You run a company that does millions of dollars in revenue. You know every inch of your operations and your finances. Your product or service delivers excellent value to demanding customers. You lead teams here and abroad. You are the captain of your enterprise.
So, how in the world don’t you know what an investment banker actually does?
Give yourself a break, because the term “investment banker” is pretty much the least intuitive name for what an investment banker does that you could come up with.
First of all, they don’t invest.
Second, they aren’t a bank.
These two words could not be more deceiving and less helpful than if you called investment bankers “grapefruit engineers” – they mean nothing compared to what they do.
An investment banker is most akin to a real estate broker. Just as the real estate broker is neither the buyer or seller of a house but rather sits in between a buyer and a seller to help facilitate a deal, an investment banker doesn’t own the company and isn’t buying the company. They sit between buyers and sellers to assist in them coming to a deal of some kind.
And, like a real estate broker, they often represent either the buyer or the seller:
- A “buy-side” investment banker advises the company buying another company.
- A “sell-side” banker advises the company selling their company.
At some point, the comparison to a real estate broker breaks down. Not all deals are about buying and selling. It could be that your company is receiving an investment from another company in exchange for equity in your company. For bigger companies, an investment banker could be advising on how to borrow money from a private lender in a complex debt transaction. And it’s common for one side to be represented by an investment banker and the other side not to.
Also, the way investment bankers get paid is a little different than how a real estate broker gets paid. There are a lot of different formulas — most apply to the “sell-side.” Here are a couple to be aware of:
- Sell-side investment bankers usually get paid a transaction fee even if they aren’t the one that introduces a firm to a buyer because they spend a lot of time and money getting your company ready to be bought or invested in.
- They are often paid on a graduated scale based on the size of the deal, so the bigger the amount of money involved, the bigger their percentage of the overall deal.
To put investment bankers in perspective, here’s a handy guide to the players:
- Venture capitalists typically invest in companies that are still growing rapidly and may not even have any revenues yet. And they typically invest in, rather than buy companies.
- Private equity firms typically invest in or buy companies that have revenues and profits. FYI, Private equity firms also sell companies in their portfolio, so they are sellers and buyers.
- Investment bankers help companies get sold (sell-side) or help companies buy other companies (buy-side).
A few more golden nuggets here:
- Venture capitalists and investment bankers don’t intersect much. For the most part, companies that want venture capital have to find it and negotiate the terms themselves.
- Some private equity firms won’t do business with investment bankers. They prefer to be the most knowledgeable when it comes to structuring deals between buyer and seller.
- Investment bankers are more likely to be used when one company is buying another company.
Another way that an investment banker is like a real estate broker is that they are regulated. You can’t just call yourself an investment banker, they are supervised by The Financial Industry Regulatory Authority (FINRA).
The next time you meet an investment banker, you’ll feel confident when you shake their hand because you finally know what they do for a living. Now if we could only figure out what a grapefruit engineer does…
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