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Fund raise advisors and their malfunctioning magic wands

03/11/2016

Too many private companies raising series-B or beyond hire an advisor for the first time on a success-fee basis, and think the deal is as good as done. But there is no magic wand that advisors can wave to get the money in and fund raises often fail because of this understanding gap between company and advisor. The more companies fix this, the more likely they are to be able to have sensible conversations with their advisor (who will be delighted at the level of readiness), achieve successful fundraises, and avoid months of wasted time. And you’ll be better equipped to run the business too.  Oakhall’s aim is to work with companies not to bridge, but to close this understanding gap between companies and their advisors. Call us if you’d like to discuss this further.

Our opening paragraph might make it sound as though we are unleashing a tirade against advisors, but this is not the case. By advisor we mean the corporate finance professionals who work for banks or corporate finance boutiques. They are essential given their network of investor contacts, regulatory and legal expertise, and experience of different funding options. But it is not their job to work out what your strategy is or to forecast earnings growth. They will check those things, but you will be in a stronger position if you have done the work before engaging.

There are three reasons why you should not over-rely on your advisor to get the deal done.

1. Their fee structure means they don’t need your deal to close

Advisory fees are usually a very small fixed fee and a very large success fee based on a percentage of funds raised. The high profits on a successful fundraise help cover losses on less successful ones. Banks will fight hard to win a fundraise because (a) it hurts their competitors and they can indulge in chest-beating and (b) as long as a certain percentage of their portfolio of deals is successful, they’ll make a lot of money. But they don’t need your deal to succeed as much as you do. They have other irons in the fire, you don’t.

2. You are not their only client in a fundraise

Advisors win a lot of their business by being appointed by investors – private equity companies or venture capital firms – to sell their portfolio companies. This means that the bank is not 100% on your side in any transaction. It is not in their interest to overprice a deal to a private equity company that next week might be offering them other business. You as a private company need to be aware of this divided loyalty.

3. They don’t have a magic wand, despite their flattering pitch

Too many fundraises fail after months of work have been done. The reason is the gap in understanding between the banks and their corporate client on where the burden of responsibility lies in completing the deal.

In order to win your business, the bank has no option but to flatter you that your business is exciting, investors will be falling over themselves to invest, and the valuation will exceed expectations. They know their competitors are doing the same. One former colleague used to say that “winning the deal involves poetry, executing the deal, prose”. But in the end the articulation of strategy, quality of financial forecasts, and preparedness of management to be quizzed by potential investors is down to the company, not the advisor. They simply don’t have the time or resources to role up their sleeves and do it for you, and neither should they.

At and beyond series-B, financial metrics and your handle on them come to the fore in investor discussions. You should be in control of your own story and strategy. You should have mapped the development of your metrics into a profit forecast. But you should also map that forecast to the return expectations of your investors and check they match up before embarking on a fund raise.

A $10m fund raise will likely generate fees of round $500,000 for your advisor, for a few months work. For a fraction of this fee, Oakhall will get you battle ready, recouping the fees in reduced management time and higher deal valuation.

Relevant Links
Pre series-B, avoid capital introducers altogether “Youth and talent are no match for age and treachery” (Oldcorn & Oldcorn)

Oakhall was established by top-rated equity research analysts to help CEOs and CFOs better analyse their own business and strategies, and articulate them to stakeholders. Founder Andrew Griffin spent almost two decades as a technology equity analyst, ultimately as managing director of European technology equity research at Bank of America Merrill Lynch, before working in investor relations, corporate development and market intelligence for a UK listed software company.