Scouts > Brokers
Incentive realignment in European venture
When you spend time in startup land anywhere, you start to notice that there are a lot of “advisors” around.
Usually, they are actually brokers. They help you raise money in exchange for a cut.
The number varies. It may be as low as 2% or as high as 10%.
Sometimes they will be great, and really help you structure things, work on your investment materials, assist you with growth strategy, etc.
But many just make a few intros and try to get fees for doing so.
Now, I want to start by being very clear - I am not setting out to criticise advisors or brokers. I’ve been one.
I respect anyone interested in engaging with the venture ecosystem, and there are some amazing people out there doing great work.
But there are three fundamental problems that make this model pretty unsuitable for pre Series-A businesses…
Good founders don’t need brokers
You will hear this from a lot of VCs. If a paid broker is introducing a deal, it is a signal the deal isn't all that hot. There are more VCs than there are hot deals, and most investors are happy to jump on a call (or get their associates to do this).
The economics don’t really work
Charging brokerage fees on seed deals (if you actually work hard and add value) doesn't make you much money. Raising a round takes ~6 months. Even if you help bring in 250k of a 500k round at a 5% fee, you're barely making 2k a month. And because of point 1, you probably won't succeed in doing it.
Incentive misalignment
This is the big one for me.
Startups need people around them with skin in the game, focused on the long term. If I'm incentivised purely for you to secure funding, I'm incentivised to make you look good, even if you suck. Moreover, even if you don't suck, 5% of your funding round in cash out to a broker is money that could have been better spent elsewhere. There is a reason good VCs charge LPs, not startups (as an aside, if a VC is charging portfolio companies ongoing fees, they're playing a short-term game and they are a second-rate VC).
So what's the alternative?
Really, there are two:
Just build a good network by referring deals for free.
This is what most VCs tend to prefer. Over time, the VC’s may even begin to offer you a cash fee themselves. In a world of increasing competition for deal access, it is likely to get harder to offer nothing in return.
Equity
Identifying great opportunities and bringing them to investors can be rewarded with equity. Larger firms like Sequoia famously run scouting programs, giving well networked individuals skin in the game.
I'm interested to see if more small VC firms will begin to offer this. Ada Ventures have made a start in the UK. It is something we are also working on at Odin.
Europe needs fewer brokers and more scouts. 🇪🇺
P.R.
P.S. Want to work with Odin or an investor in our network as a scout? Email me at paddy@joinodin.com