Whether you are a new entrepreneur or a seasoned executive, you are familiar with the challenge of allocating scarce resources. You make choices everyday based on perceived costs and benefits on where to invest your time and where to seek assistance. Accessing the private capital markets is no different. Thanks to new legislation under the JOBS Act, as well as some innovative technology, the private capital markets are opening up. This creates new choices for companies seeking to raise private capital through the advent of online fundraising platforms.
On one end of the spectrum lies the DIY model where companies are free to go it alone and directly control the capital raising process with potential investors. Professional intermediaries are cut out, which in theory should result in lower transaction costs. The argument goes something like this: “I only pay an agent to introduce me to investors, so thanks to the online platform, I don’t need them anymore”. Such may be the case if targeted investor introductions were the only value offered by a placement agent.
A placement agent actually earns their fee by fulfilling a number of key roles in addition to investor matchmaking.
- The agent acts as curator by conducting professional due diligence on the issuer and presenting a vetted opportunity to the investor community at large.
- The agent acts as administrator by preparing offering materials and managing the process through interaction with potential investors, outside counsel, accountants, and other parties to the deal.
- The agent acts as financial advisor and advocate by structuring deal terms and negotiating with potential investors who are often financial professionals themselves.
- The agent establishes credibility for investors who are unfamiliar with the offering by extending their implicit seal of approval.
Depending on your company’s background and internal skill set, you may be able to satisfy a number of these roles yourself. Even so, this would require a significant investment of your team’s time and resources which would otherwise be allocated towards more direct business-related activities (and therein lies the rub!).
In making your determination, you should remember that while going it alone may be a reasonable alternative with a seemingly attractive ROI, ask yourself what happens when a process doesn’t go according to plan, the market is fickle, or investors are difficult. How much of your scarce resources are you really prepared to devote then?
For more, see this post on ‘Using an Agent in Early-stage Rounds’