The role of a placement agent is quite unique in Canada and the US, they do much than just finding capital.
If you think that the primary job of placement agents is finding the capital you seek, then you are right. Placement agents do much more than simply find capital, but there are a number of things that they most definitely do not do. Just to make sure that you’re clear on both in the review that follows about what placement agents do and don’t do.
A placement agent is useful (often critical) in identifying sources of financing that a company wouldn’t have stumbled upon itself. A good agent has a sense of what the market wants and can give useful advice about the business plan and how to present it. Moreover, a placement agent can help reduce the hidden costs of raising capital at this stage ‘” the time that managers must devote to fundraising.
Early stage fundraising is seemingly constant. And emerging growth companies are not ordinarily overpopulated with managers ‘” they run lean and mean. Almost everyone has more than a full-time job, often working around the clock to achieve the company’s goals. Therefore, raising money is an expensive diversion for managers, particularly when they have to find prospective investors on their own.
By identifying likely prospects, a placement agent can save precious time in two respects:
- The company’s managers don’t have to do it and therefore can devote more time to running the company.
- The time between the start of the hunt and the end is shorter, often a life-or-death matter for companies operating from payroll period to pay-roll period.
A placement agent’s role should not, however, be exaggerated. If you think that all you’ll have to do is hand over a business plan to your friendly local placement agent and wait for the dollars to come in, you’re suffering from a financially fatal self-delusion ‘” one that can mean a quick end to your entrepreneurial dream.
Let us make one thing perfectly clear: No placement agent in the early stage space ‘” no matter how skillful ‘” actually sells the security in the conventional sense, the way one might sell a computer or used car. In private equity, the sales are one-on-one, with the investor on one side of the table and the managers of the company on the other. The agent’s function is
- First, to give advice on what the market is looking for
- Second, to locate potential investors
- Third, and last, to introduce the two sides and then step back and let nature take its course.
Private investors at this level are not terribly interested in hearing what the agent has to say about the company, other than the spiel given when the opportunity is being introduced. After the courtship starts, the investor wants answers directly from the company’s managers. In fact, the agent often looks to the founder for a so-called friends list ‘” that is, potential investors already known to the founder. Moreover, an agent acts only on a best-efforts basis. A firm commitment in the early stages of a company ‘” indeed, a firm commitment on a private placement of any kind ‘” is encountered only in special circumstances.