I don’t necessarily disagree with anything you say…

BUT – I think it is important to articulate what we are seeing with our early stage VC firm, and I believe this is the reality for most of our colleagues as well. Perhaps brokers make more sense downstream; they don’t make too much sense here. Currently, 95% of the deals that come with brokers attached are very clearly lower-quality deals, typically with alot of “hair” on them (i.e., broken team, rotten capitalization, etc).

I would highly recommend that if an early stage startup needs to use a broker to help them refine their pitch and figure out which investors to target, it should be much more in an advisory/consulting capacity, much more behind the scenes.

Thanks for your thoughts!

My observation is that the private equity industry has a sourcing model that includes a heavy dose of intermediaries. The bigger the deal, the more likely there is to find one (or two) investment banks involved. This market has developed into an efficient market. Small buyout shops try to mostly buy companies that are not represented by IBs because they don’t want to participate in an auction process that will result in a higher price paid and less chance that they are the winning bidder. But the more sophisticated the seller, the more likely it is that they hire a banker so they can maximize the sales price.

The venture market is far less efficient. Big, later stage venture rounds do often have bankers involved but earlier stage financings generally don’t. My premise is that VCs don’t like deals where intermediaries are involved as this generally means that the efficient banker process may drive a higher valuation and drive more competition reducing the chance that they will get to invest. Saying that hiring a banker/intermediary cast doubts on the quality of the management team is a smokescreen because you are not looking for a management team that has a good fund raising rolodex (most VCs sell that they can bring this to the table), you are looking for a team that are good operators and can articulate their value proposition to customers, VCs, strategics… The intermediary should help the entrepreneur articulate and package the story and bring multiple parties to the table to make sure the fund raising process is efficient but ultimately the VCs should be talking to the entrepreneur for the real diligence and asses his/her skill set to get across the finish line. Far too often, early stage entrepreneurs are so busy trying to run their company / develop their technology that they sub-optimize the fund raising process and only go to a few local VCs or network into the few VCs their lawyer or accountant knows – particularly in fly-over country outside the Valley/Boston/Austin. This is good for the VCs as they don’t have much competition which is why, in my opinion, the VCs prefer that an intermediary is not involved.

Frank, your comments are very interesting – taken to the extreme, the best angels in the investment world function much like the “good brokers” you describe. They take a small equity stake in a young company, but more importantly, they do the guiding and mentoring that you speak about.

I have thought there is room in our developing VC industry for outsourced skills – such as outsourced company screening, outsourced due diligence, even outsourced board governance. Different VCs have different skill sets – some are great at raising money, some are great at picking companies, some are great at company development/growth – not many can do it all.

While I agree with the context of your blog, as a strategist that focuses on dynamic thinking, I’d be very careful about taking a static stand against middlemen/brokers both the venture type, and the equity-type on Wall Street.

Things are in flux on a global basis. I just finished a major analysis for a White House Department on “what are some of the scenarios if China just decided to ‘go it alone’ on the global downturn. They could do that. They probably won’t. But, we don’t live in a vacuum. “How would it effect Wall Street, national security, the US Economy, science and technology, WalMart, the local retailer, new ventures, and so forth?” The What Ifs are many — including it having no impact.

Middleman/Brokers got lazy during the “good times.” They became order takers, slacked on the analysis, and built their branding-marketing-communications skills. They certified themselves as experts without accomplishing anything significant — but, rather pointed to their personal financial successes as if those really and magically extended to their would-be customers. As they became better at the skill-sets they became less and less valuable, until they had little value-added services they provided. That is the current situation — but after the fallout, it may no longer suffice to be the way to conduct business and hold on to a job.

If a middleman/broker can work with a entrepreneur to TRULY expand and transform a linear business plan and idea into something more complete and valuable, that one-on-one consulting and mentoring would change the situation and all would win — as this would pre-screen many loser plans, while also building entrepreneur and middleman reputable reputations. The shock to the economy, and the dynamics may shape this.