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The difference between The Venture Capitalist and a Venture Capital Broker

A Venture Capital Broker main purpose is to arrange capital for a client. On the other hand a Venture Capitalist puts up the actual funds. Both the Venture Captial Broker or Venture Capitalist may be an individual or company. When securing funds though either one of these "funders", it is important to know who you are dealing with.
Brokers generally do not use their own capital as they only arrange the capital only and are generally paid a fee upon the successful completion of the deal. Therefore it is recommended to make use of a "No Success - No Fee Broker.

Be very careful not to pay any upfront fees or even insurance fees unless you have done your due diligence and are happy to proceed. It may just happen that the Venture Capital Broker is out to scam you out of your money.

More information on Venture Capital Brokers and The Up Front Fee / Agreement Scam

Scams to watch for if you are an investor

Investors that want to invest in businesses need to be very aware of the dangers that may be present. They are more at risk than the money lender whom may just loose any up front fees and insurance fees. He may lose all his money!

The due diligence that needs to be performed on the company that is being invested in should be through and effective. It happens often that the company being invested in is actually only a front with no substance. Once the money has been lended to them, the directors "misuse" the money and the company goes bankrupt. It is therefore important not to only look at the company itself, but also at the directors and to make sure that they were not involved in other bankruptcies. Be also aware of fraudulent real estate deals.

Always do your due diligence before sending money to anyone. Getting your money back can be very difficult or in some cases even impossible.

If you are unsure on how to do the required due diligence, then use an outside party that specialises in this field. The cost of their services may just save you from incurring huge losses.

Scams to be aware of when you are seeking investment

When you are using a planner or other middleman to introduce you to, or find a Venture Capital Broker he may request you to pay him a large up front fee. This is usually done before the actual financing has been secured.

This fee may be called a finders fee, processing fee, , or even a credit application fee. The next step is then that you will be told that the financing is in place and that the insurance fee for securing the loan needs to be paid. This is the well known insurance fee scam. Almost always you will need to do a never ending amount of paper work such as credit applications, business plans, references, interviews and co-signers and much more.

The broker usually assures you that the fee is completely refundable but this may proof to be very difficult even through the court system as the middleman may not have any assets. Just be aware that there are thousands of fraudulent middlemen and fraudulent companies who make their living out of these "scam" processing fees. Usually the agreement between you and the broker will be so fine that you may find yourself in trouble as a result of some unconditional clause in the contract. They generally are very good in what they are doing (specialists) and the contract is written to "protect" them. They easily find reasons you're your financing cannot be realised.

The extend of this processing fee scam has escalated to such an extend that new legislation has been implemented in many states and provinces in order to protect consumers from such scams. This scam is generally found in the mortgage and loan broker fields.

Insist that the broker provide you with more than 10 companies for which financing have been successfully secured. Make sure that the names are not general references by calling these companies and confirm that they have actually secured funding through the broker. When the broker is hesitant to supply you with a list of companies, names and telephone numbers and indicate that this information is private, be very skeptical of the broker. Stay clear of "free" email addresses such as etc as the origin of the email is very difficult to trace. Only use an email address if the company name is in the email address after the @ sign.

It is best practice to pay the refundable processing fee to your lawyer "in trust". Do under no circumstances use the broker's lawyer. Your lawyer will then pay the broker when after the finance available.

Always be very vary of any upfront fee charged by brokers. Ask around and you will find a number of legitimate brokers (middlemen) that will work on a No Find, No Fee basis. A good place to start is with a reputable real estate lawyer of even a securites lawyer. Remember to ask for their "successes" in obtaining funding for their clients.

Once you have found a broker that can deliver and has obtained funding, it may be wise to continue with this broker to build up a solid trust working relationship. Always be wary and do not sign documents without thoroughly study them. It may be that obtaining the first finance deal was just to instill a false sense of trust. Always ask yourself what your risks are and if the procedure is still the same as the previous "successful" procedures.

Thoroughly Investigate - it may just save you your skin

In the arena of independent investment you must definitely not take anything at face value. You need to seek professional, legal and financial advice before transacting any deal. Don't get caught up in the hype of urgency or even flashy web sites or even well decorated offices. Never let anyone rush you into a deal. Moslty, when a deal is genuine, there will be time to do due diligence as the other party surely will understand if there is nothing to hide. Do not give in to pressures from the other parties. Rather walk away from the deal than loosing everything.

Do not underestimate the importance of hiring a Private Investigator of Forensic Accountant to investigate the backgrounds of individuals or companies. Investigate there past deals and criminal records.

You can be scammed if you are an investor or someone looking for money to fund your project.

Due diligence investigations can mostly be done lawfully and discreetly without the person or company knowing that they are being investigated.

Be sure to spend enough time on the due diligence otherwise you may regret it later. Do not let anyone pressurize you in taking quick decisions without consulting with your legal and financial team.

Recommended further reading:
Is VC good for Your Business?
Venture Vs. Debt Financing
Learn About Capital Sources
Frequently Asked Questions
Business Plan information and resources