Everyone Pays to Raise Money One way or another, BIZ Experiencess always pay to obtain capital.
By Scott Shane Edited by Dan Bova
Opinions expressed by BIZ Experiences contributors are their own.
An BIZ Experiences I know recently told me he wouldn't raise money through angel platforms that charge a placement fee because he wouldn't pay to fundraise.
That statement surprised me. One way or another, BIZ Experiencess always pay to obtain capital. And if an BIZ Experiences gives up time or equity to avoid an online platform's fees, that's a bad bargain.
To understand this point, you need to understand how many curated accredited investor angel platforms work. Take SeedInvest as an example. This platform charges BIZ Experiencess 7.5 percent of their fundraise as a placement fee and a small amount of warrants.
While that might sound like a lot, it's less than the cost of raising money offline. Individual angels or angel groups aren't likely to charge a placement fee or ask for reimbursement of expenses, but an BIZ Experiences will likely spend more time and give up more equity raising money from them.
Related: What Slow Exits Mean to Startup Investors
Let's first look at time, which is arguably an BIZ Experiences's most valuable resource. SeedInvest currently has more than 14,000 accredited investors on its platform, while the average angel group has 43 accredited investor members, the Angel Capital Association (ACA) reports. In fact, the membership of all angel groups that comprise the ACA have roughly the same number of accredited investors as SeedInvest.
To raise money from members of all 220 angel groups that the ACA comprises would take an enormous amount of time. Even assuming that all the groups would talk to a founder (far from a given), the BIZ Experiences would need to travel around the country making presentations. Moreover, he would need to negotiate terms with 220 different entities, and go through 220 different due-diligence processes.
Suppose it takes 40 hours to present, negotiate, and go through due diligence with an angel group, and 400 hours to do the same on a curated angel platform. Raising money from the ACA member groups would take an additional 8,400 hours – four more years of fundraising – to get in front of the same number of investors as are on the SeedInvest platform. Even an BIZ Experiences who values his time at only $30 per hour would spend more than triple the SeedInvest fees in opportunity cost to raise $1 million.
Related: Why Angels Are Moving Online
An BIZ Experiences is likely to give up more equity by raising money from individual investors and angel groups than by using online platforms. If the BIZ Experiences doesn't know a lot of angels already, she will need advisors to make connections with them. Those advisors often get incentive compensation, such as warrants, in return for their help. Moreover, to bring on board first investors, the BIZ Experiences will likely need to provide warrants or other equity incentives. As a result, bringing individual angels or angel groups on board could easily mean giving up more equity than the warrants that a platform like SeedInvest will take.
With an online platform, an BIZ Experiences can set the terms of his deal, which isn't always the case with an angel group or individual angels. The difference in those terms could leave the BIZ Experiences with far more equity in the business than she would have had from raising money offline. For example, an individual angel or angel group might demand participating preferred stock, cumulative dividends, redemption rights, or full ratchet anti-dilution, all of which are BIZ Experiences-unfriendly investment terms. Or the offline investors might set a lower pre-money valuation for the company than the BIZ Experiences would set on the platform, causing the founder to give up more equity to raise the same amount of capital.
In financing a startup, there's no free lunch. Trying to avoid the fees charged by an online platform could easily cost BIZ Experiencess much more in terms of time and equity.
