Fundraising · Negotiation

Investment offer contingent on corporate partnership?

Greg Lipinski Patent Examiner at USPTO

September 12th, 2016

My early stage consumer-facing app recently formalized a partnership with a Fortune 500 company to sell research to a big consumer industry. We've been looking to raise less than a million to expand across our first market. A P/E firm offered us a Letter of Intent saying they'll invest a mid seven figure amount if we convince one of the industry players to commit a low seven figure amount. The P/E firm expects us to launch in multiple markets within a year.

Will the contingency that we get an industry player on board make the industry players question how much faith the P/E firm has in our venture as it stands?

While our beta results are strong, they're very limited. Is it dangerous to accept too much money at this stage? Keep in mind we've been bootstrapping til now, so any investment would be a godsend.

Barry Burr founder, Barry Beams llc, a startup to re-light your night.

September 12th, 2016

Sounds like those aren't the right investors for you. They're the ones who should be convincing and recruiting the industry players to join in on their investment, not improperly put the burden on you. They should be giving you a smaller amount first, with a second tier at a higher valuation when you reach industry player investment.
I suggest you bite the bullet and walk, rather than be lured into a bottom feeder arrangement by the p/e firm.

Morey Schapira CEO at REDmedic

September 12th, 2016

Greg, Good questions. The issue is not only should you take the money, but how much of your firm do you have to give up to the P/E firm? If it's 10% take the $ and keep running. If it's 50%, I'm not so sure. Will the P/E firm be able to add any strategic value? Do they have contacts in your industry? Can they open doors? Have you had a chance to talk with other firms that they invested in? Were they pains in the ass to deal with or were they smart and strategic? Interest rates will start going up again by the end of the year. The stock market is in the process of peaking. When that happens, funders will become more conservative and it will be tougher to raise funds. It may be wise to take the $ sooner than later. Does your firm have an Advisory Board (in addition to a Board of Directors)? Hope this has been useful to you. Regards, Morey Schapira Silicon Valley

Chris Kwan & Inventor 10 US Patents in FinTech, P2P Prepaid Cards (US PATENT 8,650,126)

September 13th, 2016

A letter of Intent is not much, is not a contingent and you can't even sue on that. Its looks like someone wanting to buy a cheap option but not wanting to pay. 

David M

September 14th, 2016

Per Chris Kwan's thought, I agree. LOI's are merely conversational, and they get thrown around WAY too much by investors and entrepreneurs alike. LOI's are not binding as Chris alluded to. Not saying they are bad, but they hold next to no value as is, more or less a starting point.

If the investment firm has some cache, no doubt there is some value there to build on. If this investment firm is saying they will invest AFTER you close a low 7 figure deal, they sound like they are not willing to take any risk IN you. But I'm guessing they will want the reward of equity FROM you. How does that make you feel?

If the account you are to close pays upfront, why not just use that for your needed operating capital? One thing is for certain, if you do the heavy lifting before the P/E invests, you are going to have far more bargaining power.

It sounds like you are close. If you can hold out from investors a little longer. Be careful of LOI's though. They can really throw entrepreneurs off track. I would request a detailed terms sheet before I spent much more time with this investor. But that's just me.

Good news it sounds like you are close to having far more options than one investor.

Paul Gallo CEO at First US Advisors Inc., M&A and Capital Raising

September 12th, 2016

It's a smart thing on the part of the P/E firm to seek third-party validation of your concepts. And you can use this as a selling tool when approaching the industry big-boys for a participating investment - even if they want to make it contingent on the P/E firm stepping forward simultaneously. Think about it - if you deliver the contingent-industry-big-boy investment commitment and the P/E firm hesitates - you have one heck of a selling tool to go to other P/E firms - it's almost like the first P/E firm gave you permission to use them as a stalking-horse. The industry big-boy's interest is tweaked that there is a named P/E firm ready to invest significant sums so they take you more seriously than if you simply approached them and asked "Hey, industry big-boy, would you commitment to giving me $1mil if and when I get a $5mil commitment from a P/E firm?" That's weak compared with "Hey industry big-boy, I have the ABC P/E firm ready to drop $5mil on the table if you would just commit to $1mil - and when this works as we all think it will, you get the benefit of my concept as it is put into practice, AND you get a huge payback on your $1mil." The P/E firm would be smart to give you some seed money to start with, making your pitch to the industry big-boy that much stronger - and solidifies the P/E firm's position versus them losing out to some concept of latches because you find someone else to fun your whole deal - to include the industry big-boy simply offer the full $6mil. Maintain your killer instinct and don't trust anyone else to care as much about your success as you do. You agreeing to enter into an exclusive when someone has made a weak commitment can be a bad place to be if a player with a stronger commitment comes along and you are now handcuffed to this weak commitment. If this did not make any sense to you, it means that I missed something in the question you posed - which would be my bad . . . Best wishes, Paul Gallo 480-839-1122

David M

September 14th, 2016

One other note here. This idea that you can shop a contingent deal...that really is not going to get you far in most cases. UNLESS, the Investor is willing to openly agree to you shopping his/her interest. And the investor better be very established and recognizable, otherwise any experienced investor is going to wonder why Investor A did not invest. 80% of every entrepreneur I have ever met in a multitude of industries always has some investor interested to invest and 50% of those have LOI's. I mean give it a try, you never know. But one thing you absolutely should NOT do is shop using the P/E's interest without clearing with them.  That is a great way to burn a bridge with the P/E, who could prove a great asset down the road.