Business support consultants
- Time for self-discipline
By Bipin Parmar
Beware of a bsc's company name
Very expensive classified advertising
Look for bscs who are more than meeting fixers
Most angels and vcs are able to make their own assessments
Case 1: wasting time on a fake company
Case 2: established company masquerading as an innovative startup
Case 3: a bsc without expertise
You've been warned, so watch out
In their quest for that elusive equity capital, entrepreneurs, founders and some angels have come to rely on business support consultants (bsc) to guide them to the watering hole (ie. the money), hoping that there is enough water there to justify the expensive carriage (ie. the consultant's fees). But are the companies hiring the bscs doing the right thing, and do they know what to expect from them? The Chilli provides some guidance, and also unravels some of the sharp practices used by bscs on unsuspecting, vulnerable entrepreneurs, highlighting this with three real case studies.
According to the National Business Angel Network (nban), 93% of companies seeking angel or equity finance are not successful in securing any funds. The need for many companies and founders to raise equity venture capital from a dysfunctional capital market (read market failure) has resulted in all sort of business consultants and support organisations, networks and individuals acting as middlemen, in the guise of bscs. They come in all shape and sizes - some are private firms or individuals, some like Business Links are publicly funded, some are public-private set-ups. Some angel networks act on behalf of high net-worth individuals (hnwis), others have a spread of angel and vc investors focused on specific sectors or regions.
For entrepreneurs, founders and executives of Chilli S1, S2, S3, R1 and R2 companies, this represents a totally confusing picture, with most bscs having no or little track record, experience or domain expertise.
Unfortunately, we at The Chilli have heard of many entrepreneurs who have paid bscs from their own pockets - a considerable fee - sometimes repeated many times, without any success or professional support. Clearly the business ethics of the bsc community leaves a great deal to be desired. At The Chilli, we pride ourselves in providing a voice for entrepreneurs and investors alike and would like to caution our readers about some unethical behaviour, which you should be aware of before parting with cash.
Firstly, not all bscs are unethical. Some of them have been in business for a long time and provide a valuable service. Raising funds is hard work, and takes a lot of effort, perseverance and tenacity. The problem is a lack of transparency in terms of the number of companies that have successfully raised funds via this route and the amount raised.
Beware of a bsc's company name
If a company has 'bank' in their company name then you would expect them to be a bank, providing a banking service. Unfortunately the use of the word 'capital' in the company name does not imply that the company has its own fund from which to invest in equity capital. Clearly, this is confusing for many entrepreneurs and founders and needs to be looked at, when and if the bscs decide to self regulate. Only companies that have funds under their own management should be allowed to use the word 'capital' in their company name. After all, corporate finance houses do not call themselves banks, even if they introduce and provide you with access to banking facilities and services.
Very expensive classified advertising
Some vagaries introduced by the Finance and Marketing Act 2000 have created a whole new market for bscs. The act requires anyone seeking public funds to be an authorised person under the act. The government needs to clarify this further, such that private company directors and their representatives, should be able to circulate private particulars to specified groups of investors, such as networks, angels, vcs (excluding Joe Public) without the need to employ a middleman.
Some bscs have used the finance act as an avenue to add little or no value other than participating in the design of a classified advert, carried out by relatively junior staff. The classifieds are published in a network's circulars, newspapers or privately circulated magazines. This is an effective way of soliciting further enquiries and interest from potential investors. The question one has to ask, is what value are you willing to pay for this part of the service and is it targeted at the right audience? A private investor in a fish and chip shop in Blackpool may not be right type of investor in high-tech, high growth businesses. It may be advisable to split the contract into several parts, so each can be measured for its objectivity and effectiveness. Namely:
a. Fee for the preparation, modification and support of the business plans, financials, documentation and presentation material
b. The cost of advertising
c. The fee payable on successful introductions
d. The fee payable once the investment is made
Look for bscs who are more than meeting fixers
Be wary of bscs who fall into the category of meeting fixers. They tend to circulate widely, and have a collection of business cards, but can tell you very little about positioning, presentation and understanding each investor's mind set, preferences, dislikes, etc. Again, one has to assess the value you are willing to place on such activity. Some can take you on an endless roadshow of vcs and angels, who have very little interest in your company, technology or services. Some of the meetings are attended by back-scratching junior staff - who are themselves on a learning exercise.
Most angels and vcs are able to make their own assessments
We have found that some vcs and angels resent the presence of bscs as they see very little value being added to the process of selection and negotiation of the term sheet. Sometimes the bscs get in the way, to ensure their cut is not compromised. Only select bscs who have a good reputation with vcs and angels. Here are a few recent experiences from individuals and angel investors:
Case 1: wasting time on a fake company
A company that was advertised as early stage, with innovative multimedia technology and with patents, turned out be a one-man band, with no company registration, a badly written business plan, no patents and a poor presentation, without financial justifications. The angel investor wasted half a day on a journey which should have not taken place - he had expected, rightly or wrongly, that the bsc would have assisted the poor fellow in at least writing an effective company presentation, and that the patent issue would have been verified. Unfortunately the poor entrepreneur had already paid £3000 for this 'support' and was expected to pay 5 percent of the £1.2m required funds. In the event someone was brave enough to part with this level of investment.
Case 2: established company masquerading as an innovative startup
A 10-year old company, masquerading as an innovative startup. The bsc had promoted this company as a startup with proprietary patent-pending technology and an existing customer base. As the technology was a good fit with the domain expertise of one of the angel investors in a network, he made a point of stopping on his way from silicon valley to Singapore to learn more about this company. It turned out that the company was a distributor for another company, based in the United States, with the intellectual property (ip) belonging to the company in the USA and - worse still - this company was on the verge of bankruptcy. The funding they were seeking was just a stopgap measure to backfill the distribution company. The bsc had failed to grasp the true nature of the company, it's history, it's pitfalls and worse still he was one hour late for the meeting. When challenged, the bsc - part of a major business services consulting company - accepted that this wasn't his domain sector and he was new to the job. In this case neither the interests of the company or the investor were taken care of, not to mention the time and effort wasted. You may have guessed that the company had already paid their fees upfront, so the bsc wasn't interested in remedying the situation.
Case 3: a bsc without expertise
an individual business support practitioner located a potential investor, who was open to looking at new opportunities in a given segment. The bsc immediately proceeded to send him two new opportunities, except he had forgotten to remove all the references to a previous company in the boilerplate business plan. When asked for more clarification, the bsc requested that this experienced investor attend a meeting at the company's site and at a time to suit the company, not the investor. As for the second company, he could only ask questions at an investor fair, for which he was required to register and pay a fee.
You've been warned, so watch out
Such naivety, unreasonable fee structures, false representations and unrealistic expectations amongst the bsc community does not serve the entrepreneurs, founders, managers or potential investors. Worse still, hard earned money from some unsuspecting entrepreneurs is given, without clarity or purpose. It is not in the long-term interests of the bsc community or angel networks to allow such malpractice to carry on without a severe backlash. It's time that this sector of the industry got its act together and brings in some self-imposed discipline, as nobody wants yet more government legislation and bureaucracy to stifle the growth potential of a future entrepreneurial economy.
The Chilli's advice to entrepreneurs, founders and managers is that you should be clear as to what you expect from your bsc - be specific, break down the required activities, so you can monitor the progress. Try and negotiate, so fees are paid on progress and performance. Only use a bsc that has a reputation to protect and take references before you engage.
Comments on this story? Send an email to the editor at Editor@TheChilli.com
