5 Things to Consider When Picking an Investment Bank to Raise Capital

As startup companies are looking for investors, management teams will oftentimes seek the help of an investment bank as a way to maximize the efficiency of the capital raise. Before you even go down this road, take a look at this Fundraising 101 Primer from Entrepreneur and pay close attention to the sections “How Much Do You Need?” and “Who is Your Ideal Investor?” Information here may help you as you are deciding what you need from a capital perspective and if it is even necessary.

At OpenView Venture Partners, I have interacted with many bankers. Based on my experiences, here are five things to think about if you are an entrepreneur looking for venture funding.  (For more information on how OpenView looks at investments, check out “Raising Money is Painful.”)

#1 – Get Clarity Upfront About the Process

You, personally, should have a basic understanding of the investment banking process, so as to avoid the potential of being led to believe untruths.  Here’s a quick and dirty rundown that should give you a very basic understanding.

Have the banker communicate to you who they will be contacting at what venture funds, what the prior relationship is, and what the angle will be in terms of how they pitch your business. You should also expect clear communication in terms of the status with each fund and next steps on a routine basis.  Monthly is good—bi-weekly is better.

#2 – Make Sure the Bank Understands Your Segment and can Pitch Your Business

Since bankers will be acting on your behalf when seeking investment, they should be capable of speaking knowledgably and intelligently about your business and your business segment.  Ideally, they will have experience leading deals in your industry and will know the players intimately. Also, pitching a business isn’t the easiest process, so you should make sure you have your own pitch rock solid before having a banker pitch it for you.

Inc.com says there are three main elements to a successful pitch: words, tools and time.

• Words: Use illustrative words to describe your business and what it does.  If you’re going for the elevator pitch approach, you only have a few precious moments for convincing—use descriptive, engaging language to your advantage.
• Tools: Visuals are important, but shouldn’t supersede language.  If you’re implementing PowerPoint, Guy Kawasaki, founder of Garage Technology Ventures, has invented the 10-20-30 rule: 10 slides, 20 minutes, 30-point font size.
• Time: Get to the point as soon as possible; be sharp; and keep a mental eye on the clock.  You don’t have the luxury of an expansive conversation.

(Here’s a slideshow explaining what you shouldn’t do—it’s always good to keep an eye on the flubs while constructing what you hope is a winning strategy.)

#3 – Investment Banks Should Have Experience and Solid Relationships with Venture Capitalists in Your Business Segment

Much like the point above, your investment banker should have a thorough understanding of your business segment, and, by association, a solid relationship with the venture capitalists who work within your business segment.  You will have trouble getting traction in your fund-raising if your banker is targeting investors that don’t know your sector or have no appetite there.

The best way to determine where your investment bank stands is through doing your own research.  Conduct interviews with both VCs and bankers, search the Web, read testimonials, and reach out to trusted sources in the banking and financial industry.

Be aware of tricky language when speaking with investment bankers.  This blog about picking an investment banker warns that while industry knowledge is important, it’s not a substitute for experience.  The blog’s author says you should look for experience, commitment and character.

Here’s a sample of some questions you might ask an investment banker:

1. What is your strategy for communicating with potential buyers?  Do you plan to contact any of our competitors?  Will you approach financial buyers?
2. What kinds of transaction structures would you expect?  Where might you foresee any problems with the transaction?
3. What are some transactions you have completed that might be comparable to our situation?  Were these transactions completed by other people in your firm or completed by you personally?
4. Describe a transaction in which you were not successful in selling the company.  Why didn’t it sell?  What would the CEO of the company say about you and your efforts?

#4 – Ensure Your Banker’s Motives are Your Own

If you are looking for the highest valuation from any funding source, you want a banker that is aggressive at getting the opportunity priced up.  If you are more concerned about finding the right partner with the right fit, be careful at picking a banker that is incentivized to only find who will come in at the highest price.  Sifting through this information may be difficult and require being a good judge of character, or having external references to back up your choice in banker.  You’ll always want to intimately know your own business goals so you can be sure your banker has the same.

#5 – Pick a Partner, Not Just a Banker

Your banker is perceived by the outside world as your partner.  With that, be careful who you pick and who is representing you.  You want to pick a bank that is extremely professional and can best represent your company.  I can’t tell you how many times I am turned off by an investment prospect because the banker does not have their act together or is sloppy and overaggressive.

So, in that light, picking a banker should be exactly like picking a business partner.

There are many qualities to look out for during the selection process, including:

• Be Coldly Objective: Maybe your banker is a nice guy—pictures of his family on his desk, all that stuff—but you can’t be wooed by any personality traits that don’t directly influence your business decision.  Draw up a set of criteria that you’re looking for and judge how well a potential banker lives up to it.
• Take Your Time: You can’t get to know someone or their values after one conversation.  Sometimes you can’t get a firm grasp even after three weeks of meetings.  But don’t stress out and make hasty decisions—even if your financial goals need to be set aside for a spell, it’s better than forging a relationship with a malfunctioning entity.
• Share Values and Spirit: Much like point #4, it’s not too much to ask for a banker to actually be excited about your vision and to show that excitement.  This won’t happen all of the time—maybe not even some of the time—but that kind of fiery passion for one’s job is infectious and shows dedication business degrees cannot.
• Investigate Business Ethics: Strong business ethics are on the minds of everybody in the field—and especially in the financial industry.  You should spend time researching the bank and getting references to make sure your potential partner acts in a way that is appropriate.

These are just a few of the items entrepreneurs should think about as they are contemplating the investment bank route.  Raising capital is definitely a distracting process as you are running a business.  An investment bank can often provide leverage throughout the process.  Just be careful when choosing your partner (and ask yourself, do you really need an investment bank as they can complicate the process for no reason in some cases).  The decision is bigger than you think.