25 Jun 2017

Why Venture Capitalist Is Better Than Investment Banks!

 

In the later stages of a company after it has gone successfully from the seed stage to the mezzanine stage, it reaches the final stage where it has to get bought out.

There are a few ways to do this: to be offered to the public or to be bought out by an investor (venture capitalist) or merged with a bigger company.

Many Start-up companies in the world have successfully been sold directly to private investors or venture capitalists.

In the history of these sales and merges there are quite a few companies who have asked for the assistance of an investment bank in the process, but also some that have successfully been bought out without any outside help.

Our reporters interviewed some investment bankers that have a lot of experience with buying and selling start-up companies. In the past year they were involved in the purchase of start-up companies ranging from big successes of $500 million to complete fall-throughs (for different reasons).
Although they have an interest that companies will turn to them, they admit (without exposing names) that the involvement of an investment bank can definitely have a bad influence on the price a company can receive and even more importantly on the very chance of the sale; Some others think that that the commission that an investment bank charges definitely pays back.

There are a few advantages for the involvement of an investment bank, but most of the entrepreneurs that we interviewed believe that the disadvantages are greater, and outweigh the plusses.

The first advantage is the competition that an investment bank can create, and as a result also raising the price of the company in question. If the company can be of interest to many buyers, the Investment Bank can use its good name and create a competition over the company in order to push the potential buyer to buy. 
Some of the Start-up managers are not involved in the business world, rather they are developers of technology, so the outside involvement can help them.

Another advantage and disadvantage is the personal element. During delegations, personal friendships are created between the buyer and seller.

These friendships can be a plus, but they can also cause the company to get less money than they could have received, because nobody likes to argue with friends over money. An outsider, i.e. an investment bank comes to the buyer as a customer, not a friend”.

The biggest disadvantage is the price.

The commission the bank charges can be up to 2% of the sale, which can be a lot of money, especially for shareholders. Also at the earlier stages, if a start-up company decides to use the help and advise of an investment bank to try to raise capital from venture capital and private equity investors, then too do they charge a high commission of 1% to 5%. This amount of money (1% to 5% commission) can stay at the hands of the start-up and can make the difference of winning or losing and help the start-up exist and grow.

Many times the contrast in interests is also a big disadvantage. An investment bank usually has a long lasting relationship with the big corporations and firms who are potential buyers or mergers of smaller companies. When the Investment bank approaches these corporations, it tries to represent the smaller company, while at the same time it wants to keep a good relationship with the larger corporation.

There are many American corporations who dislike and even object to the involvement of an investment bank.

If you decide to go to an investment bank, try to determine in advance the minimum you are willing to get for your company; or according to what value you are willing to get the capital from equity firms. 
Also, it is important to make sure that the commission the investment bank charges should be a low one.

So to sum up this article, a company that is at the final stage of liquidation, or seeking for capital should seriously consider turning directly to the venture capital firms, private equity firms, or other investors that would be interested in buying or invest in the company, without going through a third party.

If you decide to go to an investment bank, try to determine in advance the minimum you are willing to get for your company; or according to what value you are willing to get the capital from equity firms.
Also, it is important to make sure that the commission the investment bank charges you should be a low one.

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