Getting Investment Capital From Investment Banks

Friday January 30th, 2004

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Summary: Investment banks use certain dollar sales minimums as criteria for them to talk to a company. Most undertake a significant amount of research on companies, and it'’ believed that investment banks identified 75% of their clients by internal introductions or “leads” while only 25% of the companies approached the investment banker. If these percentages are even close to accurate, you have a better chance of being funded by an investment bank if you have an entrée or can be personally referred to the bank by a good contact. Often that source is through your existing commercial banking relationship or by way of your attorney.

THE BASIS FOR DECISIONS

Like the venture capitalist, investment bank decisions are driven by the performance of a company and by a decision as to the viability and profitability of the company.

Earnings - A company’s earnings drive the price of the security. For example, the average multiple for the banking industry is currently six. That means that banks are selling for six times (6X) their earnings. If an investment bank would do a bank deal, the public market would probably not purchase bank stock selling for nine times (9X) earnings.

Further, since banks generally sell the offering to their customers, they are also concerned about the performance of the company over the next several years because their customers hold the stock. Earnings growth is another component which drives the performance of a company.

Marketability – Before a company can raise public money, it must have a good “story” in order to generate interest. This translates to marketability – the situation where the company can motivate investment bankers and convince them that the sale of the stock is highly probable. This generally requires a record earnings growth, and it also generally requires a large sustainable market for the product or service that the company is providing.

Sustainability – Although some investment banking firms underwrite trendy companies, the good houses attempt to underwrite companies which are going to be good purchases for their retail customers or private investors.

Advantages to Using an Investment Bank

They have financial savvy of the public and private markets versus the typical entrepreneur. Usually provide pricing, timing, and distribution ideas for the offering.

The investment banker takes the risk of distributing the securities. After the contract is signed, the banker is “on the line” for these issues.

Most investment bankers who underwrite also make a market in the security, therefore, supporting the stock in the marketplace.

Certain investment bankers raise the prestige of a company and can generate short-term financing just by their affiliation.