How to choose an investment banker…or replicate one

Should you hire an investment banker?  And if so, who?

The good news: even if you are a small company and can’t afford a banker, you can synthetically and cheaply replicate a banker. That’s part of the value proposition of an institutional VC; I have been the (unpaid) investment banker for many of my portfolio companies.  

Here’s how to replicate a banker, even if you don’t have any relationships with potential investors or buyers:

  • Hire a consultant to make your deck persuasive, thorough, and attractive, and  your data room professional. Some suggested consultants and guidelines here: Please don’t pitch a venture capitalist without this checklist.
  • Make a list of potential investors/buyers.  See the tools at What type of capital should you raise, and from who? 
  • Hire someone who has worked in investment banking or VC, even if only as an Analyst.  Her job is to lead a professional outreach campaign to investors, writing highly customized emails to each, based on your agreed-upon template. If you don’t have a pre-existing relationship, it is critical that you write emails which are palpably customized and of course well written, or else you’re just spamming. Also, if you’re paying the person on a success basis, they need to be a registered broker-dealer.
    The person doing outreach should have a title as senior as possible, e.g., “Acting COO”.  The higher her title, the higher the response rate she will get. Any good business school will have dozens of current students who fit these criteria.  She will get a lower response rate than you (with the CEO title), but likely a higher response rate than an outside banker who does not have an established relationship with the investor you are targeting. You can also have her impersonate you via email, although there’s always a risk of that ending in embarrassment if she is not highly responsible and trustworthy.  
  • You as the CEO should handle all the meetings.  No need to bring your colleague who’s setting up meetings, although I’m sure she will appreciate it.  

Raising capital is usually a time-consuming, arduous, complex task, and you will be living with the consequences of your actions for decades.  I certainly recommend hiring a professional to help you, if you can afford it. I also recommend doing thorough research before hiring a banker.  The wrong decision can cost you millions of dollars, in the form of a broken deal process, a suboptimal valuation, or inappropriate investors.  

That said, for VC raises in the low double-digit millions, some VCs view an intermediating banker as a negative sign.  To see why that is, see How much truth is there to the belief that VCs do not work with investment bankers for capital raises? and 99.5% of startup fundraising advisors are crooks and charlatans. It’s hard to establish a red line between when hiring an investment banker is a net negative, and when a banker is clearly additive.  As a very rough rule of thumb, if you have the budget to pay a five-figure retainer to a banker, or if you are raising over $15m in a round, it’s more common and wise to hire an external banker.

If you do decide to hire a banker, here’s the next challenge.  Many CEOs/CFOs default to the banker who has spent the most money sponsoring events, or whom they met at an industry event.  (Unlike VCs, most investment bankers don’t use an aggressive content marketing strategy.)  The frequent marketers are not logically also the optimal investment banker for you.

The best way to find a banker is speak with management at other companies in your space and ask for referrals.  You can also look in online investment banker databases. A number of firms offer league tables, e.g., Refinitiv and Dealogic. Wall Street Oasis can give you color on culture and size.  

Axial is a marketplace for mid-market companies with rich information on investment bankers. Peter Lehrman, CEO, says that Axial provides at no cost to companies, “recommendations for ~3 Axial bankers whose transaction history makes it clear that they are delivering high quality outcomes for similar companies.  Once you confirm the advisors you like, Axial schedules 30-minute anonymous consultations. We guide our CEO clients to ask bankers about their recent relevant deal experiences; reasons why they have failed on transactions; general transaction timeline from start to finish; fee structures (retainer + success fee); the size of the firm; the size/capabilities of the deal teams; and who the key senior contact person will be assigned to their particular engagement.”

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Because of Axial’s unique model, they are integrally involved in much of a transaction process, so have a very different dataset about their advisors than other databases.  According to Lehrman, Axial tracks:

“- Client Quality: Buy-side demand for engagements represented by the advisor.  How large and active are the investors with whom the advisor has proven relationships?  

“- Buy-side Targeting: The advisor’s ability to balance selectivity, accuracy, and breadth when identifying potential buyers.  How responsive are investors to the advisor, or do they pursue a spam strategy of bulk outreach?  

“- Process Effectiveness: The advisor’s ability to generate positive outcomes for their client.”

Emily Campbell, Esq., of The Campbell Firm PLLC*, recommends you make sure that you and any consultant or banker is in compliance with relevant regulations, noteably the Jobs Act, CAN-SPAM, and broker-dealer rules.  “You also want to avoid the unscrupulous ‘investment bankers’ which have large email lists and try to blanket the opportunity for a fee, even when someone else may have a deeper relationship with the investor and be able to close the deal.  You should also be careful about agreeing to exclusivity. It can be really costly if you don’t choose the banker well and want to change; unfortunately, I have seen that happen.”

Nadim Malik is CEO of Sutton Place Strategies, which helps private equity funds optimize deal sourcing by leveraging its proprietary database of investment banker activity.  Malik suggests his clients use their database to “[l]ook up the transactions the investment banks have completed in your sector.  What types of processes do they run? Are the professionals that did those still even there or have they formed or joined another firm?  What is their closing rate?”  

Ravi Bhagavan, Managing Director, BRG Capital Advisors, said, “Most bankers don’t like to take on smaller deals since the time and resources expended would be disproportionate to the potential fee income.  Hence entrepreneurs looking to use bankers for seed/Series A raises are often limited to small advisory firms. It’s not easy for entrepreneurs to find such firms since they fly below radar screens and are not listed in databases. Deal experience, industry knowledge and relationships with the investor community are important criteria for choice of bankers.  As important is the seniority of the team working on the deal and how hard the team will work for the client in achieving success. It is fairly common for larger investment banks to take on small deals and staff the engagements with VPs and Associates because it’s not worth the time of senior bankers. It is also important for business owners to ensure that the investment banker they wish to hire is a broker dealer registered with the FINRA and SEC. ”

Kyle Zasky, Founding Partner, Sena Hill, said, “One theory is that if a venture firm is doing their job they should already know all the target companies of interest.  [Using a banker is] somehow a signal that they were unaware of an opportunity or failed to establish a relationship with all the “investable” companies on their own. The world is a big place folks. What is semi-valid, is that investing groups would prefer 100% of their funding go to operate and build the company vs. paying deal fees… but that is naïve. Everyone would love lower expenses, duh.  It would be nice if doing a deal didn’t require expensive counsel too, but it does. Founders, Boards of Directors, and executives at young companies shouldn’t be “penny wise and pound foolish” for what is an incredibly important decision.”  

One last point: don’t hire a banker to start an M&A process if you’re simultaneously trying to raise VC. Most VCs view it as a very negative sign to do this.

Further Fundraising resources:

For further reading:

This was contributed as a guest article in Techcrunch.

* Emily Campbell has advised me on some legal matters in the past.

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