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Capital Marketers

Do you need a financing consultant to raise money--or can you go it alone?
October 1, 1996
URL: http://www.entrepreneur.com/article/13412

Luck, they say, is where opportunity and preparation meet. Such was the case with Barry Suskind, who in the late '80s got his concept--gourmet Italian restaurants with a focus on home delivery--up and running with five units in New York City. Just one call to Primo Piatto's Pasta 2 U telephone number would send piping-hot regional Italian dishes anywhere in the city.

Suskind's idea was enhanced by the fact that the off-premise portion of the restaurant industry was exploding. And Suskind was on the cutting edge with lots of proprietary software for inventory control, communications and commissary management to take advantage of the new demand.

What Suskind was not prepared for, however, was the fact that a financing consultant he hired to help him arrange for expansion financing would lead him down a blind alley. "What I remember most," recalls Suskind, "is that we spent so many months arguing about the minutiae of my financial projections that nothing got done." So much time, in fact, that Suskind finally got fed up and put together a deal on his own.

But the consultant's delay proved fatal as Suskind's own deal fell apart, taking Primo Piatto down with it--not to mention $1.5 million of Suskind's personal wealth. "I reached an agreement to be acquired by a public company in late July 1990 with closing scheduled for after Labor Day," recalls Suskind. "But when Kuwait was invaded August 3 and the markets were paralyzed with fear, our white knight left the table and never came back." Primo Piatto died on the spot, says Suskind, "not because we weren't profitable-- we simply ran out of money."

Lemons From Lemonade

The experience was not lost on Suskind. He used what he had learned in financing Primo Piatto and a previous business to form International Technologies & Finance LLC (ITF), a New York City firm that offers a variety of corporate financial and investment banking services similar to what Suskind once sought. And Suskind has prospered, raising some $600 million for emerging companies since forming ITF. But his experience brings up an interesting question for today's entrepreneurs: When the time comes to raise expansion capital, should you hire outside experts or go it alone?

The great divide in the financial markets has to do with the type of capital you're raising. Pure venture capitalists and merchant bankers commit their own capital (or the capital of others over which they have discretionary authority) to a deal. Since they have the power to write a check, additional expertise may not be necessary to complete the deal.

The question gets a little fuzzy when looking at how investment bankers and financing consultants operate, however. Investment banking firms often raise money from a pool of investors who are their clients. To do this well, they must sell the investors on the merits of any particular deal. A good financing consultant does the same thing. In fact, a really hot financing consultant might be able to do this better than an investment banker, and in this regard may be more effective at giving you more alternatives and greater access to capital markets.

But when a financing consultant promises to structure your deal and find the capital you need, are the fees--often a monthly retainer and some kind of equity stake in your company--worth it?

The answer is yes, but a qualified yes. Suskind likens using a financing consultant to dealing with an independent insurance agent: "With intimate knowledge of several carriers, an independent agent can often do a better job of finding insurance than clients can on their own," he says.

To wit, says Suskind, there are tens of thousands of companies each year that seek venture capital and have absolutely no chance of succeeding. "It's not that they are not viable companies," he says. "The fact is that venture capital is an extremely defined source of capital for which few companies qualify. And many people are shocked to learn that collectively, U.S. venture capital firms fund perhaps 1,000 new companies each year, at best."

On the flip side, however, there are thousands of other financing sources, many of which are much more viable for emerging or early-stage companies. "If someone can point you in the right direction, package your company so it's appropriate for and attractive to these sources of capital, and get you in front of the decision makers," says Suskind, "they are providing an invaluable service." Especially, he says, when looking in all the wrong places might cause an entrepreneur to run out of time and money and scuttle the venture altogether.

Risks And Rewards

But just as a bad insurance agent will get you bad insurance, a bad financing consultant will likely get you undesirable financing. So here's what to look for when choosing a consultant.

First, says Suskind, avoid people who don't charge fees. (Hmmm, was he paid to say that?) Well, yes. But, he says, "while this flies in the face of conventional wisdom, a finder [someone who offers to find an investor for you without earning a fee] has no vested interest in your company. They will simply circulate the deal as is and many times hurt a company's chances by overshopping it."

Fees, says Suskind, not only help the consultant defray expenses but also give the consultant the commitment from the company's senior management that is essential to get the deal done.

In the same breath, however, Suskind says fees for structuring and finding financing should be small and represent only a tiny fraction of what the consultant could earn if he or she is successful at closing the deal. And finally, he says, it is frequently in the best interest of the company raising money--as well as the deal itself--to structure the back-end compensation as equity participation because fees paid at closing may inhibit the consummation of the deal. Private investors often want their entire investment to go to the business rather than having a chunk given to a financing consultant, while underwriters of a public offering feel that any fees given to a middleman are taking away from their compensation.

Next, says Suskind, check the consultant's references. "It's amazing how many entrepreneurs will hire someone to help them raise money without ever checking to see that they have successfully done it before," he says. Suskind recommends speaking with the principals of three companies for which the firm has arranged financing. "Not only do you want to find out if they succeeded, but you also want to make sure they performed professionally during the process."

Finally, says Suskind, if you are going to hire someone to help you raise money, make sure there is an "out" clause allowing you to escape unscathed within a reasonable time period. "You should be talking to sources of capital within 60 days," he says. "If you aren't, something is wrong, and your deal is probably floundering--which, as I learned, can be fatal."

Contact Sources

International Technologies & Finance LLC, 181 Hudson St., #8D, New York, NY 10013, (212) 226-5700.