I Never Work with People Who Take a Finder’s Fee and You Might Not Want to Either
I am not judging anyone who takes finder’s fee from startups, I just won’t work with them for several reasons.
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A few days ago, as I was walking into the movie theater to enjoy date night with my wife, and I got a message from an acquaintance asking if I knew any startups looking for investments.
"Of course I do, many", I told him. He proceeded to explain that he knew an investor who could invest and that's when the red flags were raised in my head. I asked him if he was getting a cut of these deals. He said yes, and I said no thanks.
Of course he proceeded to explain to me and try to convince me that taking a finder's fee from startups is legitimate to which I replied, "I am not judging you, nor do you have to convince me. I just don't work like that."
Before I continue, extremely important disclaimer: I am not referring to people who accompany entrepreneurs, help them grow, close deals and raise capital. Those people fall under a different category than just a finder. I fall under that category, that is what I do. I am referring to people who send an email intro and take a cut.
I don't take finder's fees from startups I introduce to investors, and I don't work with people who do. In my opinion, neither should you. Here is why.
By taking a cut, you are monetizing your relationships.
Listen, I am going to keep saying it, I am not judging you if this is your business model. Taking a cut on deals is totally acceptable in real estate for example. In fact, I have an old friend who is kind of a big deal in that world and when I explain to him that I don't take finders' fees, he always tells me how wrong I am.
Here is the thing. In tech, the people who connect startups to investors and take a fee are frowned upon and that is not me saying that, it is the many, hundreds, of investors I have spoken to about this topic.
To be honest, I understand why these people are not taken seriously. Think about it. You are an investor and I am your friend. I send you an email introducing you to a startup and you invest. I then take 5 percent of that deal? I am basically monetizing our relationship and making a quick buck off of the fact that me and you are friends.
Even if the investor knows about the fee and is ok with it, to me, as an entrepreneur, someone who takes that fee is someone who is playing the short game and that is generally someone with whom I prefer not to work.
When you have skin in the game, you are no longer objective.
At the end of the day, as I have said many times, business is about relationships and value. If you help entrepreneurs win, you end up winning. If you help investors win, you end up winning. If you connect an entrepreneur to an investor who ends up writing a check, you are helping them both win and, sooner or later, you will gain from this connection. If you take a cut on that intro? The only one you are helping is yourself and now both sides take your connection and recommendation with a grain of salt.
The startup views you as yet another vendor, another salesperson trying to get it on the action, and the investor views you as a connector at best, and more precisely, most investors view you as a used car salesman and want no part of it.
Your recommendation is taken seriously when you have no horse in the race, which means that you are in essence building trust, and providing value to both sides. Once you take a fee, the introduction you made is viewed more as a short term business transaction, which means it is a whole lot less effective.
By definition, you are working with lower quality entrepreneurs.
To add one more point, perhaps the most controversial one, as a general rule, top tier entrepreneurs don't need you to connect them to investors. Yes, that is a blanket statement, but as a rule of thumb, if someone is able to build a multi billion dollar business, they are also able to find the email of your investor and connect with them directly.
If a CEO needs you to introduce them to an investor and without that connection, they lack the resourcefulness to approach the investor independently, well, that is a CEO I am not sure anyone would want to invest in. So by definition, again, at least in my experience, finders don't get the cream of the crop, they usually just get the leftovers, the ones who couldn't successfully raise capital on their own.
To sum it up, you want to take a finder's fee for connecting an entrepreneur to an investor? Go right ahead, but don't expect to be taken too seriously as someone who plays the long game, values relationships, and whose opinion goes a long way.