by Harry Friedberg, partner, BX3
At one point or another, most startups will find themselves in the uncomfortable position of needing to ask for a serious amount of money — beyond what they’ve been able to raise from friends and family — in order to grow their business. The snag is, most entrepreneurs don’t fully understand how to find, pitch, and secure funds from investors themselves.
Enter investment bankers, who act as a connecting link between founders and investors to help startups raise capital. Unlike venture capital or private equity firms, most do not directly invest their own money but rather, charge a success-based fee for fundraising.
Good investment bankers have established credible relationships with wide bands of investors, nurtured over many years, and possess a keen understanding of what will resonate with an investor. Why is this important? Because oftentimes, founders have great ideas but get in their own way, and don’t know how to articulate the company’s direction, or how to pitch an investor, or even know what an investor is looking for. Often, founders get so enraptured with their own ideas, they forget that an investor’s main goal is to make money. Key metrics on margins, paths to profitability, customer adoption rates, and so many of the financial aspects of the deal are often buried deep into presentations or posed as afterthoughts. The result is that the whole message gets lost, as does the potential to raise money.
And yet so much of the day-to-day, financial, and legal issues that are getting neglected in the middle part of the barbell are crucial to the exact kinds of questions investors will ask: How much money have you raised? What will you do with it? What are your five-year projections? Are you raising enough money? What are the barriers to entry? Why are you better than other competitors out there? Do you know that customers even want or need your product?
- A good investment banker for startups will anticipate these questions and coach the founder through the process, ensuring the presentation and pitch deck hits all critical points.
- An ideal investment banker for startups, however, will not only coach founders and help raise the capital, but help them build the business itself, filling in any gaps in legal, accounting, tax, operations, or marketing that might slow down progress.
Startups who can get both capital and business expertise from a single source will have a much better chance of success.
First off, having someone to walk you through the legal side of fundraising is huge. Compliant capital raising requires experienced eyes overseeing securities filings and offering documents or resolving accounting issues before going to investors. An investment bank’s general counsel can also help entrepreneurs navigate the ins and outs that a founder might overlook, such as owners’ agreements, leases, vendor agreements, basic contracts, and employment law.
In addition, content marketing and public relations professionals can also prime a startup for fundraising. Founders should ask themselves: Am I a thought leader? Am I doing something novel? Media relations experts can help founders generate third-party collateral or earned media placements that prove to the world at large that your product or service is newsworthy — and worth your attention as an investor.
According to Crunchbase, small-dollar investment deals were down in the first part of 2019, meaning that players on this highly competitive field today will need better ways to prove their investment value.
One way is for startups to find high-quality partners who can introduce them to the right investors, as well as contribute valuable business insights into all areas of their enterprise; that is if they are to successfully raise capital in the current climate.
The traditional investment banking model undoubtedly works well for many early-stage companies. But there are plenty of other founders who need an extra shot of business acumen before they can — or should — approach investors. For this segment of the marketplace, those firms that can offer both business advisory services and fundraising under the same roof are paving the way for a new model of one willing to wait till the money comes in and grow their business at the same time.
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