Q: Why are venture capitalists often reluctant to pay success fees for intros to deals?
First off, it’s true — VCs are very reluctant to pay any fees to deal promoters, banks, or other folks that want success fees. And even more importantly, it’s seen as a negative signal when a VC has to pay a success fee, or is reached out to by almost anyone but the CEO. A flag.
But that doesn’t mean they don’t pay for deal flow in some ways. They just pay differently:
- First, many funds have “venture partners”. And often, but not always, part of their job is to source, say, 1 great deal. And if they do, they are often given a % of the carry (i.e, profits) in that deal.
- Second, tons of funds now have “scouts”. These scouts one way or another share in a small portion of the gains of either their individually sourced investments or the collectively sourced investments of all the scouts.
- Third, tons of bigger funds themselves invest in smaller funds. These smaller funds serve as deal flow for them. This is paying for intros, albeit somewhat indirectly.
- Fourth, success fees are already paid in essence to top accelerators. The 5%-7% you’ll pay to join a top accelerator program is in many ways a fee to get access to 100s of top investors. And often a 5%-7% well spent.
- Fifth, many bigger funds quietly reward those who source deals for them. Less often with cash, but more often with an equity grant directly from the company.
Look, it just makes sense to reward whomever regularly sources top investments for you. So VCs do it. In fact, they do it all the time, as you can see above.
What they don’t want to do is pay for bad signals. A startup that can’t raise even a small amount of money without hiring an agent is seen as a bad signal (and generally is, in my experience). Top founders just have to do this type of sales themselves. Because the top ones always have.