Start-up companies and investment banks don’t typically go together. But, as the country’s nascent start-up economy finds its feet, a clutch of boutique investment banks are stepping in to partner with start-ups—particularly in the technology space—to help raise money from venture capital investors. Their sweet spot, in terms of deal sizes, is between $5 million (Rs20.15 crore) and $10 million, and start-up fund-raising deals now account for 5-15% of their revenues from private equity-related business.
Interestingly, this trend runs contrary to the practice in the Silicon Valley, the chief inspiration for the evolving start-up economy here. Investment banks in the US usually play in growth and private equity spaces where ticket sizes are well above $10 million. In India, the absence of a well-oiled eco-system akin to the Valley, where lawyers, accountants, successful entrepreneurs and academia introduce start-ups to VCs, has turned into an opportunity for such banks. Not many of them see the opportunity translating into a large part of their business in future, but value it for building long-term relationships both with young companies and VCs.
“The early-stage companies of today are the larger companies of tomorrow, so it is not a segment that we can afford to ignore,” says Aashish Bhinde, executive director at Mumbai-based boutique i-bank Avendus Advisors. The firm has been working with early-stage companies since 2001-02. Others active in the space are also mid-sized banks and consultancies such as Veda Corporate Advisors Pvt. Ltd, Spark Capital and Cipher Capital Advisors Pvt. Ltd, Ernst and Young India and Pricewaterhouse Coopers.
The local VC community so far has been fairly receptive to sourcing deals through such banks. Firms such as Helion Venture Partners, Nexus India Capital Advisors, Matrix India Partners and Canaan Partners frequently work with them. “Entrepreneurism is happening in nooks and corners (across India). So for a VC to be able to spot companies is not always going to be easy…they (the banks) play a good role in helping entrepreneurs to understand that there is an asset class called VC,” says Sanjeev Aggarwal, managing director at Helion.
Given the somewhat unique dynamics of working with a start-up, many banks have to go well beyond their traditional roles, often mentoring start-ups on tightening their business plans, restructuring their financials, educating them on valuations and, of course, introducing them to VCs. “Our role is to act as a filter,” says C. Venkat Subramanyam, director at Chennai-based Veda Corporate Advisors. Deal flow is typically generated through referrals and cold calls from start-ups. Some also network with industry associations such as TiE (The Indus Entrepreneurs) and university incubators to find start-ups that may need funding. “Until there is a significant angel (seed investors) community that gets built with linkages into VCs, banks work,” says Sandeep Singhal, partner, Nexus India Capital.
This expanded role comes for a price, though. Such deals attract higher fees—3-5%, sometimes even 10% of the amount placed, with maybe advisory fees on top. Some may also pick up a minority stake in the start-up in lieu of fees. Also, while there may be exceptions, most deals are not in the seed and very early stages. Bankers say they cannot make enough of a profit on deals smaller than $5 million.
“Early-stage funding is the toughest, uphill battle,” says Klass Oskam, vice-president of transaction advisory services at Ernst and Young. “They (start-ups) need to be past that point, unless it is an exceptional team.” So bankers prefer to enter when a start-up is in the market to raise the first round of VC funding, as opposed to seed funding.