Investment Banks for small growth businesses

So, what do you do if you are a small (revenue of $1-50M), growth startup that needs a good investment banker to help do a strategic partnering or M&A deal? Several of my companies have had this challenge over the last few years, and I am thinking about a better way to go about this. 

This is about small-medium deals ($1-50M).

I am not talking here about IPO’s, or about large Facebook-type deals, where name brand investment banks like Goldman Sachs compete to help with the various tasks like prospectus-writing, and book-making. The companies I am thinking of are typically in verticals like medical devices or cleantech or telecom. Some have raised venture capital and a handful have grown solely by bootstrapping or angel investment.

Now they have some revenues and are real businesses (maybe even profitable), and they see an opportunity to accelerate growth by taking a large investment from a strategic corporate investor which is in their industry and appreciates the in’s and out’s of their business and can add value over and above cash. Or, they feel the time has come for an exit, and they have a product that represents an attractive strategic fit with the product portfolio of some potential acquirers, and they have grown large enough to validate the customer demand and growth potential for their product.

Help develop a more time-efficient approach

On behalf of one of the companies I help, I am getting ready to go through the process of identifying all the likely boutique investment banks with expertise in the relevant industry vertical and interest in modest size deals, and of interviewing them, and getting references, and generally narrowing down the field. At the same time, I am sure others are doing exactly the same thing. I have done it before myself. This strikes me as a very inefficient process, and likely ready for some web-2.0 disruption. I am looking for some like minded people with whom to brainstorm on some ideas I have about how to make all this more efficient.
Contact me if you are interested in discussing.

Why do you need an investment banker anyway?

In the circumstance I describe, a CEO typically needs help with some or all of the following activities. Even if the CEO has the skill sets to do all this him/herself, you have a business to run and most likely need some help in the form of bandwidth-relief.

• help identifying the right target candidates (analysis);
• help getting the story right, and the right collateral (analysis);
• help identifying the exact contacts to talk to (transactional);
• help getting in the door (transactional);
• help with the “sales” aspects of the discussions (transactional);
• help managing the process of sheparding multiple parties across the line at the same time, orchestrating bids (if you are lucky) and the like (transactional);
• validation of your financial model (analysis);
• help developing industry valuation comp’s (analysis);
• help with negotiation, and terms (transactional).

You’ll notice these activities are of two types, which I call analysis and transactional. Big I-banks have deal makers (transactional), backed up by an army of recent MBA “analyst” types. But in the small boutique investment bank world, things are a bit different. There is always some degree of transactional expertise, but in my experience the analytical skills are often a bit weak.

So long as you think about it this way, there is no real problem. You can always put together your own team: a transactional person and an analytical type (often someone with deep industry expertise). [Shameless promotion: TangibleFuture sometimes helps with the analytical part].

Now we get to the key issue. If you need help with the transactional part, and often you do, you really need a proper Investment Banker rather than one of the many well-connected advisors and consultants out there. And the reason is that in the US, any third party that takes on these transactional activities for you needs a broker dealer license, and that typically means a real Investment Banking firm.

The problem: deal size too small

The problem arises if the size of your deal is insufficiently large. There is quite a bit of overhead in running a broker-dealer-licensed firm. And the good Investment bankers are used to being part of “the 1%” and expect to live pretty well. Compensation is typically in the form of a retainer plus a percentage of “the deal” and so if your “deal” is only $5-10M, a lot of the bankers would rather hunt for bigger fish. And the ones who want to talk to you may not be as on-the-ball as you would like. Or they might be all about “deal volume” when you want in-depth hand holding. Even for deals in the $100M range I have seen some very disappointing work.

The bottom line is that in this segment of the market, the quality is a bit variable. Some of the firms are fantastic. Some can be pretty disappointing frankly. So figuring out how to find the good ones and doing the right due diligence becomes rather important and can be very time consuming.

Boutique firms and transparency

It turns out that there are quite a few boutique investment banker firms that specialize in smaller deals. They tend to be quite narrowly focused on specific industries. And picking the right individual within the firm is important. Now, whether they are top class or second class, the one thing they are all pretty good at is selling. And so the CEO doing this for the first time tends to find them all fairly impressive. And after all, most CEOs have not done that many of these sort of deals in their life. Like most things, word of mouth from colleagues is a good place to start. But, having talked to a lot of these firms, I have to say it is quite hard to get any meaningful data on the actual quality of their work, and how applicable their past experience is to your deal.

Sharing experiences, and due diligence

Over the years I have developed an approach to this that usually works pretty well. It involves talking to lots of people, asking lots of questions, some pattern recognition, and references and recommendations from industry colleagues I trust. What it is not, however, is quick or easy.

I am getting ready to do it again in a vertical that is a bit different, so my past investigations are only partly relevant. And I started to think “it would make sense to share this with others. And would it not be good to get help from others who had this exact same challenge last month?”

So, … I am looking for people who are knowledgeable about boutique I-Banks and want to share information, and I am looking for people who have a need to find the best boutique I-banks and could benefit from work others have already done. I even have some ideas for some web 2.0 tools to make all this work better.

Let us know if this is interesting

Please let me know if this is of interest to you, either by commenting below, or by contacting me if you want to talk or be part of the discussions, or just express interest and support.
Contact me to express interest or support or get involved.