The Role Of The Analyst In An Investment Firm

The analyst in an investment firm usually has a thankless job. He’s usually the youngest person on the team, and because he is the most junior, he ranks low on the firm’s totem pole. It’s his task to do all the dirty work, including screening the new deals; doing the due diligence; and monitoring the portfolio companies. This means that he needs to ask difficult questions, so he can assess the startup’s potential; the founder’s compatibility with the investment firm’s philosophy and track the progress of the startup.

The problem is that while digging deep to do his job, he needs to ask the founder uncomfortable questions. He needs to cross-question the potential of the business, and the entrepreneur’s abilities. Sometimes entrepreneurs get offended by the scepticism with which analysts view their startup and its potential.

They wonder what gives the analyst (who is usually the same age as them, or even younger, and usually lacks entrepreneurial experience), the right to judge them or the potential of their dreams. To them, the analyst appears as someone who is comfortably ensconced in a cushy job, where all they have to do is decide whom to fund, while the entrepreneur is stuck slogging away and doing all the hard work to ensure his startup succeeds.

This is why there’s always tension in the room when analysts meet founders. However, each party needs to be more empathetic, because they are both on the same side! Analysts need to understand how dear the business is to the entrepreneur’s heart, and entrepreneurs need to appreciate the analyst’s dilemma.

An analyst has to pick and choose which entrepreneur to back, and this can be very difficult, because so many of them are excellent, and it’s hard to decide amongst them. However, he has to keep the firm’s investment thesis in mind, and only select those startups which fit their sweet spot. At the same time, when making calls to explore the founder’s character and competence, he needs to be empathetic, so that he can form a bond with the founders. Making this emotional connection is important because it allows the entrepreneur the comfort to open up, and allows the analyst to read between the lines. At the same time, an analyst has to be quick and honest in his replies to the founders, so that he doesn’t keep them dangling in limbo. He needs to explore all the deals in his pipeline – and there are usually far more than his bandwidth can comfortably accommodate, which means he is often stretched to the limit.

Sometimes an analyst has to say no quickly to an entrepreneur. This could be because the startup may be too early, or the pre-money valuation may be unreasonable; or it maybe in an area they are not interested in; or there maybe a potential conflict of interest, since one of their existing portfolio companies is already operating in that space. This quick no maybe perceived as a brush-off by the entrepreneur, who may get upset as he thinks that the analyst has not bothered to spend the time and energy he should have on evaluating his company properly.

However, entrepreneurs have to understand that analysts can be their best friends if they like you and your startup. They will bat for them in front of the partners and the investment committee, and try to make sure that the entrepreneur succeeds. After all, closing the deal is a feather in his cap as well, and reflects well on him.

If the startup gets rejected, then the entrepreneur can ask for honest feedback from the analyst, which can help them to improve their pitch, as well as their business. It’s also a good idea to stay in touch with the analyst so that they can demonstrate what progress they have made over time. If the metrics improve, an analyst will be happy to re-assess your company, and you may get funded the second time around, so please don’t burn your bridges.

Often times, after meeting a founder face to face for many hours, buying into his story, and watching the progress he has made, analysts start secretly admiring the entrepreneur. However, if his Partner still refuses to invest, this can get very difficult for the analyst, because he’s the one who needs to convey the rejection.

This is no fun and can be quite heart-wrenching. Thus, while an analyst’s job may seem very glamorous to an entrepreneur, who feels that all he does is look at spreadsheets and balance sheets, and decides whom to fund or not to fund, the reality is it does require a lot of hard work and discipline if he wants to do a good job. Mutual respect and understanding between an analyst and entrepreneur can lead to a win-win for both of them, whether the final outcome is an investment or not. Analysts usually have a good network and can help entrepreneurs connect with other entrepreneurs, or even with other investment firms.

This is why entrepreneurs should think of analysts as potential evangelists, rather than gatekeepers. The analyst is often the entrepreneur’s voice in the investment firm, but it can be hard to keep all the players in the ecosystem happy because they often have different goals.

A thoughtful commentator wrote after reading one of my LinkedIn posts: “Often young MBA Graduates (who have never ever risked their guts for entrepreneurship) from large VC firms message us on LinkedIn to understand the problems that we are solving through our startup. During the call, they end up asking boring predictable questions, and at the end of the call, their boilerplate reply is that we are not yet ready for their investment, as they are looking for companies with the potential for exponential growth. The problem is that they know nothing about agriculture, except what they learn from Google, and they just try to pretend to be experts. Second, they don’t understand the real struggle of entrepreneurship (particularly in the agriculture space). Many are unable to discuss anything outside their set questionnaire, and have a very limited perspective. They must learn from the Japanese phrase, “genchi genbutsu” – which means “Go and See”. This is a key principle of the Toyota Production System, which suggests that in order to truly understand a situation one needs to go to gemba or, the “real place” – where the work is actually done.”

[This post by Dr. Aniruddha Malpani first appeared on LinkedIn and has been reproduced with permission.]

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