Brokered Startup Financing

Abstract

I study broker intermediation in entrepreneurial financing. Brokers intermediate 15% of startup offerings, but 20% of these brokers are unregistered "finders." Issuers using finders are 30% and 20% less likely to have successful post-funding outcomes than issuers in registered-broker and direct offerings. These outcome gaps are larger when state-level regulatory oversight, which only applies to registered brokers, is stronger and when finders are expelled brokers. These findings are consistent with adverse selection in finder-intermediated offerings. I also show that finder-intermediated offerings more often place with retail (non-accredited) investors and rarely involve VC participation, also amplifying the gap in post-funding performance.

Keywords: Brokers, Finders, Startups, Private placements, Venture capital, IPO, Acquisition, Retail investors, Entrepreneurial finance, Regulation D, Form D, BrokerCheck

JEL Classification: L26, M13, G24, G29, G34