Optimizing The Entrepreneur/Broker Fund Raising Relationship

Entrepreneurs engaged in a fund raising effort have a number of options at their disposal when seeking funding. Entrepreneurs are usually familiar with friends and family, angel investors and venture capitalists as sources of funding. Another way to obtain funding is to engage a broker. Broker/entrepreneur relationships are commonly used to bridge the gap between investors and entrepreneurs. Broker relationships come in many forms creating a need to fully understand the relationship to maximize the potential for fund raising and to decrease the possibility of misunderstanding between the entrepreneur and the broker.

The following are important pieces of information that should be known before a broker is contracted.

1. The broker's operational mode.
2. The range of services provided by the broker.
3. The compensation model of the broker.
4. The tasks expected of the entrepreneur in the broker/entrepreneur relationship.
5. The term of the contract.
6. How the entrepreneur funds will be used (if funds are being transferred).
7. References for the broker.
8. Funding sources to be contacted by the broker.

What Does A Broker Do? Brokers can provide a number of services including document preparation, consultation, deal negotiations and raising capital. The range of services provided by the broker influences the compensation that the broker receives. It also influences what is expected of the entrepreneur during the funding process. A funding broker acts in a similar manner to a mortgage broker. The funding broker usually (not always) is not the funding source. They make a connection between the entrepreneur and the funding source. There are exceptions to this rule. Brokers may decide to invest their own funds in a venture. However, this usually occurs after the broker has negotiated a relationship with the funding source. It is rare for a broker to take a primary or first mover position in a funding effort.

When Should An Entrepreneur Use A Broker? - There are a number of reasons why a business owner may use a broker.

1. Identify Funding Sources - Newly minted entrepreneurs frequently do not have contacts in the investment community. It certainly is possible to contact funding sources directly and is advisable even if you do use a broker. However, a broker will usually have long standing relationships with investors. Using a broker can give you a quick introduction to a range of investors that you would normally not encounter as a free lance entrepreneur.
2. Document Preparation - Investors frequently want to see a number of documents explaining the business in a way that allows them to evaluate the business from their vantage point. These documents can range from a reasonably brief overview summary (PowerPoint elevator pitch) to a complex business plan providing multiyear sales projections and operating budgets. If an entrepreneur is uncomfortable preparing these documents they may call upon the broker to create these documents.
3. Negotiations and Deal Closing - Raising capital is not much different from negotiating any large commitment financial transaction. Something is being exchanged for a significant amount of money. If you are unfamiliar with negotiating investment deals a broker can be a handy resource to help sort out what is best for both parties.

Sources of Capital - Brokers tap angel investors, private investors, VC's and institutional investors as sources of funding for their entrepreneur clients. Each broker will have their own collection of investors. The investors they work with will be influences by the "stage" of the company they are seeking investment for. For instance, if a company is a startup with no real revenue and still in the idea or development phase the broker is most likely to seek funding from individual or angel investors. If a company already has a customer base and a revenue history the broker may seek funding from traditional venture capitalists.

From the entrepreneur's perspective it is important to understand what funding sources are going to be tapped and why. The funding sources will have an influence on how long it will take to close a round and the viability of the funding source. The funding sources will also influence the likelihood of the business getting funding. For instance, if a broker is contacting traditional venture capital sources for a very early stage company then it is unlikely that the funding effort will be successful. The broker may not be willing to reveal the details of the funding source out of concern of revealing the funding source to another broker. However, they should be able to tell you that they are seeking funding from an individual, angel, VC or institutional investors.

Can An Entrepreneur Go Directly To Investors During The Broker Relationship? Unless the broker relationship specifically states otherwise yes you can. It is advised that you do not engage in a broker relationship that prohibits this activity. Brokers have a stable of investors that they contact. The stable has a finite amount of investors in it. An entrepreneur needs to cast a wide net out into the investor pool do not limit you investor options to just one section of the pool.
If you do decide to seek funding outside of the broker relationship inform the broker of what you are doing and who you are contacting to make sure there is not overlap of effort. An independent effort to raise funding will also have an ancillary benefit of increasing the fund raising experience level for the entrepreneur. It will also give them an appreciation for what the broker is doing for them.

How Are Brokers Compensated? - Brokers can be compensated in a number of different ways. They may receive cash, stock, stock options or a combination of stock and cash for their services. When negotiating a contract with a broker make sure you understand the compensation structure, when payment is required and specifically what the broker is being compensated for. If the broker is performing a number of functions including preparation of the executive pitch, creation of a business plan, formulation or financial projections, introduction to investors, closing funding, etc. make sure you associate compensation with each of these tasks. This makes it easier to establish the relationship of accountability and compensation.

What Is The Entrepreneur Responsible For? In many ways the entrepreneur is responsible for making the broker successful in closing funding for the entrepreneur. The fact that an entrepreneur is using a broker to raise funds does not exonerate the entrepreneur from assisting in the fund raising process. The entrepreneur has to make their business viable and marketable.

1. Business Plan - Even if the broker is creating the documentation for the business plan the business owner has to create the content for the plan. This plan may be massaged and reformatted for an investor by the broker. The broker may provide input to the plan. However, the business owner needs to understand the business plan and drive the business plan development process.
2. Team - A team should be assembled that demonstrates that the company cam execute on the plan when funds are raised.
3. Executive Summary - Perhaps the most important document in the fund raising process is the executive summary or elevator pitch. It is the first impression that a potential investor will get of a company. The details for this pitch will be provided by the business owner. The broker my change the format and ask for additional information.
   
4. Pitching The Company - The broker will introduce the business owner to investors and describe the business to investors. However, the investors will want to meet the business owner and the team and they will want the business owner to pitch the company. The business owner will sell the investors on the company the broker's responsibility is to establish the contact.
5. Self Assessment - The entrepreneur should conduct a self assessment as to their preparedness for the funding road. Many entrepreneurs under estimate the commitment associated with starting a business and raising funding. The funding road can long, frustrating and expensive. Only a very small percentage of companies seeking funding receive it. In many cases the initial funding is lower then expected. Ideas are seldom funded. A demonstration of the viability of the business is required before an investor will engage. The entrepreneur will most likely have to fund the first stage of funding. Make sure you are ready for the show before you jump into the pool!!

Managing The Broker Relationship - Managing the relationship with a broker is key to the success of the funding effort. In many ways managing the broker relationship is no different than managing direct funding sources. However, there are some important difference.

1. Legal Advice -It is suggested that an entrepreneur engage legal counsel to review a broker contract. Carve out what each party is responsible for and when control actually passes over to the investor.
2. References - The broker should be willing to provide the client with references. This should include entrepreneurs that have used the broker service and possibly a funding source that has worked with the broker.
3. Time Lines - Establish a start and finish time for the relationship. The funding road can be long with no guarantees that the broker can claose funding. Give the broker a period of time to close. If it does not work out move on to another source or extend the contract with a new set of objectives.
4. Exclusivity - Is is advised that a relationship with a broker be non-exclusive. An entrepreneur should be continuously looking for funding from a number of different sources.
5. Clarity of Tasks - the broker my perform many tasks for the entrepreneur. Make sure you are both clear what these tasks are and what the entrepreneur and broker are responsible for.
6. Compensation - Put a price tag on each task the broker is going to perform and what constitutes a completed task and acknowledged payment.
7. Ending The Relationship - There should be a term to the contract and a clarification of what rights the entrepreneur has to the materials created and relationships established during the funding process after the contract is terminated.
   

In conclusion, the broker relationship can be a useful option for an entrepreneur during the fund raising process. Broker relationships come in many forms requiring a clear understanding of the responsibilities and compensation associated with broker executed tasks. Clarity of responsibility and compensation reduces the likelihood of misunderstandings.

The entrepreneur is in control of their destiny and is the party responsible for getting the business funded. A broker is a "facilitator" and will only be as successful as the entrepreneur and business warrants.

International Venture Capital Sources Outside Of The US

A significant portion of my blog community is outside of the US. This community has asked me to help them identify where they can find sources of capital for their new ventures. The following is a list of international venture sources I have researched. I have categorized them based on region and country.

In some cases I have interacted with these references. Many of them I have researched for my own fund raising efforts. Some of them have been referred to me by blog participants and other VC's.

The identification of these companies as funding sources does not mean I do or do not endorse them. An entrepreneur should always do their own due diligence on a potential funding source. I am technology centric so many of these sources fund tech companies. If this is not your category a further search is in order. Check out a company's portfolio and see if there are companies that are in the same category as your venture. Check references on any venture firm if you get serious about them. Always get advice from a number of different respected individuals before progressing to a term sheet.

Venture capitalists do fund companies outside their domiciled region. There is certainly a bias towards local companies. However, if an idea, team, product or strategy is attractive to them they will invest in a company that is not located in their country. So do not limit your inquiries to only firms in your region or country.

If you do decide to engage with a VC from another region and culture be cognizant that different cultures have different ways of communicating and doing business. Do your homework before you engage a group outside of your cultural milieu. You want to avoid making mistakes in communication or expectation setting.

ASIA PACIFIC

The biggest following I have outside of North America is from the Asia Pacific region. This is a geographically, politically, developmentally and culturally diverse region. There are many VC's in this region. My selections are based on references, direct contact and my own research.

Singapore
Singapore is an interesting region for a couple of reasons. Singapore has a pan Asian investment strategy investing in countries throughout Asia. The VC firms are typically affiliated with the Singapore government chartered with maintaining a regional technological lead. Investments are also expected to benefit the Singapore society and economy.

Sirius Venture Consulting
Sirius is an early angel/seed round funding source. I mention them first because many of my blog participants are looking for that first institutional investment. Sirius might be able to help you.

Infocomm Investments
Infocomm does invest in early stage companies but they also invest in subsequent rounds as well. They do require a co-investor to participate. So, this would not be your sole source of capital. A company like Sirius could become your other co-investor.

Australia/New Zealand
I get the sense that there are not many funding options for entrepreneurs in Australia. Not sure why this is given their interest in technology. I have identified a firm that can help.

Technology Venture Partners
I know a well respected colleague that is a partner at this firm. I also know that they strictly invest in Australian and New Zealand ventures. If you are down under and your are in the technology space I suggest you contact them.

India
India is a source for a major portion of my Asian blog traffic. India's emergence as a technology leader has also brought about the need for funding new and emerging companies. Many US VC's are active in India along with local VC outfits.

Sequoia Capital India
I use Sequoia as an example of a US VC firm actively funding Indian based ventures. They are the granddaddy of VC's and perhaps a VC with one of the largest funding source. I suspect that they are not investing in many seed rounds. If you are in the official A round category and technology focused you might want to contact them. Also, even if they do not fund your seed round they may refer you to a fund that can. If you do see early success they may be a source for a second or third round of funding.

ICICI Venture
Helion Venture Partners
I do not know much about these funds. I did some research on them based on size, portfolio and focus. The appear to be respected firms They look like good sources of seed funding.

Philippines
I have seen some interesting ideas for products and companies out of the Philippines. I have considered sending them off to some US VC's but did not know of any that invest in this area. It appears that the Philippine government has also identified this as an issue. The article below is a proposal by the Philippine government to start funding startups. I do not know where this legislation stands. In the meantime I suggest the Philippine entrepreneur community visit the Singapore VC sites and see if they are interested in investing.

Lawmaker proposes RP venture capital fund for tech startups in the Philippines.
This is the article I recently found on the Philippine governments proposed legislation to fund Philippine based Startups.

Japan
There is certainly a robust venture community in Japan. I have identified two venture sources that have English and Japanese translated web sites.

Aozora Investments
Entrepia
I personally have not used these firms so please check their references before proceeding.

China
I have specifically chosen Hong Kong based venture firms. These sites have English and Chinese web sites. Hong Kong to a certain degree competes with Singapore in funding Asian based companies. However, the emphasis is not on technology.

Asiatech
Beijing Venture Capital Company
The firms I have identified do focus on technology.

Europe
In the order of interest Europe is my third largest source of inquires about raising funds. Europe like Asia is extremely diverse. However, Europe has a longer track record for venture funding and a more developed community of VC's. My research and exposure to VC's is limited to Western Europe. I am not familiar with Eastern European venture community and suggest independent research for that region.

UK
The UK has a well developed venture community. A walk down St James Street in London will yield a plethora of VC's. However, finding technology focused funds and seed round funding could be difficult in this traditional VC environment. I have identified two organizations that are technology focused and potentially interested in funding an early stage company. They were referred to me by one of my colleagues.

Balderton Venture Capital
This is a former Benchmark subsidiary and still retains some of the bravado and aggressiveness of its US counterpart. This organizations does invest throughout Europe and has a definite internet and technology focus.

Wellington Partners
This is another referral from a US based VC. Their team looks great and they have made UK and European investments.

Ireland
The vibrancy of the Irish venture capital world was brought to my attention by a blog participant. Ireland like Singapore has a government sponsored VC program. To complement this they do have several high profile private VC firms.

ACT Venture Capital
Delta Partners
These are two recommended firms that invest in technology and internet ventures. They do invest outside of Ireland.

Scandinavia (Sweden, Finland)
This region is all about mobile platform development.

If you are developing a mobile application you might consider Nordic as a source of capital.
Nordic Venture

Italy
This was a bit of a surprise to me. Italy does have VC firms.

One of my blog participants is a partner in this firm. They have made Italian and US investments.
dpixel

Germany
The German VC world is not as developed as the UK. If you are in Germany you may want to contact them. Once again even if they do not invest they may refer you to a group that will.

SHS
This firm does invest in technology companies.

France
The French venture world is a hard to figure out. There is certainly activity but I am not sure about the role of the French government in the funding world. The following are two recommended funds.

Butler Capital Partners
Butler does not do technology ventures but is the old boy on the block. You may want to touch base with them to see how they would react to a technology play. Of course, if you are looking for money not related to technology they are a good source.

Ventech
This is a technology focused French VC.

Middle East
With Israel being the big exception VC funding is not very popular in the Middle East. However, there does appear to be a move lead by Dubai to get the rest of the Middle East up and going in the VC community.

Israel
Israel is very active in funding new companies. They are a technology leader in the region and work very closely with US VC's. Some US VC's have representation in Israel.

Giza Venture Capital
Gemini Israel Funds
I picked two local VC's that are locally operated and fund technology companies.

Dubai
Dubai appears to be making a move to encourage VC funding in the Middle East outside of Israel. This appears to be in its infancy.

New Enterprise East Investments
This is a Luxembourg venture firm focusing on the Middle East and Africa with special attention paid to Dubai.

Other

There are funds that do not have any particular regional focus but do have a charter to help developing countries seed new enterprises.

Global Venture Capital
Walden International
These funds are good for startups that have few funding options locally. I have not worked with them but do recommend exploring them if your other options are not working and your business fits into their charter.

In conclusion, there are funding options for entrepreneurs outside of the US. Certain venture firms focus on regions as opposed to countries giving entrepreneurs more options and choices. I have provided a few examples of VC's. There are certainly many more. This list is not exhaustive and should be the starting point for more research of your own.

Good Luck!! Let me know how you do.