The Match Game

Need a million dollars or more? Thousands of new investment bankers can lend a hand. Just watch costs, and read the fine print.

Tweet

Like tens of thousands of other business owners looking to raise money every year, Brooke Savage and his wife, Melissa Mabon, recently had a choice: Should they try to raise a new round of expansion capital themselves, or should they hire an outside adviser, such as a boutique investment bank, to help them out? The question is especially germane today: Literally thousands of new boutique investment banks have set up shop in the last couple of years (there are now as many as 10,000 investment banks in the nation, industry insiders estimate), and they are marketing their service to business owners looking to raise anywhere from a million bucks on up. There are, in fact, so many investment bankers now in the business of arranging private financings that growing companies who do decide to use an investment banker are in a buyer's market for such services.

No longer are investment banks just for IPOs and raising large amounts of money in the public markets. With the stock exchanges still in the dumps, investment banks in need of work have aggressively been courting profitable companies seeking private, rather than public, financing. Their big selling point: Money is still out there, but you need us to tell you how to get it.

Boutique investment bankers often have extensive contacts in the tightly knit world of VCs and private-equity investors, as well as with wealthy individuals and potential strategic-partner investors. Plus they're able to understand and negotiate away the complex and draconian conditions that some investors now demand. The complexity of the terms being sought, and the effect on the valuation of a company, are such that the up-to-the-minute understanding a banker can provide may very well determine who ultimately controls a company. (For an explanation of some of the most important developments in private financing terms and conditions, see "The Latest Fancy Footwork in Private Financing Deals,".)

But are boutique investment bankers worth the fees they charge? Like anyone who brokers deals, investment bankers can have a self-interest in completing transactions and collecting a fee rather than walking away from bad terms. Not all are experienced. Neophytes to small private financings (even if they previously did multihundred-million-dollar deals on Wall Street) can tie up a company for months in a fruitless search for capital.

Many of the new boutique investment bankers are Wall Street veterans laid off in the last three years by big firms such as Goldman Sachs. The new boutiques sell themselves to the so-called middle market: privately held companies that are at least two years old; have a real product or service, and customers and revenue.

How much a business owner ends up paying a boutique investment banker can vary wildly. The typical company can expect to shell out an up-front retainer ranging from $25,000 to $125,000 and then fork over from 3% to 7% of the proceeds of a financing round. In general, the larger and more established the investment bank, or the more complicated the financing, the higher the fee. A company can negotiate for lower fees or demand that no up-front retainer be charged at all, especially if more than one investment bank wants its business.

An investment banker may also demand a piece of the company in return for securing financing. Lloyd Greif, who founded Greif & Co. in Los Angeles a decade ago, typically takes a warrant allowing him to acquire up to 10% of the stock issued in a transaction, or 5% of the overall company, as part of his fee. Other firms, like Headwaters MB, a merchant bank in Denver, co-invest with the fund that they bring to the party. (A merchant bank typically uses much more of its own capital in a deal than would an investment bank.) "We don't take on a fund-raising assignment unless it's of a quality where we're willing to invest ourselves," says Dave Maney, managing partner of Headwaters. "That's part of the upside for us over the long haul."

For Savage and Mabon, the answer to the question as to whether they needed an investment banker turned out to be yes, despite the many years they had spent learning to be successful business owners. In 1995, Savage and Mabon sold their first piece of software, which enables salespeople to prepare everything from proposals to follow-up letters, for $199 at a Boston trade fair. Six months later, when they landed a $20,000 order from a Midwestern bank, Savage knew the company would survive.

After that, sales -- to companies like Motorola, JPMorgan Chase, and Hewlett-Packard -- grew steadily. Pragmatech has now become a bona fide success story: It has 71 employees, $10 million in revenue, and a 10% margin. To maintain that rate of growth, Savage and Mabon estimate they'll need to raise $12 million. The funds would allow them to expand the company's product range to include software for manufacturers and for companies trying to win government contracts. If successful, they hope to have annual revenue of $50 million within five years.

 1 | 2 | 3 | 4  NEXT 

Read more:

Sign-up for our Finance Newsletter

Email Address: