Should I Compensate People Who Make VC Connections?

We need to point out that the registered broker/dealer regulations are US only. Europe works differently and most of the fundraising fee agreements will be legal if they have had some legal review. The investor/investee market is very imperfect, it contains a lot of information assymetries, and as such it is ripe for arbitrage. Many VCs simply do not scout the market well enough. For instance due to geography. And many entrepreneurs simply do not have the depth of thought or the experience in similar transactions to know who their investor targets are. This is especially true at the seed and growth stages. After that, a good lead VC should drive the rest of the rounds and the advisor is less needed. So my answer is a big YES, and I have seen it working for my clients just too many times.

I do startup advisory work which often includes helping startups position themselves for investment and in turn making the pitch to seed investors and/or VCs. I know there are many people out there who will pitch themselves as being able to make VC intros and will offer up that they are only paid if a startup gets funding. There are several issues with this. First, despite the fact that many people say they can and will do this, structuring an arrangement in this way is skating very close to violating SEC broker-dealer regulations. There are numerous articles about this on the internet so I'd suggest you do your own research and speak with a lawyer. What was already a gray area has become even more gray with 1) the JOBS act, and 2) the SEC "no action" letter for AngelList. But understand that payment premised on "if the deal closes" sounds a lot like a broker commission to the SEC regardless of whether the securities buyer or sell pays for it, and even if the commission is non-cash. Because of this, I structure my work such that I advise clients on VCs to target, how to pitch to those VCs, and even do VC introductions, but I will not take compensation based on the outcome (i.e.,if they get funding) or how much they raise. I would advise both startups and intermediaries to be very careful here. Second, I always wonder what is meant by "(to) make VC (c)onnections". Getting connected to VCs, even "Tier 1" name brand VCs is NOT hard -- i.e., getting a deck in front of a VC and exchanging an email. Most VCs, including the big well known VCs, are very public and their business is premised on deal flow. What I think startups really want (and/or actually need) is to stand out from the many other pitches a VC sees (and perhaps to not be pushed down to gate keepers at the associate level). This is where a good startup advisor can be helpful - to work with a startup to help them get their pitch together in such a way that it increases their chances of being noticed. There are common items that most VCs want that sometimes startups are missing (e.g., an actual concrete plan for how the startup can make money). There are also VC specific items that a startup advisor can help a startup with to make sure their presentation is well tuned (and in some cases that may be a matter of saying "Such and such VC doesn't look at decks at all, so we need to get you ready with a solid product demo during which you describe your customer acquisition and go-to-market plan"). Related to this is a personal pet peeve of mine -- what it means to "know" someone. Lots of people run around saying they "know" this or that investor. Often times you find out they only have met that person at a cocktail party and exchanged an email or two. Before you engage someone to make intros on your behalf find out just how well they really know the VCs they purport to know. One litmus test is "Do you know the VCs mobile # and would they take your call?" More generally I'd suggest startups really ask hard questions of intermediaries about the depth of the relationship with the VCs they "know." Again, VCs tend to be pretty public and accessible exactly because they need deal flow. "Knowing" a VC is not a great feat -- it's the depth of the relationship. This all goes to another reason intermediaries should not take a results based compensation. VCs are smart -- they will recognize they are not talking to the founder but an intermediary. If you're getting paid - or expecting to be paid - based on your success in the placement (which they may very well ask) they will know you have an incentive to make the deal happen. I know that if I were to intro a startup to a VC that I know and the VCs were to find out I was getting compensated based on whether or not that VC took the investment, I'd probably lose a degree of trust with that VC. At a minimum it turns a relationship into a sometime very transactional and I doubt one could do this much more than once with a particular VC. In conclusion, I'd caution again compensation of advisors or any form of intermediary based on outcome -- that sounds a lot like a commission. And I'd be wary of what is being paid for to boot.

Great post Jason. My wife has enjoyed all the fruit baskets over the years :P

Do not do this. It opens the door for the investor to rescind their investment when things go sour. Furthermore, there are civil and even criminal penalties for people assisting in deal making unless they are a registered broker dealer, in which case, you may simply compensate them on their efforts.