I have been asked by some of the founders on how they should choose an Investment Banker. I have reflected on this issue and here are my high-level thoughts on the process of choosing the right banker.
While quite a few founders are very savvy and handle the process themselves and only hire lawyers and other partners to complete the process, some of the firms have gone and hired ex-bankers to be a part of the team. Depending on the stage of maturity of the firm, one of the founders is almost always on a fund raise treadmill.
However not all founders have either the experience or bandwidth or the network to do the fund raise therefore in my opinion it is a good idea to outsource the process of fund raise, while recognizing fully well that the story around the business can only be sold by the founders themselves.
While engaging the banker the first step is to define their expectation around fund raise process i.e. quality of investors, strategic and/or financial, investment size, dilution, role of investors etc. and share the following set of questions to the banker to present their credentials at least around the following:
- Depth of investors network of (Strategic and Financial) both in India and overseas for the kind of business being run by a start-up.
- Relationship of banker with investment decision maker and Investment Committee members
- Their perspective of the industry and likely outline of story line for potential investors
- Track record of deal closure based on the deals run and closed by them (percentage of deals closed), time taken from start to finish i.e., mandate to closure
- Deal closures done in last two years in same/similar space by the firm, lead partner and project lead engagement
- Realistic valuation, dilution, number of investors in the deal
- Scope of the mandate to include at least the following:
- Help in negotiation and closure of discussions including valuation and other commercials
- Project management for efficiently running the process for timely closure by anticipating the needs of the investors and managing all advisor partners
- Ensure preparedness of commercial, financial and legal DD and closure of queries within a defined timeline
- Deck preparation, financial model etc.
Here are some softer aspects which need to be evaluated as well:
- Alignment of DNA and philosophy with banker and their hunger for the deal
- Who is the partner leading the initiative and project lead and their time commitment
- Reference check on the firm, partners and lead
- Performance linked compensation wrt valuation and time to close
- Likely potential investors and their depth of network
Commercial Construct
- Most Bankers accept success fee on fund raise
- The compensation varies on size of the fund raise
- Expenses on actual
- It is a good idea to create a ratchet structure to align incentive of the banker based on valuation and time. Higher compensation for higher value and incentive/disincentive for quick/delay in closing.
In some cases, engaging a banker gives comfort to potential investor of the seriousness of the process.
The bankers are also choosy about the Start-Ups as most of the fee is paid on success of closure, besides the bankers are categorised into various buckets depending upon the check size
I hope founders find the construct useful and they may amend as they deem fit.
September 2021
