Stay away from financial middlemen

I just read this post by Mark Birch, Avoid the middlemen & it reminded me of a few Indian startup stories on the same topic.


Story 1


Couple of weeks back one of our portfolio founders told me that after presenting at Startup Saturday Delh he received a call from a certain middleman who was also at the event & the conversation went like this.


Middleman: I saw your presentation at Startup Saturday, it was very impressive. You guys are onto something big.


Founder: Thanks.


Middleman: You could easily raise some good money.


Founder: Maybe, but we are not looking to raise money right now, we are focusing on building our sales channels.


Middleman: You really should raise money right now. There is so much money available in the market, investors are investing like crazy. I run a financial advisory firm, we help startups raise money.  We can help you as well. How much would you like to raise?


Founder (getting impatient) : Well, as I said we are not looking to raise. Maybe we will get in touch with you later.


Middleman (not giving up): I know some folks who will be really interested, I can talk to them. Why don’t you send me your business plan?


Founder (cuts him off) : I have to get into another call, will talk to you later. Bye.


Most founders get tempted to go after opportunities to raise money, even if the opportunities don’t look so real. So even in this case the founder was a bit tempted and discussed the same with me. I happened to know the middleman who had approached him & was also aware that all these promises of “I can help you raise funding” are totally fraudulent. Good investors do not invest via middlemen, they look for deals themselves & good founders raise money by themsleves. I advised the founder to stay away from this guy & other similar characters. I asked him to continue his focus towards building a great business. Funding (growth capital) is a by-product of building a high potential business.


Two weeks later, the founder received another call:


Middleman: Can you come to mumbai next week? I have arranged for an investor meeting.


Founder (who is based in Delhi): But I never asked you to talk to any investor.


Middleman (ignoring the founder): But I already talked to them & they are really interested to meet you. There is a cocktail party with the investors, you can have a few drinks.


Founder (a bit angry): I don’t drink


Middleman (trying his best): You must come, I have talked to them about you & they want to meet you. These guys are top angel (devil) investors in the country.


Founder (cuts the call) : Don’t think I can come. Will talk to you later.

 

Story 2


Couple of years ago I was invited as a speaker to a startup event in Noida. I ran into a gentleman who is member of a well know angel network & had given a very cold response to the pitch for investing in my first startup madhouse. He faintly recognized me & asked what I am up-to these days, I told him about Morpheus. He suddenly got very warm & told me that he has recently invested in a company which could have synergies with Morpheus. Before I could say anything, he took me to meet someone from that company, who was also attending the event.


This new gentleman started explaining me about their business & what I heard was shocking, I had never heard about anything like this. They were running a company which sold investor meetings to founders & charged 15-25 k rupees for setting up a single meeting. Can you imagine paying 25 k to meet someone at a VC firm or some angel investor?


I was thinking in my mind that this totally sucks, these guys are making fools out of ignorant founders. And you know what he said about synergies to me, “Why dont you send startups that are rejected by The Morpheus to us as leads?”. Oh man I was so fucking angry, I could have slapped the guy on the spot. But I controlled myself, told him I don’t think I am interested & walked away. The guy even had the nerve to send me a followup email (which I deleted).


Later I learned that this new guy was just the front face. Actually this company belongs to the so-called angel (devil) investor. He uses the tag of an angel investor to meet new entrepreneurs & then refers them to his company which will sell them “investor meetings”. He did the same thing at various startup events, where he would claim on stage that he is an angel investor, desperate founders will come talk to him & they would be sent to the company as ‘leads’. The society thrives on someone else’s need, but this is out right dacoity! Isn’t it disgusting?


These are just two stories, I could go on but I guess I have made the point.


Taking advantage of the startup trend


In last few years startups have become a trend, loads of people (young & old) are starting companies. Across all startups, the thing which is in most demand is “funding”. Almost all founders want to raise funding desperately & if they come across a person who says “I can get you funded” they are ready to do whatever it takes.


There are two things at play here:

  • One, the demand of ‘funding’ is much higher than the ‘supply’. 
  • Two, the whole fund process is totally opaque, there is very little credible information about how the ‘black magic’ of funding actually works.

Almost none of the investors in India maintain a blog via which they can create transparency around the whole process and what they really think. They only appear once in a while on the stages of “startup events”, as part of a panel or as a speaker and after they are done, they get swarmed by crowds of foudners who have bought expensive tickets to such events just to meet with “the money guys”. Soon after that they leave the venue to catch a flight to the next destination or to attend another meeting.

This maddness for funding has given birth to many business models.

 Financial advisory firms / Individual deal brokers

  • These firms are almost always run by folks who never did a startup in their life
  • They all tell the same story in different words
    • We have done research on your startup & the market you are in
    • You have a lot of potential and you are the next facebook / twitter / groupon / apple / cisco etc
    • All you need is someone who can help you raise a “ton of money” 
    • We understand the startup investments very well and have partnerships with “leading VCs”
    • We already know some really good “strategic investors” who may be interested
    • Strategic investors is really a label for some names they will talk about and claim would be most amazing investors in the world for you, even though you may have never heard of them and can not find them anywhere on google / linkedin etc
  • What will they claim to do for you?
    • We will help you create a business plan if you dont have one and if you do we will help you make it fundable
    • We will create financial projections for next 5-10 years and do discounted cash flows to derive a valuation
    • We will take the deal to the “investors” and help you thru the process
    • We will help you get the best valuation since we are the experts here and you the founder can focus on the business
  • What do they want from you?
    • Depending on whom they are talking to they will ask for a combination of
      • 2-10% of the amount raised
      • Upfront fee between 50 k to 2 L which will be adjusted against the % of the amount raised
      • Monthly retainer
      • 2-10% equity in the startup
      • In some cases they will agree to waive of the upfront fee and only charge a % of a the amount raised
  • What can they actually do for you?
    • Practically nothing, except wasting your very precious time and money. 
    • You & your team will have false hopes of getting funded
    • You will end up having some useless discussions / meetings which wont go anywhere
    • If by chance there is an interested investor, the terms would be totally “anti entrepreneur”
    • As a founder you need to take charge of something as important as raising money from the right investors
    • I know most of the real VCs & individual investors in India, plus I have first hand information of minimum of 50-70 startup investment deals in morpheus portfolio and outside (not counting our own investments)
    • Never in my life I have known of a startup investment deal where either the entereprneur or investor worked with a “middleman”
    • This just does not happen – so stay away from these guys
    • Do it on your own, when the time comes – you can get the knowledge about the process from so many excellent blogs and by talking to some helpful founders who have done it before

These financial advisory firms may work well in the world of mid size / large companies where most of the work is done based on numbers but in the world of startups this kind of stuff is an utter waste of time for founders. 

PS: Warren buffet never uses middlemen to buy any companies


Indirect middlemen


There are also set of indirect middlemen which are trying to take advantage of the startup trend and want to profit from it without really creating value for the other side.

  • Startup events / awards / showcases
    • Most (not all) of these use “here is your chance to get funded” as USP to lure ignorant, desperate founders to attend these events
      • They claim that the event will be attended by 40-50 VCs & angels
      • Speaker list will be filled with names of startup celebrities: VCs / angels / recently funded companies
      • You will get opportunity (speed dating, lounging, whatever) to pitch to investors one-on-one, exchange cards with them and have drinks with them
      • Most times VC firms send junior guys to these events (if at all they attend)
    • Important disclaimer: As mentioned, my comment above is not applicable to all startup events, infact in the last 2-3 quaters the quality of startup events have really improved a lot. But some of them really suck
  • Startup Magazines
    • For many (not all) of these mags the only technique to get sales is to put big catchy funding related headlines on the the cover page:
      • 10 things a startup should do get funded 
      • Funding tips from “Mr angel investor”
      • How did company ABC raise 20 Crore in 16.5 months?
      • and more such stuff
    • Startup founders should stop reading such mags which are spreading this propaganda of funding and spoiling the bloody eco-system


Advice for founders

Guys – do you really think, some random financial advisor can go pitch your company to a top VC firm & get a cheque which you can deposit next week in your bank account. These are just fantacies so just stay far far away from these “financial middlemen”

 

As  founders you should just focus on building the best business possible within the financial & human resources available to you. Use capital efficiently & most importantly focus on building a good product & adding value to the life of your customer. If you can do that repeatedly, you are on the path to building a great business and if you are worth funding, money will show up

 

Even if you want to go out and proactively raise money from VCs or individuals, you should reach out to them directly. Do not send mails to the generic email IDs given on the websites, but get a warm introduction to the investor via someone with whom they have worked before and have respect for. If you can not manage that – you may be missing on the vital skill of networking that is needed to build any business.

 

The fundamental reason to become entreprenuer is to do each and everything yourself, learn from it and do it better the next time – so go do the fund raising yourself.



Advice for good investors

 

Kill the opacity, share more information so that we can have a more efficient industry. Here are some ideas to become more transparent and more available to founders:

  • Write regularly on a personal blog
  • Comment on other blogs
  • Join twitter & be active on twitter
  • Join quora & answer stuff
  • Once in every 1-2 months, conduct open events / open hours where people can just come and meet you
  • Answer more emails
  • Partners of the VC firms should attend startup events along with the junior guys & stay longer to interact with founders in an informal setting
The good investors are already doing some / all of these and that is what will make them “stand out” in the coming years. I love Fred wilson’s answer in the the NYtimes interview

 

Has the blog helped your  investing?

Absolutely. I’m not sure I could be a VC without the blog. You have to be out there in the hearts and minds of the entrepreneurs, and that’s the scarce resource with what we have as investors; it’s certainly not the money.


Advice for ‘middlemen’

Guys – startups really do not have anything for you. They need to do things on their own. So please leave them alone and change your focus to some other customer segment or better yet do a real startup yourself. Do not take my post personally, this is just an indiviudal prespective. 

 

  • roshanonline

    I have met couple of so called fraud investors and middlemen! funny who this works!

  • Prasoon

    Each point well written,and very useful :)

  • Sachin

    This remind me of the advice one friend chuckled during weekend beer party: “nobody cares about you!”. More or less, perhaps this is the reason why when it comes to web design and development, I never liked Elance.com, Odesk.com or 99designs.comAlso, makes me think of an interview with Warren Buffet a few months ago when they were asking him if he used Moody’s ratings to assess bond risk. His answer was basically of course not. I started a web firm from college from my own money; got failed eventually. But I see a lot of start ups giving away too much of the control in favor of the money today. Usually in a few years they realize the mistake they have made but by then it is way too late. Very good piece, as usual. The hidden side of everything, from passport office brokers to PRs, and from recruiters to real estate agents. Thank you!Sachin Arora@sachinhep http://sachinhep.blogspot.com

  • Radhika

    Excellent piece and very true and from being on the ‘financial’ side last couple of years, can totally relate! It seems so simple and to some extent ‘obvious’ but I guess it does need to be spelt out from time to time – to be wary. Thank you yet again for a great piece!

  • Rahul Chidgopkar

    Very good piece… Good investors have a way of finding out good investment opportunities… No need of brokers!Many a times the founders feel compelled by the need to scale up fast to compete with the bigger players, unless one has a true differentiator in terms of a path-breaking innovation. So the pressure to raise money is felt early on.However, if one can withstand that early temptation, investors are bound to sniff a good venture out.

  • vipin

    Its very new information for me. Your posts are always unique.

  • marksbirch

    Sounds like India is where NYC was not so long ago; few well known investors, lots of opacity in the funding process, and tons of sharks preying on the ignorance of first-time entrepreneurs. The good thing is that these things have a way of correcting and once a few investors break the mold (much like Fred Wilson did in NYC), it will elevate the community to deal in a more open and transparent fashion.Great blog by the way and look forward to reading more!

  • marksbirch

    India sounds like NYC not too long ago; few well known investors, very little information about the funding process and lots of sharks preying on naive first-time entrepreneurs. The good thing is these things have a way of self-correcting. There are still fake investors and advisors around, but they have gone off to other pastures. The most important piece of advice for the entrepreneur is to never feel pressured into attending such “pitch events” or taking meetings with fraudsters.Thanks for the shout out in the post. I really enjoy your blog by the way and look forward to reading more!

  • atulsian

    A great post indeed ! Every entrepreneur NEEDS to read it. Its not a problem with the new ones only, the candy of funding looks tempting to even the ones who do fairly well for a while but never raised money in life. Due to the opacity of the process before and after, they fall for the orgasmic fund-raising-to-success stories.

  • Pankaj

    Great reading as always Sameer!You can add “advisors” and “mentors” into this category. I recently met with a founder who was going to pay his mentor Rs. 75,000 for one day a month of his time + 8-10% equity in the startup + a commission on any funds that he would help them raise. Btw, perhaps I forgot to mention that the “mentor” had no experience building or running a startup but was a pure academic. *sigh*

  • Vijay Shekhar
  • Subhobrata Sengupta

    Hi Sameer, Very true stories … in fact during our initial days at Krostini we too fell into the trap of one such guy … We had applied for a loan at SBI and submitted our business plan. The Branch Manager of the Small Industries Branch at SBI informed us that this business plan was not in line with the format accepted by banks and referred to his friend who was a retired SBI-ian and currently a ‘consultant’. He agreed to help us resubmit the application for a payment of 8000 Rupees and a small % of the loan secured. A few weeks later we were told that the application was rejected as Food and Beverage was not a preferred lending sector for SBI. Surprisingly, this caveat had not been uttered by the branch manager while he was busy securing business for his friend. We lost 8000 Rupees. Your article is a very timely warning to other entrepreneurs to not fall into similar traps.

  • anuragji

    Thank you so much for your detail advise. Any innocent founder can get trapped in this easily and waste his time,money or control in his start up. Thank you very much.

  • Subhobrata Sengupta

    welcome !

  • oligoglot

    Hi Sameer,Really damning and clear article. Even we’ve been approached by three middlemen of different flavours. :) - Sundar

  • Abhishek Rungta

    Advice from the heart. Some people may frown upon this post, but it is going to save many young entrepreneurs loads of time and money. Well written. Genuine advice.

  • Chris

    Well Written .. Thank you

  • Harsha M V

    Awesome Post. Thanks Sameer :)

  • GauravPandey260

    Eye opener!I am being called by a guy from last few days again and again.

  • Vijay K

    Nice Article..

  • Sarasan Se

    Now you are the kind of guy startup founders should meet. Thanks.

  • Hiren Dhanani

    What do you think about viedea capital advisors ( http://www.viedea.com ) ?

  • Rakesh Kalia

    Informative

  • http://www.facebook.com/ambarish.gupta Ambarish Gupta

    Hmm.. not sure. At Knowlarity we used an investment advisory firm for Series A. It helped a lot. We could continue to focus on building business and products while the advisory firm did the “5 year projections” and “what ifs”. Would kill us if we were doing all that ourselves.

    However, very much agree with the kind of people out there in the market. Never pay unconditionally. All of the fee we paid was “success fee”. So the advisory firm get paid only if we close the round.

    My 2c.
    AG

  • http://www.facebook.com/alokebajpai Aloke Bajpai

    Having dealt with advisory firms for a limited time but having closed both of our financing rounds without their help, here are my additional 2 cents:
    1) Advisory / i-bank make sense only for larger deal sizes, on a completely success-fee model, and only with the right partner/team leading the deal (some startup-linked experience and mindset is critical).
    2) In many cases, even though their presentation material will be more professional than what founders could come up with themselves, they do tend to make deals more complex, time-consuming, inefficient, and less transparent.
    3) You need to build a direct personal relationship with your investors in either case (post-transaction it’s just you and him on the board), so you better keep that in focus, whether you use an advisor or not.

  • http://www.schoolgennie.com Pardeep Goyal

    Nice piece of advice for founders. Recently we have been chased by two separate firms, both wanted “success fees”, I think that should be fare for startup ecosystem.