Skip to main content

Do you really need an investment banker?

Fabruce Grinda strongly recommends that an entrepreneur - even if he/she is a "former investment banker or someone with significant M&A experience" - to use a banker when selling a business. (I think this applies when raising Private Equity/Venture Capital as well.)
(Avoiding conflicts with the buyer) is the single most important reason to use bankers. Negotiating a sale of a company is one point in time at which your interests are not aligned with those of the buyer. It is very easy for the negotiation to turn acrimonious.

The sale of the company is not the end game, but only one step in its development. You will have to work with the buyer for the foreseeable future and must thus maintain a good relationship with him.

Whether negotiating the price or the details of the stock purchase agreement (SPA - representation and warranties, etc.), I always let my lawyer and bankers take the lead in the discussions. This way I can blame everything on them – they are greedy and difficult while I am the reasonable guy willing to make compromises.


Speaking from the context of a US-based VC, Brad Feld thinks entrepreneurs should use an agent if they raising late-stage capital, but go direct if they are raising funds for a start-up.
Many early stage VCs - especially those that are in saturated geographies and see a lot of deal flow – don’t pay much attention to deals that are promoted by an “investment agent.” I know a number of folks who simply “hit delete” on an email (the virtual equivalent to tossing the physical PPM – the document most agents insist on putting together – in the trash.) In the early stages, the entrepreneur is by far the best fundraiser for his company and there is a knee jerk negative reaction by many VCs against early stage deals that “require” an agent. At the early stage, an entrepreneur is much better served by finding an advisor (or set of advisors) or angel investor that has good VC connections and fundraising experience who can get actively involved in the company as advisor, board member, consultant, or even chairman.

Later stage companies and larger capital raises are a different story. The universe of later stage investors is very dynamic – consisting of corporate (strategic) investors, high net worth individuals, private equity firms, and hedge funds – in addition to later stage VC firms. Many firms enter and exit the market regularly for a variety of reasons (e.g. a number of hedge funds have recently started doing what traditionally look like late stage / mezzanine VC deals). An agent who is active at raising later stage capital will typically have some relationships with folks currently in the market, can run the drill of identifying the primary suspects for the entrepreneur, and can help manage what is typically a more complicated and less structured financing process (e.g. there often isn’t a clear lead investor in a later stage deal.)


Update: IDG Venture's Jeff Bussgang has more on this topic here

Arun Natarajan is the Founder of Venture Intelligence India, which tracks venture capital activity in India and Indian-founded companies worldwide. View sample issues of Venture Intelligence India newsletters and reports.

Popular posts from this blog

How I Raised Funding - Priyanka Agarwal, Wishberry

You have to be confident and shameless while crowdfunding. Priyanka Agarwal, Wishberry shares on how to succeed in crowd funding with Venture Intelligence in this  interview. Priyanka also candidly shares how the team built Wishberry, raised funding from top angel investors like Rajan Anandan, on pivoting, and difficulties in raising capital for entrepreneurs operating in niche spaces not chased by VCs. Q: What does Wishberry do?Priyanka Agarwal: In its latest avatar, Wishberry has pivoted into crowd financing of low budget films (INR 1-5 Cr). We are essentially trying to create an internet platform for investment opportunities for HNIs in films including Marathi, Tamil, Kannada, or films targeting the global diaspora.

L-R: Co-founders Anshulika Dubey & Priyanka Agarwal, Wishberry Given that you are building a marketplace, how did Wishberry solve the Chicken and Egg problem? Beyond the “all or nothing” model what did Wishberry do to pull in more artistes and investors? First, you…

Interview with One97's Vijay Shekhar Sharma

Venture Intelligence featured an interview with Vijay Shekhar Sharma, Founder & Managing Director of One97 Communications as part of the July issue of the US-IVCA / Venture IntelligenceIndia VC report. One97 is one of the pioneering start-ups in the Indian Mobile VAS space and recently raised its first round of funding led by SAIF Partners.

Some extracts from the interview:

VI: How were you funding the company until now?
VSS: We were the first company to put a revenue sharing model in place with operators. That gave us recurring revenue and made the company cash positive.

VI: What were your challenges in fund raising?
VSS: Two challenges: first, deciding on the network the fund could provide and second, the kind of size commitment they can make for future investments. A third factor was the comfort with the VC: what kind of team it was, the chemistry between team members, the kind of person who will come onto our board. The VC on the board becomes your everyday business partner.

V…

How doing Outsized Partnerships led Karadi down the Wrong Path

Business Line has a fascinating account of the travails faced by Chennai-based children's entertainment and education brand, Karadi Tales, in its search for strategic / financial partners. Viswanath has been fire-fighting to keep afloat Karadi Tales (now a unit of Karadi Path), the company he and his wife Shobha founded in 1996. A distribution agreement with Times Music had landed them in court. And the merger with ACK Media (publishers of Amar Chitra Katha) and subsequent acquisition by Kishore Biyani’s Future Ventures didn’t pan out as expected.  ...The partnership (with Times Music) turned sour when there was a change in leadership at Times Music...When Viswanath cited the exit clause and asked for the agreement to be nullified, his partner refused to oblige and instead took him to court, which issued a stay order. Viswanath and his team, despite founding Karadi Tales, could no longer use the brand. “It took us two years to get out of the case,” says Viswanath, who also had to fa…