Helping companies do the best possible due diligence

Up Front Due Diligence Fees from Investment Sources

I came across an interesting post on A VC, Musing of a VC in NYC, where an entrepreneurial company wanted to know if it was standard venture capital industry practice to charge the entrepreneurs a fee for processing due diligence.

This request looks like an up front fee scam. I have seen a ridiculous number of such scams. However, to be fair I have not seen any of the established venture capital firms charge such a fee. (If you have, please email me right away!) You should NEVER pay upfront fees or charges to any capital source, such as a venture capitalist.

Now of course there is the investment banking route, which is an entirely different story. The poor entrepreneur gets poorer until the deal is done, by paying up front, during the money-raising process, and after the capital is acquired, for practically anything the investment banker can think of.

This brings up one of my pet peeves. Financial houses are really good at adding more and more charges to the deal. I have a rather strong opinion about this practice. Over the years, capital sources have created a myth that all this falls under the heading, 'a standard industry practice.' Baloney! There are no standards here at all! Every year they try adding new charges and categories, and when no one successfully challenges these, they build it in as if it were part of the foundations of every deal.

I have seen some absolutely outrageous charges. Probably the most outrageous of all time is the 'non-accountable expense allowance.' Let's play that back. The entrepreneur pays for something that is nothing, just a number pulled out of thin air!

Make no mistake, all these charges do not benefit the entrepreneur at all, and in fact, come right out the entrepreneur's pocket. So, the financial houses deduct all the charges from the amount of money raised, and the entrepreneur ends up with far less than their requested capital!

I suggest an industry-wide practice change. Add all the fees and charges on top of the requested capital and raise that amount, so that the entrepreneurs receive what they actually need vs. a watered-down remainder! One man's humble opinions.

Charles F. Bacon, CEO & Keeper of the Vision
charlesbacon (at) superdiligence (dot) com
Due Diligence, Inc.
www. superdiligence (dot) com