👋🏾 Hi friends!

Been a busy return to the UK since I got back from my break in the Maldives - from catching up with the team, getting ready for my first live show with Peter Walker (Head of Insights at Carta), to recording three back to back podcasts last week ⚡️ 

Here’s a sneak peek behind the scenes of what, I can assure you, is not the bridge of the Startship Enterprise 😂 

In this weeks Off Balance, I’ll be chatting about:

🤝 The grey world of fundraising brokerage
🧮 Financial modelling Part III

Check out this weeks Primer where I sit down with my old friend, Shruti Ajitsaria, Head of Fuse, Allen & Overy’s legal tech incubator where she tells me a bit about how she got to building Fuse, what it does and who it’s for 👩🏾‍💼

Also, if you have any feedback, or if there’s something you’re desperate to see me include, just reply to this mail or ping me online - I’m very open to conversations.

If you like what I’m putting out, do give me a follow on LinkedIn, Twitter and Instagram.

(If you are trying to connect with me on LinkedIn, maybe read this post I wrote and make sure to start your request with “Off Balance” and, more importantly, tell me why you’d like to connect 💪🏾)

Don’t forget to like, rate and subscribe to Nothing Ventured on Apple, Spotify or YouTube, it really helps more people see what we’re doing - you can find links to these (and more including my Office Hours) right here!

Now let’s get into it.

How can did I add value?

I had a chat with someone that had a couple of companies they were involved with that were looking to raise some external capital but didn’t feel like they had the experience or the network to make that happen.

They were essentially looking for a broker that would make a bunch of introductions with a contingent fee in either equity or cash post fundraise.

I have some quite strong feelings on this subject and won’t do ‘introductory / broker’ work which I explained in a fair amount of detail.

Here’s what you need to know:

Brokerage is a ‘grey area’
The FCA in the UK has rules around ‘promotion’, that is, the promotion for sale of financial products (of which equity is one) especially to retail investors. Now the case is often argued that most people investing in early stage businesses are sophisticated investors and should be aware of the risks of investing, but the reality is, if a deal goes south, the ‘broker’ could leave themselves open to issues down the track.

Skin in the Game
I run a team of CFOs that work with venture backed businesses. There is a level of trust that is placed in us as individuals as well as collectively. When we recommend a course of action, implicitly we are putting our name to that action. But in the introductory / brokerage game, you are typically not involved in the business in any kind of deep capacity (financially it would not make sense - see below). What this means is that you are creating reputational risk should things not work out and, as most of you will know, it takes decades to build a reputation and only seconds to demolish it.

Contingency is for suckers
One man’s opinion, but let’s say I get over these issues and spend time understanding the business, refining the model or deck, reaching out to investors, providing updates, following up and all the rest of activities entailed in raising investment. At that point, I’ve put in substantial time and effort into a business which is only going to pay me if I secure them investment. And, whilst the numbers may seem sexy, let’s break it down:

Standard fees in this space are 5%. So let’s say a business is raising $1m, that means you have the potential to earn $50k right? Well kinda.

• Firstly, you only earn the $50k if you raise the whole $1m.

• Secondly, it can take 6 months+ between starting a fundraise and cash hitting the bank.

• Thirdly, only the founder can raise the money (I can make an intro, but it’s the founder that has to sell the opportunity) so I have no control over outcomes.

• Fourthly, it’s unlikely that as a broker you raise the full amount, much more likely that you raise a portion of it - and here’s the kicker - it requires just as much time and effort to raise $200k as it does to raise $1m (often more)

• Finally, there are enough stories in the market to suggest that it is not uncommon for these agreements to not be honoured.

Founders are the front line
When asked to assist in these situations my first question is why can’t the founder do it themselves? I mean, it’s kinda their job isn’t it?

And the reality is that investors get so much direct deal flow, when they see a broker in the arrangement (especially if they are VC investors) they are likely going to red flag it.

Because the reality is that great founders (and great businesses) get funded - so what does that leave.

Now don’t get me wrong, there may be some legitimate reasons the founder thinks they can’t raise (no access to networks of capital, don’t know how to approach term sheet negotiations) but these are solveable (i.e. just read this newsletter, use LinkedIn or other tools and start building a network).

More likely, it’s that the opportunity is just not interesting enough for people to sit up and want to invest. (As a side note, I get very frustrated when I see people trying to ‘engineer’ FOMO when raising a round - you can’t engineer it, it happens because your product / business / fundraise has momentum).

So, at this stage, I’ve no doubt you’re saying ‘this doesn’t sound particularly helpful Aarish, you’ve just told this person all the reasons why you won’t do it’, and you’d be right.

But I didn’t stop there.

I offered to speak to the founders, review what they’ve done and give them a bit of guidance (pro bono of course) on how they might want to move their fundraise forward.

After all, that’s why I set up my office hours, precisely to help founders like these struggling to figure out a way forward.

So no, I won’t be a broker. But I will try to be helpful. Always :)