Do startups and investors need Intermediaries?
Smart intermediaries add tremendous value to both startups and VCs. They help founders in pitching their ideas and reach out to the right investors. They also save VCs a lot of time by doing their due diligence before introducing them to startups.
What's in a name?
Brokers, investment bankers, intermediaries, transaction advisors – these guys go by different names. Some are "lone wolf" while others are part of boutique firms. The successful ones wear bespoke suits and Swiss watches. They are wondrous salesmen and master storytellers. Sometimes they act as if they control the capital even though they just find avenues for capital which is not theirs. It is easy to disparage them because they don't have any skin in the game. Their job is to help startups raise capital from investors (angels, family offices, venture capitalists, private equity firms etc.). The interesting question is whether they are a vital cog in the startup ecosystem or not.
Not all advisors are valuable
Some founders, especially those with an MBA degree, tend to think of intermediaries as plain vanilla "brokers". They believe, and rightly so, that an intermediary's job is to introduce them to investors. The job is done once the connection is made. They (the founders) can take it from there. After all, investors want to talk to dynamic founders and not staid brokers. It is they (founders) who are creating the next unicorns through their blood and sweat. These founders believe they don't need anyone to tell them how to manage "their capital-raising process". This naivety stems from the fact that most founders are confident people by nature. It takes courage to risk your career and start something of your own when most of your peers are watching Netflix posting their 9 to 5 (9 to 9 in some cases) jobs. To start a company is to risk failure. More than 90% of companies fail. It takes courage to take the plunge and bet your career to chase your dreams. Founders have it even more difficult in cultures that prize conformity, encourage mediocrity and don't forgive failures. Hence, it is logical that most founders come with a "we can do it alone" mentality and believe they don't need advisors to guide them on the capital-raising process. After all, it is this attitude that drives them to start companies.
But it is folly to believe advisors bring little to the table other than a few email addresses and phone numbers. A competent investment banker makes the life of a founder easy by managing something critical for the survival of the company – money. There are lots of moving parts in a startup, and it is a big help if founders have one less thing to worry about. Smart founders appreciate the value good advisors bring.
Never underestimate the value of experience
All VCs and Family Offices have an online presence. Platforms like Angel List have made it child's play to contact standalone investors. The Internet has democratised information and reaching out to investors has never been easier. Despite that it is a common practice for startups, especially bigger ones, to engage investment bankers to manage their fundraising process. Even successful entrepreneurs with a track record of starting and selling businesses prefer to work with investment bankers despite having strong connections in the investment community. Experienced founders know capital raising, like everything else, is a specialised task that comes with its challenges. One doesn't shoot an email to an investor and get a check the next day. We keep reading stories about founders raising tens of millions of dollars for their world-changing ideas over a coffee with a VC, but we don't read about thousands of good startups who die because they couldn't raise capital. This is a prime example of survivorship bias. As a wise man (or a woman) once said, "Cemeteries are littered with graves of failed entrepreneurs". Most smart founders know this, and hence they know the importance of capital raises.
Capital raising is a full-time job. It is difficult to do it on the side while running a fast-growing company where things are chaotic at best. Capital raising demands a plethora of skills including a wide network, a flair for sales, financial acumen, market understanding, legal and regulatory knowledge, storytelling ability and "persistence". Good investment bankers understand investors' needs and how they evaluate startups and help founders achieve those things. They help founders solicit the best investors for their business and do it quickly. Since they have raised capital umpteen times, they know the drill. Good investment advisors intimately know the investment philosophy of investors in their network. They know the business models, sectors, stages, and traction their investors prefer. This is critical because it saves time and streamlines the process for both founders and investors. Startups adore them because they shorten the fundraising process while investors value them because they bring attractive deals that fit into the fund's investment thesis. In short, good investment bankers create a win-win scenario for all parties.
Great vs good investment bankers
Great investment bankers go much beyond connecting startups to the right investors. Most founders don't have a background in finance. As a result, they understand little about projections, unit costs, valuations, and investment instruments. Investment bankers help founders assess their business models and make desirable changes. They come with a holistic view and bring an outsider's perspective. Their job is to make startups investment-worthy. They advise founders on hiring, marketing, expansion, and financing. They help create MIS to monitor revenue, expenses, and sales pipeline and track metrics fundamental to the businesses. Most investors use industry metrics to assess the investment worthiness of startups. Every sector and stage has different metrics. Investors analyse different metrics in an early-stage SaaS startup as compared to an advanced-stage Agritech company.
Excellent investment bankers are well-versed in financial modelling, valuation, MIS, and industry metrics. They collaborate with founders to achieve their goals. Their incentives are tied to those of the firms they are advising. They help startups reach out to the right investors whose investment thesis (be it dilution, sector, stage or valuation) is perfect for the startup. They make money only when they successfully close a fundraising round. Most VCs and FOs prefer working with exceptional investment bankers because they trust investment banker's judgement and know these bankers will bring them great investment opportunities