Have you ever wished to be free of the fundraising process and allow yourself to focus exclusively on business growth?
Have you ever longed to have a professional advisor, at a reasonable price, who can also provide you with a large network of investors?
The emergence of investment bankers and investment banking services has undoubtedly facilitated both at the same time.
Investment banks form an essential part of the financial sectors of modern economy. They serve as intermediaries between a company and investors when the company wants to issue stock or bonds. They assist corporations (both private and public) in raising funds in capital markets, as well as in providing strategic advisory services for mergers, acquisitions and other types of financial transactions.
A simple question must have popped in your mind by now,
What is investment banking?
So before moving into the impact of investment banking in the world of business, let’s have a look at the basics.What is Investment Banking?Investment banking falls among the most complex financial mechanisms in the world. It is a specific division of banking that helps individuals or organizations to raise capital and provide financial consultancy services to them.
Investment banks take care of a number of responsibilities. For example, they underwrite new debt and equity securities for all types of firms and corporations, help to facilitate mergers and acquisitions (M&A), aid in the sale of securities, and improve structures of companies to make a business more efficient and also help it make maximum profit. They also provide guidance to issuers regarding the issue and placement of stock, alongside providing ancillary services such as market making, assistance to FICC services etc.
Investment banks employ investment bankers who help corporations, governments and other groups plan and manage large projects, thus saving their client time and money by identifying risks associated with the project before the client moves forward.
Now that you have understood what the investment banking is, let me elaborate the role of investment banking and why you need the same for your business.
Role of Investment Banking Services in Business Territory
Typically, an investment banker assists companies in raising money by :
- Lending their expertise to a company that can help it determine the best strategy and the best place to raise either debt or equity capital. Most companies lack the idea how to do this, hence a good investment banker can save them an enormous amount of time and money.
- Preparing all the required documents to present the value proposition for funding accurately while protecting both the company and the investors from any misunderstanding. Good investment bankers prepare a private placement memorandum. A private placement memorandum (PPM) is a legal document which is designed to protect both sides from making a bad investment.
- Ensuring that all government regulations have been followed during the raising of capital. Often, entrepreneurs raise capital in ways that may violate SEC and NASD rules, clearly indicating the need for a good investment banker.
Unlike venture capitalists (VC’s), investment bankers do not have funds to tap into and write a check. Rather, they have a whole network of investors (both institutional and private, accredited angel investors) who relies on the investment banker for getting quality deals.
Why Should You Hire an Investment Banker?
Studies have shown 8 distinct ways in which investment banking services add value for middle market business owners at the time of selling business.
- Managing the M&A process and strategy.
2. Structuring the transaction.
3. Educating and coaching the owner.
4. Negotiating the transaction.
5. Enabling management to focus on running the company.
6. Adding credibility to the seller.
7. Preparing the company for sale.
8. Identifying and finding the buyer.
An entrepreneur is primarily concerned with the effective and profitable growth of his company, which is itself an immense task. Fundraising, on the other hand, is a time-consuming “sales” activity that requires a lot of networking, follow ups and discussions even before a term sheet is received. And it becomes extremely difficult for an entrepreneur to manage both growth of the company, as well as fundraising at the same time.
Secondly, advisors are recommended in every business at the right price, for they can pre-empt the questions that VC-s may pose to the entrepreneur, and also help in the preparation of a sound business plan and financial model. Their experience across dealing with multiple other transactions is very useful to avoid the pitfalls of adverse clauses and conditions mentioned in the term sheets.
Thus, if an entrepreneur focuses solely on the growth of his company, and relies on professional investment bankers for the entire fundraising process and also for advices regarding efficient management of business, he is acting at the best interest of the VC’s as well as that of the company.