Should You Use a Finder to Obtain Venture Capital?

Posted by: Rod Kurtz on October 1, 2008

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.

Marc Averitt
President, Orange County Venture Group
Co-Founder and Managing Director
Okapi Venture Capital
Laguna Beach, Calif.

Reader Comments

Isaac Taitler

October 19, 2008 12:35 PM

Dear Mr. Marc Averitt,
The impressive “money finder” description really matches our vision, on the other hand, the need of r&d and engineering capital for fueling our activity requires expensive time.
Tairob is an Israeli R&D company in the robotics field and computerized consumer products. Tairob collaborates with the Technion (Israeli MIT) and R&D institutions from the European Union countries. VCs are interested in robotics, but want us to provide
a prototype (that is the reason why we need capital), they are not interested
in the consumer products. Angels are interested to invest in their neighborhood only. We apply for institutional funding, but it is a long process and time consuming, sometimes 2,3 full time jobs activity.
I’ll be happy to get your advice.
Regards, Isaac Taitler
General Manager

Michael N. Brette,J.D.

November 1, 2009 1:46 PM

Money finders cannot be paid a commission or other success-based compensation unless they are a licensed broker/dealer. Paying an unlicensed finder a commission or success-based fee is illegal and violates state and federal security laws. The fact that some people do it and get away with it does not make it legal. Why do you think they have security laws?

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