When should startups hire advisors or bankers for capital raising?
Series A onwards is the right time to engage a banker. Several founders raise Series A/B rounds by themselves. But even the smartest founders hire bankers when they are raising Series C or $10 MN upwards because it involves a lot of work.
Since I often write about venture capital and startups, many founders contact me to fund their companies. They mistakenly believe I am a full-time VC.
When I tell them that our primary business is helping startups raise capital, they ask me if we can help them. Because India is full of advisors/bankers, some good and some bad, I thought I will write something on hiring an investment/fundraising advisor.
1. Seed stage – Advisors don't add any value at a seed or an idea stage. Seed-stage investments are all about the founders. No one gives a damn about the idea. Investors will back you only if they think you have the drive to create something valuable. Most investors prefer to speak directly to founders at this stage. It's a terrible idea to hire a professional advisor for raising seed capital.
2. Pre-revenue / Minimal revenue – Most of the founders who contact us fall into this category. They have built an MVP. They will start making revenue in a few months. Few already have some revenue – $ 2,3k monthly.
While you can work with advisors at this stage, they won't add much value except connecting you to prospective investors. There are no KPIs to track or unit-level economics to explain. Financial projections and decks are also relatively simple. Unless you are super busy running the business, my suggestion is to directly approach the investor.
3. Series A/B – This is our sweet spot – startups with $50–100K monthly revenue looking to raise $2 MN and above. Good advisors can add value with KPIs, projections, storytelling, and decks at this stage. Since all advisors work on a success fee, the round sizes are big enough at this stage to attract competent people.
The entire fundraising process takes 4–6 months, and there is enough money at a 3-4% success fee in $2 MN & above rounds for good advisors to justify their time. It especially makes sense for solo founders occupied with several things to hire an advisor to manage the process. But several founders raise Series A and B by themselves.
4. Series C onwards – Most founders raising upwards of $10 MN go through a banker. Companies like Avendus operate in this segment. Even the smartest founders with finance backgrounds prefer bankers at this stage because there is a lot to do.
There are several rounds of negotiations and complicated term sheet clauses. There is a lot of data to share. All startups and VCs hire a law firm for transaction structuring. There is quite a bit of work in a $10 MN deal, and even the smartest founders need outside help.