Hiring a Funding Advisor

If you're heading out on the fundraising trail, consider taking a guide along to keep your company on the right path.
Magazine Contributor
6 min read

This story appears in the December 2005 issue of Entrepreneur. Subscribe »

Fundraising is not something most business owners do often--maybe only once in a lifetime--so the thought of doing it wrong, getting ripped off, or simply failing can give you heartburn. Fortunately, there are consultants and investment bankers who specialize in planning and executing capital campaigns. And while hiring an outside advisor can be a difficult decision for an entrepreneur who is used to doing things independently and on the cheap, an advisor's expertise can jump-start a process that might otherwise stop you in your tracks.

No Time to Stub Your Toe
There's no stopping Tori Stuart, president and founder of Zoe Foods, a $2 million natural-foods company in Needham Massachusetts. Stuart, 40, is anxious to raise nearly $3 million to fuel growth of about 150 percent in the next 18 to 20 months, but she knows from experience that she needs help with the process. "As a small-company owner, I find raising capital is a big time-sink," Stuart says. "And nobody's going to do my job if I'm raising money." So Stuart is already speaking with investment bankers, and plans to hire out the process rather than let it distract her from driving the company's growth.

Time and attention are probably the main reasons entrepreneurs call on an intermediary when embarking on a fundraising campaign, says investment banker Patrick Vaughn of Triarch Capital Partnersin Charlotte, North Carolina. Triarch works with "small middle-market companies"--those with earnings of $1 million or more, "who are still too small to wrestle with the Wall Street investment banking crowd," says Vaughn.

"It's a significant distraction to [raise money] yourself," says Vaughn. "Once you publish your numbers to a prospective investor, they'll start tracking how you do. That's the wrong time to stub your toe. Having an advisor frees you up to focus on the shop; you need to be firing on all cylinders."

But having an advisor or investment banker on the job doesn't mean you can sit back and wait for a check, Vaughn adds. "You're going to be involved in the process. We'll do legwork and preparation of materials, but [the investors] want to hear what you think."

Who Does What
"I know I have to be involved," echoes Stuart, but she emphasizes that in addition to being a project manager, her ideal intermediary will bring a Rolodex of angel investors and VCs. "I need somebody to help with introductions," she says, "and then there's follow-up- constant outreach to the investors, all the way through the close."

Stuart is fortunate to have team members who can do some of the work that precedes investor introductions and negotiations. That includes putting together a "deal book" and a "data room." A deal book is the document that goes out to investors and explains all aspects of the investment opportunity. For a larger company, a deal book can be hundreds of pages long, while simpler investment opportunities may only take a few pages. The data room is simply a filing cabinet or online folder that holds copies of all the company's key records, from historical accounting statements to insurance policies and records on key personnel.

As all that information comes together, an investment banker or intermediary will help you decide whether the money should come from an equity investment (i.e., the sale of company stock), some kind of loan, or a combination of both. And finally, the intermediary will run the numbers to determine the right stock price or loan amount, and the potential return on investment.

Picking the Right Person
Knowing what help is needed is the first step to finding the right financial go-between. Whether they call themselves advisors, bankers, consultants, finders or intermediaries, each can help plan and execute a typical fundraising process. What differentiates them is whether or not they are licensed to promote the sale of shares of stock in your company to an investor. For help with that task, the law requires you to hire a securities dealer. Individuals and firms that hold a securities trading license will list themselves as an "NASD member," denoting their status in the National Association of Securities Dealers.

There are, of course, situations where you may not need an NASD member. If you're buying or selling an entire business (or a business asset), you may be able to do so through a business broker or corporate finance advisor. Likewise, if you've already identified the potential investor(s), you may want to hire a consultant or valuation expert just to help with negotiations.

"We act only as an advisor; we're not selling securities," says David Tolson, CEO of CapitalValuein Denver. Tolson is a certified valuation expert and advises business owners during negotiations with investors, purchasers, heirs or even the tax man. While consultants like Tolson cannot legally offer securities directly to investors, they can play a vital role on the entrepreneur's team during a transaction. Just as a lawyer is needed to draw up the proper investment documents, an advisor, licensed or not, can be key to pricing and structuring the best deal. And a valuation advisor, which is much less expensive than an investment banker, can provide you with an objective evaluation of the deal.

Ken Katuin, founder of Abbisoft House Plans Inc.in Novato, California, called on Tolson to advise him during negotiations with a buyer for his business. "I tried to negotiate the deal myself," recalls Katuin, 40. "But when they started talking financial details, [Tolson] could discuss those and back it up with the numbers. I didn't have that kind of skill." Katuin adds that having an intermediary helped him stay on good terms with the buyer, with whom he would have to work for some time. "You don't want to look like the bad guy," he says. "Let another party do the tough negotiations."

Since an advisor becomes a trusted member of your team for several months, Tolson says picking the right person for the job can be tricky. "You want a level of experience, but you also want a personality fit. Make sure you enjoy working with them," he advises. "Also, make sure the intermediary understands your objectives, both financial and nonfinancial."

References and Results
Stuart of Zoe Foods is busy looking for the right advisor, and results count. "I want to know their track records," she says. "What other companies have they raised [money] for, how much did they raise and how long did it take?"

Though licensed brokers typically charge from 5 percent to 15 percent of the transaction, Stuart says the expense would be worth it. "I look at the cost of not [hiring someone]," she says. "I'd do all the work, [so] I won't be doing other work, and the business won't continue to grow." If sales at Zoe Foods keep growing 150 percent every two years, the advisor she picks will have plenty to chew on.

David Worrell is author of the e-book Finding Funding.
More from Entrepreneur
Entrepreneur Select: A Fund For Entrepreneurs, By Entrepreneurs

Entrepreneurs require more than just money, which is why we aim to empower you, as well as act as a catalyst for value creation.

Make sure you’re covered if an employee gets injured at work by
  • Providing us with basic information about your business
  • Verifying details about your business with one of our specialists
  • Speaking with an agent who is specifically suited to insure your business
Try a risk-free trial of Entrepreneur’s BIZ PLANNING PLUS powered by LivePlan for 60 days:
  • Get step-by-step guidance for writing your plan
  • Gain inspiration from 500+ sample plans
  • Utilize business and legal templates
  • And much more

Latest on Entrepreneur