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Can I Get a Little Help Here?

You need experience to hit up investors, but no one said it had to be your own.
November 1, 2001
URL: http://www.entrepreneur.com/article/45360

David Macrae is a serial entrepreneur. After successfully growing three technology companies, he's at it again with Atlanta-based Bulletin.net. With this new company, Macrae hopes to capitalize on the need for expanded services from wireless carriers. Bulletin.net's software products enable a range of wireless devices to provide users with messaging, wireless applications, e-mail and wireless Internet access, and help integrate future technologies as they emerge. "The large telecoms are not equipped to develop and deploy these services to mobile professionals," says Macrae. "But a nimble company such as ours can." Like McDonald's, Macrae sees billions and billions to be served.

But, as Macrae is the first to admit, "No matter how many times you start a business, you almost always get to a point where it needs an infusion of equity capital from outside investors." That also means you'll have to face one of the greatest entrepreneurial quandaries: Should I try to raise the money myself, or should I hire a consultant to help me find the capital my business needs?

Macrae, 49, who has been down both routes before and has learned the ropes, is going it alone for his new company's $3 million raise. But he cautions, "Entrepreneurs should seriously consider outside help when it comes to raising money."

Russell Robb, managing director of Atlantic Capital Management and president of the Association for Corporate Growth, a trade group for deal-makers, is less ambivalent on this point. "If you are raising capital for an emerging-growth business," he says, "in most instances, an outside advisor is the safest, smartest way to go."

Points of Light

Robb's opinion is biased, of course. He is just such an advisor and therefore has a vested interest in the topic. Still, he concedes that advisors are more necessary in some situations than they are in others. While there are lots of exceptions to the rules, Robb says if you fall into one or more of the following categories, an outside consultant is the way to go.

1. You have few contacts. If you don't know anyone who is in the business of investing in emerging-growth companies or if you have never made anyone a pile of money from investing in one of your companies, then you're just the type of entrepreneur who will get the most out of having an outside advisor in on the deal.

"To successfully raise capital, you must have a champion in the community," Robb says, "someone who is willing to say 'You know me. Look at this-it's a damn good company, and I am putting my reputation on the line.'" When you're able to show them you have that kind of backing, top investors will be willing to look at your deal. When you don't have that kind of support, the chances of someone taking an active interest in what you're doing are greatly diminished.

2. You're in a time crunch. If your business is busting out all over the place, the fact is, you don't have the time it will take to successfully raise money on your own. "You need the extra arms and legs just to qualify leads," says Robb. Truthfully, however, some early-stage businesses can sit on the shelf for a few months without suffering many drawbacks whatsoever to their competitive position because nobody is out there attempting to offer the same products or services as they are. For companies in that situation, time is not an issue they need to concern themselves with. Likewise, a profitable business seeking expansion funds may also qualify for the slower do-it-yourself approach.

In relation to the time aspect, you have to consider the speed with which you need to get your hands on fresh capital. "If you need money fast, within three to six months, get a consultant," says Robb.

Macrae concurs. "It can take three to four months just to get a memorandum together," he says. "And in today's environment, a company can get itself into trouble much faster than that. Speed matters more than ever."

3. You don't have experience. Finally, there's the experience factor. "If you have never raised capital before, get help," says Robb, adding that you will likely get a much better deal with someone who has been through the process than if you're getting an education on your first deal.

"When I raised money for the first time," says Macrae, "there were so many things we did not know: valuations, how to put together a board, how to manage expectations. In particular, we did not have a capital plan for how we would get more cash in when we needed it and found ourselves unexpectedly in a crisis mode. Having professional help could have saved us a lot of that pain."

Pay Me Now . . .

The only conundrum larger than deciding whether to hire a financing consultant is how and how much you should pay one.

Often the first great divide in the compensation question is whether equity-aka a piece of the action-is involved. Robb says that while it's common to give up equity, in general it's not a good idea. "You want to limit the number of minority shareholders you have," he says. "They can cause problems down the road by themselves or in the eyes of other investors." Second, he says, if you issue stock to intermediaries before they raise any money, and they fail, you end up with shareholders you might not want.

The optimal compensation structure, according to Robb, consists of an upfront retainer and an accomplishment fee to be paid on closing and receipt of funds. "The upfront retainer might range from a low of $5,000 to as much as $25,000," he says. In the crudest sense, this is so-called "pay attention" money. It lets the consultant know you are serious and will listen to the advice he or she gives you. "The problem with pure contingency arrangements is that any and all advice prior to a deal is perceived as free and is often treated that way," says Robb.

As for the percentage of the amount raised, Robb says 5 percent is typical, though he points out that there are very few hard and fast rules. He adds that while 5 percent may seem like a lot, it's fair if you get a good deal. Says Robb, "If an advisor costs you 5 percent of the amount you raise, it's a good value because that allows you to concentrate on the true cost and terms of the other 95 percent of the deal."


David R. Evanson is a principal at Gregory FCA, an investor relations firm.