This post is to share my thoughts on investment offers where the investor requests a support fee in the form of cash for the post-investment services that they’ll be providing the startup. I’m writing about it because, although it’s rare, I’ve seen such offers, and entrepreneurs would do well to avoid them.
As investors, we’re motivated to help the startups we invest in because of the resulting appreciation in the value of our investment that will take place following this help. That’s how we’re compensated.
Support fees attempt to extract resources from a startup which is already undercapitalized relative to the bigger companies that it’s competing with. The startup needs to use its limited capital very effectively in order to have a chance of winning, and getting paid for the support you provide as an investor makes it less likely that the startup you back will have the resources necessary to win. This also makes it less likely that you win.
In addition to this argument based on self-interest, it’s also the wrong way to treat an entrepreneur.
We offer advice to our startups and we don’t charge for it. We open our network to our startups and we don’t charge for it. In the past, we offered functional support in the areas of HR, IT, marketing, and finance to our startups, and we didn’t charge for it. The reasons are simple. Our upside comes from the appreciation in the value of our investment, and our startups need to use every dollar that we give them effectively. Paying us for support services isn’t an example of this.
So if you’re an entrepreneur and you receive an investment offer where the investor also requests cash compensation for the support that they should already be providing you as part of their investment, be very skeptical.