Lessons For Startups From A Former Investment Banker
By Juan Linares
As with any industry, venture capital benefits from incorporating the perspectives, life experiences and skillsets of a varied set of people…even of investment bankers. Having spent most of my career with investment banking firms both in New York and in New Orleans, I know there are many relatable lessons from the IB world that could benefit startups as they continue to execute on their growth plans.
Attention to Detail
As an investment banking analyst, you are expected to spend a lot of hours on rudimentary tasks as part of the deal cycle. Often you wonder when you will be in the large boardroom negotiating the megamerger or ringing the bell at the NYSE while you run another comparable company analysis or flip through each page of a pitchbook making sure there are no errors well past midnight. What is ingrained in you through all of this is attention to detail. In a competitive industry, clients, whether companies hiring an investment bank or venture capital firms deciding whom to fund, will often view sloppy errors, inconsistencies or typos as a filtering mechanism: what larger issues aren’t being carefully focused on or executed if there is not attention to detail on the small things?
Anticipate and be Proactive
Not exclusive to investment banking, but as an analyst the path to promotion and career progression is based on an ability to anticipate the needs of higher-ups and to be proactive. Start-ups should also have at the ready a lot of the information that is important to venture capital firms (e.g. financials, pro forma model, KPI overview, cohort data, etc.) and be able to anticipate those information requests.
Furthermore, during the initial conversation with a VC, startups can learn a lot based on the line of questioning or the issue that gets the most attention from prospective investors – this could represent an eventual roadblock for the startup or a reason for the VC to pass. Picking up on this feedback and following-up proactively with specific information that helps to address these issues can invite a continuation of the process toward raising capital for your startup.
Scenario Analysis/Financial Models
When building out financial models, investment bankers focus on building in the capability to run easy scenario analysis. This exercise relies on spending time and really thinking through the driving assumptions for the financial performance of the business. Startups should approach their pro forma models in the same way – obviously every startup’s model is going to show the path to unicorn status, but what happens if things don’t quite play out that way? Having a downside case that a VC can assess helps determine the company’s understanding of variable costs, hiring plans and the ability to stay nimble during potential downturns.
The financial model is not an exercise in precision, but rather serves as a gauge on the startup’s thought process behind key assumptions and their understanding of the key aspects of revenue drivers and related costs. Relatedly, as an investment banker, you know that despite spending hours working on a sophisticated financial model and valuation analysis, the ultimate price for a company, security or asset is basically just what someone is willing to pay for it. In other words, do not anchor around a valuation set in stone – the market will provide that feedback.
Risk Factors
I remember during the first week of my analyst training program, we were asked to read through the risk factor section of a common prospectus. It basically says that you are going to lose all your money and that you would be better off heading off to the casino with your cash. The risk factors paint a bleak picture of the chances of success and provide a litany of reasons on why you should probably not invest. One wonders how things get funded at all and why companies seeking capital would be so transparent with the risks involved. The answer is that investors are aware of all this (also something about securities law). They have seen a ton of prospectuses that lay out the risks. Most of the time, unless there is something very specific to the company, these risk factors do not scare them off and are standard practice.
For a startup, sometimes it feels like you do not want to focus on any of the risks/downsides to the business for fear of scaring off investors. When speaking with institutional investors such as VCs, keep in mind that they are aware of the risks. Trying to hide or avoid discussing them will serve as a red flag and fail to establish trust from the outset. Be realistic and do not be afraid to discuss some of the negatives – there is no such thing as a risk-free investment in the startup world, so best to have an open discussion with a potential investor.
Conclusion
One of the great things about investment banking is that it really does provide you with a broad skillset that can be applicable in other jobs and careers. Some of these lessons are relevant for startups as outlined here.If all goes well, you will impress the investment banker taking you public or selling your company with how prepared and aligned you are when the process comes.
Finally, one last lesson to really date myself: when you can’t commit to something or need to leave a conversation or a room, you can always tell people that you have to return some video tapes.