are financial institutions and individuals who assist companies in raising capital, often through a private placement or public offering of company stock. Sometimes investment bankers are referred to as brokers or deal makers.
Companies frequently use investment bankers to help identify available financing options and obtain introductions to funding sources. Some also look to investment bankers for assistance in building a business plan or prospectus for use in raising capital. Others look to them for up-to-date advice on the conditions of fundraising for private companies. Because investment bankers make a business of raising money for companies, they can often be quite helpful to a company in analyzing its funding needs, identifying the most likely or appropriate sources for raising money and executing a fundraising strategy.
This is not to say, however, that any investment banker can always sell any company’s business plan to investors. The quality of a company’s opportunity and the strength of its management team determine the breadth of options open for a given fundraising. Investment bankers also vary in quality, resources, experience and contacts. Investment bankers who are experienced with the company’s industry and the type of financing it needs, can often help a company raise funds. If they are unfamiliar with the company’s industry or the type of financing being sought, they may actually hinder a company’s financing efforts.
Some venture capitalists believe investment bankers are unnecessary, even disruptive, to a venture funding. For the most part, however, the venture capital industry recognizes the legitimate role investment bankers play. Most venture capital firms will not decline to review a company business plan because the company has engaged an investment banker. They typically prefer, however, to deal directly with the company’s management team through the due diligence process.
Many entrepreneurs prefer to raise funds without the assistance of an investment banker and look to investment bankers, instead, only when they prepare to take their companies public. Then, an investment banker’s ability to underwrite (or sell) the company’s stock can make its services indispensable. Choosing the best investment banker to lead the underwriting of a company’s initial public offering is an important part of conducting any successful public offering.
Investment bankers charge for their services in a variety of ways. Most look to receive some sort of success fee as part of their compensation that is typically computed as a percentage of funds raised. Engagement agreements with investment bankers can sometimes be complex and should be reviewed carefully before they are signed. Qualified legal counsel can help a company avoid unwanted obligations by reviewing the proposed agreement with company management.
The Brokers entry earlier in this book discusses a number of provisions common to investment banking agreements used for raising capital. The Underwriters entry focuses on an investment banker's role in taking a company public. See: Brokers, Finders, Going Public, IPOs (Initial Public Offerings), Stage Financing, Underwriters.