When is it the right time to bring an investment banker on board?
Despite sufficient growth since launching our tech startup, we still face common startup challenges. With that being said, I see great potential in our product. When is the right time to bring an investment banker on board? How established should your company be at that point?
Thanks in advance!
As an investment banker, I clearly feel it is never too early to work with a banker. Establishing a dialogue with an advisor can be very useful as you come across fundraising events or other strategic planning issues. Investment bankers are in consistent dialogue with funding sources and companies so will be able to share trends and other insights about the market.
While some of the larger investment banks may not be as responsive to a new startup, there are plenty of bankers who prefer (including myself) to begin a discussion and develop a relationship with a company over time versus having to respond to "bakeoff" request.
There is no set stage or size that you should feel is needed to bring on an advisor. I have worked with companies that have yet to achieve any significant revenue but based on their product, traction, and current strategy were at the right stage to explore alternatives or hire an investment banker.
A helpful function of an investment bank will be to discuss the issues you may face and assist you in strategic decisions. This may include determining that you do need to grow or achieve certain milestones before you seriously consider raising capital, exploring partnerships or a sale of the business. Most of this early discussion can be done without having to "bring one on board". Therefore, I would suggest having some discussions with investment bankers and then reassess your need or desire to engage one on a more formal basis.
You do not state why you think an investment banker on your board would be helpful. If you need help raising a second round or thid round or fourth round of financing then your current Venture Capital investor should be able to assist you. If you have not sought Venture funding yet, then what you need is not a board member as much as an advisor and that can be an investment banker, venture capitalist or someone who has raised venture financing for a start-up in the past. Finding the right person is important, but not as important as your product and the quality of your business plan and understanding not only your target market but how to go about generating sales, distribution channels as well as the various industry applications of the product.
Some great points here. Have you considered asking one to sit on an advisory board initially? Gives you an opportunity to get to know them and see if they're a good fit while learning much more about the investment process.
Build simple scenarios if bring or not bring the investment banker on board help to determine yes or no mathematically. There is no right answer, very case to case basis.
I was an investment banker for many years, although not now so hope my judgement is impartial !
I feel the only error would be in bringing an IB on too late in the piece.
While conceding the point already made regarding expense, there are varying ways to skin the cat regarding fees and it is a very competitive world out there.
My advice would be to do a "beauty parade" over about 6 IBs, specifically asking about fee structures (and all the normal sorts of questions) and choose a couple that you feel comfortable with and you feel will work for you and your company.
In the early stages not much sense in having just the one on the books and keeps them hungry.
In my opinion, , I would start thinking about that within the first five years that you are in business. I would wait for the first three years that is usually a good barometer of how the business is going. That does not mean that the business will fail.
Depending on the banker themselves, they may not want to be involved with you until they see a track record. Good Luck.
Watching your startup for signs of growth, and thus investment means you shouldn't have used the startup route at all! Startups are all about investment - the idea was that good. Bring on the investment banker like yesterday!
It would be remiss of me to respond with advice without establishing some preliminary information.
1. What's your Market Capitalisation / Equity Value?
2. How are you funded? (seed capital, self-funded, VC investment, business loans)
3. What are you common startup challenges? For example, scaling or production issues, resourcing / staffing issues, lack of product brand / social media presence, operational / management issues, etc.?
4. What is your "burn rate", IRR, ROI and forecasts reflect?
5. At what stage of development are you? R & D, pre-production, production, go-to-market, etc.
6. What are your contractual arrangements/obligations (re suppliers, strategic partners, customers, etc.)?
7. Do you have any proprietary software / technology and is this protected (by way of patents, legal agreements, etc)?
8. What type of market activity are you conducting? (i.e. capital raise, merger/acquisition, equity buy-in/sale, joint ventures/minority stake, etc).
If you are struggling to respond to some of the above, your initial time (and funds) may be better invested in a mid/top tier Chartered Accountant and separately mid/top tier Lawyer (to help prepare / advise on due diligence and preliminary information).
Think of "Investment Bankers" to "Corporate Finance" as "Neurosurgeons" to "Medicine" - they are at the pinnacle of their profession (Top 1% skill set). Whilst you technically could engage a Neurosurgeon to put on a Band-aid or prescribe Cold & Flu medicine, a GP is qualified to do this at 1/100th of the cost.
As a former Investment Banker Analyst (over 7 years ago), my charge out rate was higher than Managing Director's at Chartered Accounting / Management Consulting firms.
Take the time to clearly establish what your scope is, budget and time frame to execute. These 3 variables will determine who, what, and how many resources you bring on.
Feel free to come back with any questions.
Is it in the business budget to bring one on board? If not, what is the plan to make it part of the budget? What are your current and projected cash flows right now, and what would they be with an investment banker? Start by answering these questions and you'll find your answer.