The Match Game

"I liked his background and the fact he was running a boutique firm," Savage says. "I knew I wasn't going to end up in a mass-production line, and I'd get good advice from someone who had specialized in technology companies."

Manuel charged Pragmatech a $25,000 retainer and will take at least 3% of the proceeds eventually raised. In return, Manuel has helped Savage and Mabon sort through the vast number of possible sources of institutional capital. Manuel had no difficulty arranging meetings between Pragmatech's management team and top-tier venture firms in the Boston region such as Charles River Ventures.

Ronald Darata, founder of Concepts in Optics, an eyewear company in Florida, attributes the very survival of his business to his decision to turn to an investment bank. Darata started his business in 1998 with an ill-fated acquisition of a business whose assets proved to be of poor quality. He had financed the deal with debt, and by 2000 he knew he had to refinance if he was to stand a chance of expanding his business. After his banks turned him down, he begged his lawyers for help. They referred him to John Gullman of the investment bank USBX Advisory Services. "He was a miracle worker," Darata says. Financial companies that Darata hadn't been aware of -- or previously would not take his calls -- suddenly were available. USBX had become Concepts in Optics' "Good Housekeeping Seal of Approval."

Three months later, Gullman had presented Concepts in Optics to 15 possible investors and had 3 of them eagerly bidding for the business, which took the shape of a hybrid debt financing. A year later, Gullman helped Concepts in Optics restructure that financing again. Now the entrepreneur says he's ready to turn to the banker for help with the next step: turning Concepts in Optics from a company with about $7 million in revenue to one with $30 million within five years. "You find the right professional counsel, you put yourself in his hands, then you can come through this process a lot more smoothly than would otherwise be the case," says Darata.

In exchange for USBX's help in landing financing, Darata paid a percentage of the amount raised, a figure he says is closer to the low end of the typical 3% to 7% range. The fee agreement also included a provision under which Darata would pay a modest fee of less than $10,000 if USBX's efforts to find financing failed -- a sum that would cover the bank's time and expenses.

Of course, not all business owners feel comfortable shelling out even that much money. Others resist relying on an outsider to take such an active role in charting the future of their companies. "It's easy for an entrepreneur to say, 'Well, I've got a great company, and I should be able to raise money," says Dan Gardenswartz, of the Sage Group, a Los Angeles investment bank. "But you have to know how to present your company properly, so it doesn't get dismissed out of hand in the crowd. And you have to persuade potential investors that you're a credible company. The bottom line is, no matter how well people know their business, they're not going to be experts on all the options that are available to them. Without the right adviser, they run the risk of spinning their wheels and wasting time."

There are certainly cases, however, in which a company seeking midlevel financing can afford to go it alone. If the businessperson knows that a particular individual or fund is the only investor that he or she will be happy striking a deal with, there's obviously little point in paying a banker. Still, an experienced securities lawyer should be retained to advise on deal terms. There are also many cases in which a lawyer, accountant, or industry consultant -- instead of a banker -- can provide introductions to sources of private capital. While lawyers can also negotiate specific deal terms, other non-investment bank consultants may be barred by securities law from participating in structuring a deal. Instead, they provide introductions, then often must sit out the negotiations.

These days, some skittish VCs rely on trusted investment bankers to thoroughly prescreen deals, often refusing to even consider a company that hasn't already been vetted. This is in stark contrast to VCs' traditional hesitation to enlist expensive investment bankers for early and mid-tier private financing rounds. "All they do is put together really pretty pitch books that no one reads and collect a fee," says Lawrence Goldfarb, reflecting the conventional attitude of VCs toward bankers. Goldfarb is a managing partner at BayStar Capital, a San Francisco- based hedge fund and private-equity investment firm.

But offsetting the traditional reluctance of many VCs is the eagerness of investors to see the best deals available. "They view us as a necessary evil, since they're not going to find every viable company out there," says Kevin Jolley, of Boston-based Adams, Harkness & Hill, a bank specializing in emerging companies.

There is a growing recognition that more promising deals are likely to come via banks as entrepreneurs turn to investment bankers for help in leveling the playing field, especially given the new array of harsh terms that investors are demanding. Even in tough times, a well-connected investment banker can drum up enough interest from different investors to help chip away at some of the more onerous terms and conditions. "If you've only got one term sheet on offer, you're at their mercy," says Jolley.

Business owners looking for a banker can turn to anything from very small shops, like Manuel's Black Point Partners, to Wall Street behemoths, such as Citigroup's Salomon Smith Barney, to help them find their way through the financing minefield. Bankers help position the company, doing everything from refining the business plan to drawing up a PowerPoint presentation. They'll assist a company in setting the right valuation for the business, taking into account myriad internal and external variables.

Matching a company to the right fund is perhaps the most important task an investment banker performs. "It's amazing to me how bad the information flow really is in this world, where everyone is supposed to know each other," says Monish Kundra, a Headwaters director. Headwaters recently introduced a food manufacturing company outside Chicago to a Chicago-based VC that invests in food products companies. "They were in the same business, established, and less than 10 miles apart, but they had never heard of each other," says Dave Maney, Headwaters managing partner.