investor or pursue a path, you will have a trusted advisor to steer you in the right direction, and a safe place to blow oﬀ steam.