The Role Of Investment Bankers In The Startup Ecosystem

Startups often need to raise funds in order to grow, and most entrepreneurs don’t understand the fundraising process. It’s all very foreign to them, and they don’t know how to pitch, or how to contact investors.

This is where investment bankers can be helpful – they help to connect funders with founders. Good investment bankers have cultivated relationships with investors, which they nurture over many years. They understand what investors are looking for, and can help to bridge the gap between entrepreneurs and investors. The reduce some of the friction which founders would otherwise encounter.

They coach entrepreneurs and explain to them what investors are looking for. They help them to polish their pitch and massage their numbers so that they are better prepared for some of the tough queries which investors are going to ask them. They provide many dress rehearsals so that the founder is better positioned to be able to raise funds. A good investment banker actually acts as a guide and can play a key role in helping the entrepreneur to succeed.

Good investment bankers take a lot of time and trouble to create a good reputation for themselves. He understands what each investor is looking for because funders come in so many shapes and sizes. He is a skilled at connecting the right entrepreneur with the right investor. Because he’s built up a lot of credibility in the startup ecosystem, his word carries weight, and he can help entrepreneurs to get warm introductions to the right people.

However, because you don’t require any special qualification to become an investment banker, lots of middlemen are positioning themselves as specialists in fundraising for startups. Sadly, they end up taking undue advantage of raw entrepreneurs, most of whom don’t know how to differentiate between good bankers and bad ones.

They are sweet talkers and slick salesmen, who promise founders they will be able to raise millions for them – after they have been paid their fat fees. They charge a consultation fee; they charge a sign-up fee; they charge a fee to vet the proposal; which means they keep on extracting money from the entrepreneur.

These investment bankers want to make lots of money, which is why they hang around at startup conferences. They style themselves as Investment Consultants and make lots of promises, most of which they’re never able to fulfill. They get the entrepreneur’s hopes up, by arranging meetings with many investors in fancy hotels, but usually, these are not serious angel investors – not the ones who actually sign cheques!

Many entrepreneurs waste not only a lot of money but plenty of precious time and energy as well. His confidence in the startup ecosystem takes a big blow because he’s been exposed to the wrong people. He starts feeling the Indian startup space is a sham, and there aren’t any good guys at all. This is tragic, and that’s why it’s so important that entrepreneurs are able to differentiate between a good banker and a bad one.

Bad investment bankers also make an investor’s life difficult. They mindlessly send the decks of all the companies they are raising funds for to every potential funder on their list. Not only is this spamming bad for their own credibility, it actually backfires, and ends up hurting the founder. If a deal has been shopped around for too long, it becomes stale, and serious investors will no longer be interested in evaluating it.

Good investment bankers do not take fees upfront. If anyone asks for this (often in the guise of “processing fees”), then this should be a red flag. To make sure your interests are aligned, good bankers only make money when they are able to help you raise money, so what they should charge should be a success fee, which they get only after you have received your cheque.

A good banker will take the time and trouble to study both you and your company. He will act as your champion, and he should know as much about your company as you do, so he can be an advocate for you. You don’t want someone who takes on too many clients because he will not be able to give you the personalised hand-holding and attention you need. Good bankers are in great demand, and they are quite picky and choosy as to who they will sign on as clients. They should add value to your life, and it should be very obvious to you what this value is. Just like the chemistry between the founder and funder is so important, the chemistry between you and the investment banker you select is also critically important.

The truth is that you are very vulnerable as a first-time entrepreneur. Anytime anyone promises to help connect you to an investor ( especially when they call him by his first name!), you are happy to clutch at straws. Some of these bankers are extremely slick salesmen, who are happy to help part you from your money. This is why you need to be on your guard. Please check out their reputation, and see what their track record is. Talk to entrepreneurs who they’ve helped to raise funds for in the past, before signing up with anyone, because making a wrong decision can prove to be extremely expensive for you.

I asked Devendra Agarwal of Dexter Capital for his comments. He is unusual because he wears two hats at one time – not only is he a very thoughtful investment banker, he is also an entrepreneurs who is the founder of InstaOffice!

* I feel investment banking for startups below a certain size is very hard for good knowledgeable bankers, especially if they want to build an organization (as that entails incurring a fixed cost every month, and good people are expensive)

* Most good investment banker will charge a fixed fee to ensure that they are dealing with only serious entrepreneurs. However, good ones will not take wrong mandates just in order to earn the fee, because they don’t want to jeopardise their reputation.

* Yes, their final fee should be paid once the entrepreneur has received the money , but often entrepreneurs do not pay even after having signed a contract. For all practical purposes, contracts are not enforceable in India’s legal system today, and some entrepreneurs take advantage of that fact

* The investment needs of a startup looking to raise seed vis-a-vis Series A vis-a-vis growth capital is very different.

* Many time the investors by-pass the banker, and even entrepreneurs feel happy about this, because it saves them the banker’s fee, but this leaves the banker high and dry.

* A good investment banker adds a lot of value during the negotiation of the termsheet and can help to expedite documentation and the closing process, as often the entrepreneur and investor get stuck on many legal points

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