Many entrepreneurs fail to consider what investment bankers can do to help them raise money. Let’s look at investment bankers — who they are, what they do, and how they differ from a VC or an angel — and key reasons that hiring an investment banker can be one of the smartest decisions an entrepreneur can make.
WHO they are.
Investment bankers are not bankers and they are not investors. An investment banker is an individual who works for a financial institution that primarily raises capital. Investment bankers have a network of investors (often both institutional and private angel investors). Investment bankers work to bring quality deals to this network of investors for funding. Unlike with VC or Angel Investors, funds aren’t readily available to an investment banker.
WHAT is the process.
Investment bankers require a retainer, sometimes a closing fee, and could demand a percentage of capital raised. It is wise for the entrepreneur to ask for a basic plan — where funding will come from and in what form — before agreeing to pay a retainer or fees. Also ask what the fees will be used for, and inquire about payment terms (upfront or monthly, etc).
Initially, the Investment banker will assess viability of your startup. If they do not see your idea as fundable, the investment banker should stop work on your project, explain why, and perhaps spare you the final payment of your retainer. If your startup is fetching interest, the investment banker will prepare your business plan and marketing documents to support raising capital, solicit investors, and negotiate term sheets.
HOW do they help.
In the process, investment bankers help entrepreneurs by:
Lending Expertise The Investment Banker can teach an entrepreneur many things. They can help determine viability of the startup and whether the concept has investor appeal in the most cost-effective manner.
When considering an investment banker, ask for examples of previous successes. While past success doesn’t predict future success, it is important that the firm have an established track record. With investment bankers, experienced advisors collaborate with you to help determine the optimal fund raising plan (debt vs equity capital), meet goals, and they can help with an exit strategy. Plus, many investment bankers provide management services to startups.
Preparing The Way An investment banker can help your startup reach funding targets faster than most other options. They will diligently assess you, your idea, and your value proposition to ensure your startup is fundable. Then they will help create a business plan, marketing materials and documents to accurately present your proposition for funding. This includes a Private Placement Memorandum, or PPM, which protects parties from any misunderstanding. It is a legal document designed to support full understanding of a mutually beneficial investment.
Following Regulations The investment banker will ensure meeting SEC and NASD rules for raising of capital. Make sure the brokerage and principals are licensed by NASD (check out www.nasd.com).
From finding out investor appeal of your concept to reaching funding targets, a good investment banker can be a smart choice for your startup.