Founders and business angels often see external advisors during startup fundraising as an unnecessary cost they are not willing to bear.
In only very few cases we have seen business angels having a strong enough network, willingness to invest time and resources and skills to support all their startups’ fundraising in multiple rounds. Sometimes this means that they had to raise for five companies at the same time and provide one bridge round after the other themselves. Is that efficient? No. Is it necessary? Also no. Let us shed some light on what the real pros and contras of fundraising management are. There are often ‘hidden’ or misperceived financial consequences of a seemingly ‘easy’ way of raising money.
The truth is, fundraising will always cost roughly the same, whether you use external advisors or not – the only thing that’s different that having your founding team tied up in fundraising will cause really high opportunity costs (on-top). We have seen founders losing more than 30% of their growth momentum over 6 months because of running fundraising themselves. This was not only damaging their valuation, but also cost them some key talent that left the sinking ship.
WHY STARTUP FUNDRAISING COST WILL COST THE SAME WITH OR WITHOUT ADVISORS?
The answer is simple- lawyers will overcharge, tax advisors as well, and if you calculate the hours that a business angel invested at 30% of the rate of a professional – you’d end up at the same amount. It will simply take more time, if she or he does not have a specialised team behind them supporting this endeavour.
Professionals are called professionals because a certain job is their profession. They have teams holding hundreds of valuable relationships up over years. They are used to preparing legal documents and are usually very tight on cost-controlling of other advisors like lawyers or tax-professionals. A rule of thumb is: A good investment advisor saves you at least his cost on other bills during the startup fundraising process. In addition, you will very likely end up with a better deal (terms & conditions), in a healthier company (because founders remained focused on growth) and your investment will gain in value.
Estimated Cost of Raising Capital:
Do you know how to write a good business plan? Most entrepreneurs know that they need a business plan but lack the time or skill-set or both to write one that is thoughtful and complete. Generally speaking, a good business plan takes at least a month to write from scratch, longer if your business is larger or more complex. Having this work done will cost from $5,000 to upwards of $30,000 depending on the amount of work involved.
Advisors – are you a one man show? Or, does you management collectively have the competencies necessary to raise capital and formulate the tactics necessary for your business plans success. If not, you may want to consider retaining advisors. The successful entrepreneur is on who recognizes their own strengths and weaknesses and surrounds themselves with people whose strengths and weaknesses are complimentary.
Advisors will generally want to paid in cash for a short term introductory period. That way, they have something in exchange for their time if the relationship doesn’t work out. Going forward, you can most likely work-out a cash and stock compensation plan. At any rate, you should plan on spending $7,500 – $10,000 for advisors over a three month period depending on how many you hire and the demands your company puts on their time.
Marketing your business – Think of the countless color copies of your business plan that you will be mailing to potential investors. Also, consider how much it will cost you in travel to present to investor groups and the fees associated with presenting at investor forums. For a six to twelve month process you should count on $15,000 on the low expense, short time frame end and up as time goes on and expenses go up.
Legal and accounting fees – Unless you’re an attorney and your partner is a CPA these fees are unavoidable. You’ll spend money organizing your company and setting up the correct legal and financial structure. And, if you have intellectual property to protect you’ll want to do that up front in way of patents, trademarks or copyrights before going forward. It’s hard to say how much you will spend because it is so dependent upon individual situations. But, you should plan on spending at least $5,000 or substantially more if there is intellectual property to protect.
All in all, for a process taking six months to a year you should anticipate spending upwards of $30,000 on the low end.