Starting a business in itself is quite a challenging job as managing a business is like a moving vessel in the sea.
In the era of technology where ideas sell more than before, every year we hear about thousands of startups that come with attractive business ideas which can revolutionize the world around them.
However, after two to three years, their ideas fail, which pours many reasons which leave many reasons piling up behind their successful ideas.
Why does it happen, what are important steps one should take, and how can investment bankers help them to grow their business to an upper level.
Investment banking can play an important role in fundraising, however, they are not limited to raising capital for the business, instead, it is far more than that.
Here, we will take a quick tour of investment banking and how do investment bankers work for a Startup?
What is an Investment Bank?
An investment bank is a bank that primarily works on securing investments from willing investors for startup projects. It helps companies access capital markets to raise money and take care of other business requirements. Now a question arises: the regular banks also issue loans for the people, what makes an investment bank so special?
Normal banks lend money to people on a fixed interest rate and are limited by law such as how much money a bank can lend to. Some startups demand huge funding which is impossible, which is impossible by several government rules.
Here the investment banks come into play. They may:
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- Raise Equity Capital
- Raise Debt Capital
- Insure Bonds or Launching a New Capital
- Perform Merger and Acquisition
- SME IPO launching
As stated above, investment banks aren’t just about fundraising they do proper research of the startups, analyze their company valuation and also tells them the accurate data in terms of business expansion.
Furthermore, they also give an idea like how much capital do startup requires. They are also responsible for mapping the financial structure of a startup.
Investment bankers are generally overpaid, there is a myth circulating in the market. It is not so entirely true. A lot of research is required at their such as securing the investment and getting it to the right startup takes a lot of hard work.
Investment Banking for Startups: How It Works
You may be curious to know why investment banks are always inclined towards startups and vice versa. Conventional banks also provide loans that can be better than all kinds of investment pitches and paying large sums to them.
Well, it’s more than that. Conventional banks are very limited when it comes to startup funding but not as selective as investment bankers. Conventional banks can only give loan amounts up to a certain limit as they are restricted by law.
Investment banks are not restricted to any boundaries; instead, they are selective in choosing the startups like which startup do they select so that they can add value to their portfolio.
Before selecting any startup, investment bankers do detailed homework such as paperwork, projections and statistics to make confident that the startup they present before potential investors are strong enough so that any financial party think thousand times before saying no.
This hard work pays off because, unlike a normal bank, investment bankers are not regulated by the law and is not stick to a certain amount.
There have been several instances where the investment banker raises million of funds from a single investor. And it works only if the startup seems attractive enough and has a solid team (technical and management).
For a banker, it’s a huge responsibility to make a startup strong in front of investors as they are the only ones who can convince the investor to have full faith in the startup and invest in it.
Why Should Startups Engage with Investment Bankers?
Investment banker helps the startup in many ways. For instance, they can assist your startup in raising funds for the huge growth capital. Does it mean that investment banks participate in startup funding right from the start? Well, the answer is NO. you don’t need to go for the funding at the beginning of the startups.
At the beginning of a startup, it’s very hard to encourage them to expand their business. This might raise a question for many: what is the right time to approach an investment banker.
The investment banker has a reputation and therefore before getting contact with any investment banker, your business needs to be somewhat established before they show interest in you.
The role of investment banking comes into play when your startup is gaining momentum.
Things you can Learn from the Investment Bankers
There are several things you can learn from investment bankers whether you work them or not. Investment bankers are excellent at networking and that’s the thing you can learn from them.
Investment bankers are excellent at building networking as they have the patience to prosper that relationship over time. They function on one thing that whom you know is far important than what you know.
Investment bankers have full insight into what investors expect from the startups. For instance, the study and everything in detail about investors. Sometimes bankers also try to read the investor’s mind such as what they think of a startup. What are the key points they focus on while analyzing a startup?
This means bankers have a lot of experience in analyzing the thinking of a startup and due to study, they get to realize the type of questions VCs will ask the startup founders.
Experience investment bankers know the criteria for how the VCs work. Learning these skills and apply them same in your business will help specific investors for the pitches.
Are Investment Banks Good for Startups?
Yes. Investment banks are a good option for startups than conventional banks. As explained above: commercial banks can lend startups with a limited amount. Startup founders should not forget that commercial banks come with an interest rate that you need to repay after a considerable amount of time.
The Bottom Line
Investment banking is a good option for startups because it is a smart and safe choice that the business that is in an initial stage requires the most effort and resources. Investment banks are considered as one of the most efficient ways to raise capital.
Investment banks come with some limitations, however, these can be neglected because the banks generate a massive amount of capital for the startups which can be efficient for any business.
