dangletech

As a young capitalist growing up, I really wanted to be an investment banker. I watched Traders and pictured myself all decked out in fancy suits, wheeling and dealing and giving Gordon Gekko a run for his money. Fast forward to reality. I do get to wheel and deal, and I do occasionally don a suit. But, I stayed away from the dark side and became a client (or target) of bankers rather than one myself.

Yes, investment bankers, it seems, have a bad rap. They’re highly paid and, stereotypically at least, would sell their Moms for the right price. Still, they can and do play a vital role in the capital markets.

First, some background. Investment banks provide two primary services:

1.) They help you raise money by selling debt or equity in the public markets (NASDAQ, TSX, etc) or to private investors.

2.) They advise on the purchase or sale of companies (Mergers and Acquisitions)

Not all investment banks are created equal. You have the big kahunas such as Goldman Sachs, Lehman Brothers that only deal with the largest Fortune 500 type of clients all the way down to two shady people in a dark alley way who tell you they can raise money for you if you pay them up front.

When do you need an investment bank?

Raising money: If you are a technology startup do not use an investment bank (or any agent for that matter) to help you raise money. You are expected to be able to do this yourself (this is in fact one of the big tests that investors use—do you have the connections to get in front of them?). Anybody who tells you he can raise your money is misguided or is praying on entrepreneurs who don’t know better (there are some rare exceptions, but this is a good rule of thumb). VCs just don’t want to see 5 - 7% of the money they give you going to some agent.

Selling your company: Not all acquisitions involve an agent. But in my experience, when you have an agent between you and the buyer, the price goes up. And it goes up by more than enough to justify the fees you will pay. The math doesn’t work if you’re selling in the $10M range, but in the $35M range and up - an investment banker can pay for himself nicely.

Buying a company: This is not likely something that you will do until you’re pretty car along the growth path, but when you’re a big bad “real” company you will likely want a bank involved in your purchases in order to give your board a “fairness opinion” that the deal and the price are all good. By then you won’t be reading this blog anyway, so let’s move on.

Choosing an investment bank

Relationships: Investment banking is all about relationships. This is in fact their inventory. Bankers offer up their relationships for a price. So, the # 1 thing to look for in a banker is whether they have the relevant relationships. Say you’re looking to sell your company and there are 4 or 5 logical buyers. A banker who knows the CEO of 2 -3 of those companies is likely the right banker for you.

Track record: Bankers all like to parade their tombstones. No, this is not some morbid habit. This is their hit list. All the companies they have helped buy, sell or take public. You want a bank (and banker) with recent, relevant experience. Which bring me to the final element:

Fit: There are two aspects to fit - interpersonal and domain. Bankers have egos. It comes with the territory (and the pay). Don’t work with someone who won’t give you the personalized and immediate attention that the fees deserve. In addition, they must be active in your domain. Don’t engage someone with no or no recent transactions in your industry and with your size of company.

The hit list

There are far too many investment banks to list, but here are a few in Canada and the US that I recommend for IT/ telecom companies:

Canada

RBC Capital

Macquarie (This is the former Orion Securities which was the former Yorkton Securities team)

Q1 Capital

U.S.

Thomas Weisel

Updata Advisors (the most active bank for sub $100M software exits)

Kirchner & Co. (like Updata, good for smaller tech transactions)

Needham & Co (great for IPOs and bigger ticket M & A)