Connecting decision makers to a dynamic network of information, people and ideas, Bloomberg quickly and accurately delivers business and financial information, news and insight around the world.
+1 212 318 2000
Europe, Middle East, & Africa
+44 20 7330 7500
+65 6212 1000
For early-stage entrepreneurs looking to obtain venture capital, an important decision to make is whether to use a finder. A finder (aka broker) is someone who offers to help an entrepreneur secure venture capital in exchange for compensation (cash and/or equity). Most finders typically charge an up-front fee and a percentage of the amount of money they "help" the entrepreneur raise and/or equity in the company. Before you decide whether to use a finder to obtain venture capital, consider the following:
1. Pursuant to the Investment Advisers Act of 1940, finders/brokers must be registered with the Securities & Exchange Commission and licensed to transact in such matters. Those who aren’t are in violation of securities regulations, so be very cautious if someone offers to make some intros and/or help you "find" venture capital money in exchange for money and/or equity.
2. Most VCs have plenty of deal flow from people they know and trust, and therefore won’t entertain a startup referred from a finder. In fact, most financing transactions require the CEO/founder(s) to represent and warrant that there aren’t any brokers involved so as to avoid potential equity encumbrances.
3. VCs invest in people so they will want to hear from you, not a finder. They’ll want to establish a rapport with you throughout the process as the financing results in a long-term partnership analogous to marriage.
4. VCs don’t want a portion of their investment going to pay a finder—it is an inefficient use of capital. They’ll want the money spent to build the business.
So when, if ever, should entrepreneurs consider using finders? Oftentimes, going through a finder can work for a very late-stage company just prior to a liquidity event.
President, Orange County Venture Group
Co-Founder and Managing Director
Okapi Venture Capital
Laguna Beach, Calif.
Want to improve the way you run your business? Entrepreneurs, academics, and consultants from diverse industries offer practical advice on a variety of topics each business day.
To submit a tip for consideration, first check our archive of previous tips to make sure you're not repeating a tip someone has already contributed. Then send the tip to Small Business channel contributor Michelle Dammon Loyalka. Because of the volume of material she receives, she may not respond to each individual.