Fundraising for Entrepreneurs: DIY or Hire an M&A Advisor?
Sep 25, 2024
Fundraising is a critical activity for entrepreneurs, especially as they navigate the different stages of their company's growth—from startup to scale-up, and eventually reach maturity. One of the fundamental decisions in this process is whether to undertake fundraising independently or require the assistance of advisors and individuals external to your company, such as placement agents or M&A advisors. This decision involves evaluating various factors such as network access, prior experience or process expertise, cost implications, resources at hand and the specific needs based on the company’s stage of development. In this post, we'll delve into the pros and cons of each approach, offering insights from real life situations to help entrepreneurs make an informed choice for their own specific case.
Decision factors
First, we're going to map all the different factors to use to determine the optimal decision when it comes to understand whether the capital raise should require the help of a third party. We’re identified several factors to consider:
Cost: Assessing the financial implications of hiring an advisor versus handling fundraising independently.
Network Access: Evaluating the reach and connections you have internally compared to those of one or several advisors. The strength of established relationships is a critical element in this dimension.
Control and Involvement: Determining the balance between direct involvement in the fundraising process and delegating to an advisor.
Expertise and Experience: Comparing the knowledge and negotiation skills of entrepreneurs versus professional advisors.
Time and Focus: Weighing the time commitment required for the DIY approach against the efficiency of using a well-versed advisor. Experienced, quality advisors will typically prepare the ground for investors to hear your pitch, rather than pitching on your behalf.
Learning and Development: Deciding between learning to manage the fundraising process on your own versus gaining insights from experienced partners about how to approach investors.
Strategic Guidance: Assessing the value of strategic insights provided by experienced advisors versus going it alone.
Potential Conflicts: Identifying possible conflicts of interest with advisors who may focus on commission or represent competitors.
Assessing Pros and Cons
Once the decision factors are clearly outlined, it's essential to weigh the specific pros and cons of each approach—whether fundraising independently or through an M&A advisor—against these factors. The pros and cons can vary significantly based on the stage of the company (startup, scale-up, or mature) and the specific circumstances of the entrepreneur. For example, while a startup might benefit from the cost savings and learning experience of DIY fundraising, a mature company might find the strategic guidance and network access of an advisor invaluable.
Take a more detailed look at how the DIY approach to fundraising compares to hiring an M&A advisor across different stages of company maturity in Figure I.
Figure I: Table of Comparison:
Real life examples
Consider the recent case of a seasoned entrepreneur in Germany who was raising funds for his fourth venture, a biotech firm. Despite his experience with three successful startups under his belt, he initially decided to handle the fundraising on his own, relying on his network and prior knowledge. However, after months of effort, the term sheets he received came in with valuations far lower than expected. Realizing that he might need a fresh perspective, he brought in an M&A advisor to assist.
The advisor, leveraging their broader network and market expertise, quickly expanded the reach to more qualified investors. Within just a few weeks, the entrepreneur received new term sheets with valuations twice as high as what he had secured on his own. On top of that, the advisor's connections helped bring in 30% more investment capital than the entrepreneur had initially raised independently. This case highlights the potential of experienced advisors to significantly expand the network reach, enhance both the valuation and the overall amount of capital secured—proving that, in some cases, the cost of hiring an advisor can be more than justified by the results.
In another example, a mid-sized technology company was looking to sell a majority stake after a successful growth period. The leadership team had a clear idea of who their potential buyers were and assumed they knew their market well. To refine their approach, they spoke with several M&A advisors. The discussions quickly revealed that the company’s assumptions were too narrow. The advisors helped challenge their initial views of the buyer pool and provided valuable market insights, including emerging trends and buyer preferences that had not been considered.
Armed with this new perspective, the company expanded its target list, leading to a more competitive bidding process and ultimately securing a higher sale price than expected. The advisors were able to guide the leadership team through a more nuanced understanding of the market dynamics and helped them position the company to appeal to a broader range of buyers.
These examples illustrate the value that skilled advisors can bring—whether it's maximizing fundraising potential or helping a company navigate a sale. By challenging assumptions, providing valuable market insights, and offering access to a larger network, advisors can create opportunities that entrepreneurs or business leaders might not have reached on their own.
Conclusion
Deciding between fundraising independently or hiring an M&A advisor involves carefully considering various factors such as cost, network access, control, but also expertise, scale and outcome. Startups may benefit from the cost savings and learning experience of DIY fundraising, while scale-ups and mature companies often find the strategic guidance and extensive networks provided by an advisor indispensable.
While there are additional dimensions to consider, business leaders should make this decision based on their unique circumstances and context. By doing so, they can navigate the fundraising landscape effectively and secure the capital needed to drive their business forward.