Charles Lesser, Apricum Partner and Head of our transaction advisory business addresses the right and wrong ways that start-ups select a financial advisor for a capital raise. Charles has nearly 25 years of banking experience in the energy space and that includes raising billions of dollars for FTSE100 energy companies as well as advising on M&A, A&D and strategic transactions. But he is also passionate about cleantech start-ups and enjoys applying his corporate finance skills to help innovative start-ups succeed.
As access to capital is critical for any start-up, Charles offers the following advice for start-ups selecting a fund-raising intermediary for the first time.
What are common mistakes start-ups make in selecting a financial advisor?
Of course first-time buyers of intermediary services make mistakes. But for that, the brokers are equally at fault. Brokers should be candid about these pitfalls, not pander to them or seek to exploit them.
The first and most common is selecting the advisor with the highest valuation. Every founder wants to minimize dilution – so should their advisor – but selecting a financial advisor based on who gives the highest valuation creates an auction of the dishonest. It priorities unprincipled advisors preying on your ambition over proven experience and sober capital market knowledge. In fact, greed kills deals. The truth is, your advisor does not set the price, the market does – their high estimates may be baseless. Sure, the advisor may win your contract, but they won’t close your deal. So don’t focus on the output valuation, focus on the inputs behind it. Ask them which investor groups will offer the highest valuation, which characteristics underpin that, which peer transactions support this. This is how an advisor influences valuation. But the market sets it, not them.
“We prefer substance to style, using our cleantech strategy consulting teams to rework business plans so they are challenged, detailed and viable. It’s an invisible contribution with a profound impact, and it’s unique to Apricum”.
– Charles Lesser, Apricum partner and head of Apricum’s transaction advisory service
A second mistake is being swayed by slick seniority. Pitch meetings can be stuffed with grey-maned smooth-talkers, implying senior attention that never materializes. Your deal is done by the deal team. Identify them and focus only on them: are they hungry, energetic, creative, connected, honest? Be skeptical of promises. Words are seductive and cheap: judge advisors on their actions. Grill the deal team on their experience, prior transactions, ask about the hard details.
The third is fees. There is a market standard and rarely much benefit in deviating from it. For goodness’ sake don’t overpay, but underpaying is almost always a false economy: a weak advisor will almost certainly achieve a weak valuation. Experienced founders are the least price sensitive – and there’s a reason.
So, you are an advisor. How would an advisor choose an advisor for a cleantech capital raise?
I have narrowed it down to five key elements:
Above all sits network. This is what you are buying in a financial advisor. Network has two pillars: breadth of relationships, and depth of relationships. You could replicate one but never both. This is what you’re paying for, so diligence it. Not the corporate network (logos) but the deal team’s network (relationships). Learn which investor types they are closest to, what underpins those relationships, and whether those are the investors you really need: does your business need the investors’ experience, cost of capital, distribution, credentialization, follow-on funding? Does their network’s strengths deliver that?
VC runs from tax advantaged capital and small VC to family offices, through institutions and corporate venture capital, to behemoth funds: make sure their strongest cohort is your target cohort, not the starriest one. We are strongest with institutional and corporate venture capital so far less useful on smaller transactions. Then make sure the advisors has depth in those communities. Do they really know each community and its advantages and limitations? This breadth and depth is important because a good advisor network widens your pool of potential investors, which gives start-ups the requisite pricing power on valuations. It also means knowing investor behavior. Capital raising is not just about the capital: your investor will own part of your businesses and have a voice in strategic decisions. An experienced advisor will know who requires harsh liquidation preferences, who uses pre-packs, who will reopen valuation as closing approaches. They should tell the wolves from the sheep and the wolves in sheep’s clothing.
Second, credibility is key. Your advisor acts like a curator to VCs inundated with pitch decks. Their deals should command attention. And in cleantech you need an agent who can educate the investor and explain the complexities in your business. The other side of credibility is an ability and willingness to challenge you on your assumptions. Any advisor worth their fee should not be your ’yes man’ but should instead warn you about the things that their experience tells them wont – or can’t – work. It goes back to promises; start-ups should be wary of any financial advisor who doesn’t have at least one piece of bad news for you. And don’t shoot the messenger. Listen to bad news. It saves you time and heartache. If you’re not willing to listen they are not your advisor.
Third, you need to evaluate a financial advisor’s track record before settling. Track record is the manifestation of credibility and network. So, it’s your job to drill them on this track record. Find completed private markets transactions in your vertical. If they have track record, your advisor will know more about valuations than anyone else – because they have closed deals with undisclosed valuations.
Fourth, don’t overlook communication collateral. Your algorithms may peerless, your product design might be ground-breaking, but the only thing most investors will see is your pitch deck and financial model: you will be judged on the quality of those. And you don’t get a second chance to make a first impression. So, a good advisor has the appetite, capability and resources to make that first contact a success. Some do this using graphic designers to add gloss. We prefer substance to style, using our cleantech strategy consulting teams to rework business plans so they are challenged, detailed and viable. It’s an invisible contribution with a profound impact, and it’s unique to Apricum.
Finally, attitude matters. It has long-term impact on your company. Are they a long-term partner, or a broker throwing proposals see what sticks: does their proposed transaction structure derisk your next round? Will they tell you the hard truths about your business? These will come out during the capital raising process, and should be addressed before launch. Let your gut will be your guide: if you don’t entirely trust them, you can assume investors feel the same.
If you’d like to judge Apricum on these criteria, we should stand up well. We have focused exclusively on cleantech for almost 15 years. We offer two businesses, investment banking and strategy consulting, under one roof leveraging a deep technical and engineering base. If your cleantech requires capital, ask us who might be able to help you. Perhaps your needs are too small for us, but we want you to succeed. We exist to accelerate an efficient energy transition.
Apricum Partner Charles Lesser gave cleantech startups is advice for what to look for when he spoke at EcoSummit 2022 in Berlin