Investment bankers have often decried as adding little value and adding complexity to otherwise simple sale processes. I strongly disagree.

Even if a startup is run by a former investment banker or someone with significant M&A experience, I would not recommend handling the sale process without a banker. Abraham Lincoln once remarked regarding lawyers: “he who represents himself has a fool for a client.” The same applies for bankers.

There are several reasons why I recommend you use bankers:

1. Avoiding conflicts with the buyer:

This is the single most important reason to use bankers. Negotiating a sale of a company is one point in time at which your interests are not aligned with those of the buyer. It is very easy for the negotiation to turn acrimonious.

The sale of the company is not the end game, but only one step in its development. You will have to work with the buyer for the foreseeable future and must thus maintain a good relationship with him.

Whether negotiating the price or the details of the stock purchase agreement (SPA – representation and warranties, etc.), I always let my lawyer and bankers take the lead in the discussions. This way I can blame everything on them – they are greedy and difficult while I am the reasonable guy willing to make compromises.

On my last transaction – after we had run the process and signed the LOI – I went on vacation and left my banker and lawyer to negotiate the SPA. I only made myself available to the buyer for 1 hour every few days. This forced the buyer to focus on the essential, thus involving me only for the most important discussions and removing further potential for conflict over details.

2. Bankers have good senior level relationships:

When selling your company, you typically know a lot of the people in your own industry, but you often don’t have the relationships to bring parties in conjoint spaces to the table. Senior bankers have the ear of CEOs, CFOs and corporate development people … and the more parties bidding for the company, the higher the ultimate price.

3. Running a sale process increases valuations:

Running a process usually means:

• a. Sending an executive summary to gauge interest
• b. Organizing management presentations
• c. Requesting LOIs by a specific date
• d. Selecting a shortlist and organizing follow-up presentations
• e. Requesting a new LOI by a specific date by the short list
• f. Selecting the winning bid (after doing one last all around check)

The first offer we received for Zingy was $40 million. After we ran the process the winning bid was $80 million in cash.

Side Note: I usually blame the requirement for running a process on my shareholders. After all, even if you are the controlling shareholder, your minority shareholders will want an independent process to make sure they are treated fairly.

4. Bankers do a lot of the work:

Bankers use your existing material to write the executive summary and management presentation. They track the status of the discussions with all the contacts. They coordinate the meetings. They prepare justifications of the valuations for the buyer. They help negotiate the LOI and SPA.

Selling your company is extremely time consuming without having to do all the above given all the management presentations and follow-up discussions with potential buyers. Given that you also have a business to run, bankers allow you to offload as much of the work as possible.

5. It’s not expensive:

Investment bankers take between 2% and 0.5% of the sales price depending on your company’s valuation. In light of the 4 benefits listed above they provide, the price is very reasonable.

Conclusion:

Use investment bankers if your selling price is above $10 million. The best investment bankers I know in new media and wireless are Andy Kass and Emmanuel DeSousa. They are former CSFB bankers who now work at Deutsche Bank. They are super smart, hungry, extremely well connected and in the midst of every deal I heard of in the past few months. They really make deals happen!

The only exception to the above rule is if you have strong professional investors in the company – VCs and/or private equity firms who also want to sell. Then, you can let them run the process and blame them for being greedy and difficult. Just make sure that your interests are truly aligned and that they want the same thing you do. If in doubt, hire bankers!

Looking back, I realize how little I really knew about fund raising when I started Aucland. It seemed to me all you had to do was write an amazing business plan, send it to a VC, organize a management presentation, do a brilliant job and all your problems were going to be solved. How little did I know 🙂

There were two fundamentally flawed issues with this: timing and approach.

a. Timing

When you create a new business from scratch, you face two main types of risk: idea risk and execution risk. Idea risk is the risk that the business you enter is not attractive and ends up not working for whatever reason (market too small, bad business model, etc.). You can minimize that risk by applying the 9 business selection criteria previously mentioned and/or copying an already successful idea from abroad. Execution risk is the risk that you are not able to execute and take the business from an idea to a functional product that can generate revenues.

I have come to realize that VCs are willing to accept idea risk much more than execution risk. Approaching a VC when you only have a business plan is a bad idea. The risk in your project is so large that you are unlikely to get a valuation above $1 million pre-money – if you can get funding at all. Moreover, if the VCs like the idea, they will immediately start looking around to see if there is another company in the space that might further ahead that they could fund. That said don’t worry about the VC stealing your idea and building the company – they are too busy being VCs to do that 🙂

If you wait until you have a functioning product and a proof of concept – even on a small scale – you will have proven that you can execute and that your go to market strategy has some merit and you will then find VCs to be much more responsive and valuations much more attractive.

Side note: Most entrepreneurs think that the largest risk they face is competition – they typically overestimate the competitive threat and completely underestimate the execution risk.

b. Approach:

Now that you have a functioning site it’s time to start contacting VCs to obtain the funding you need to accelerate your growth. Sending a VC a 50 page business plan and hoping to get a reply is not a realistic approach. VCs receive thousands of business plans a year, but between the companies they are on the board of, companies they are negotiating with and companies they are just talking to, they have very little time and will not read a 50 page business plan.

Prepare a 9 slide presentation with:

1. Cover page
2. The concept
3. The market
4. Your specific implementation
5. Your differentiation
6. Your team
7. Your projected financials
8. Your capital needs
9. Closing page with contact information

Now that you have your teaser presentation ready you must contact the VC. E-mailing it to businessplans@vc_name.com is unlikely to work as that e-mail address is flooded with thousands of ideas and projects and your presentation is likely to get lost in the clutter.

The best way to approach a VC is through someone they know and to organize a brief voice conversation. Work your network – between your classmates, co-workers at all the companies you have worked at, family and friends someone must know a VC that invests in the field you in (or a VC in any field who might be able to point you to VCs in your industry if need be). Have your contact send an introduction e-mail. Reply, thank your friend for the introduction and express interest in having a brief conversation. The VC will usually reply accepting to talk, asking for the Powerpoint or telling you if your project is out of scope for his firm. If the VC does not reply within a week call him — if he is in a meeting or traveling ask his assistant when he will be free and call again. As with many endeavors in life, persistence usually works 🙂

Conclusion:

The earliest capital is the most difficult and expensive to raise – and you are extremely unlikely to get it from a VC. Do whatever it takes to get the project off the ground without it. If you don’t have enough personal money to fund the early stage development you can:

• Beg friends and family for money
• Don’t pay yourself
• Beg your developer friends to build the software for you
• Give sweat equity to whomever you need in the early stages of the company
• Penny pinch on everything – you most likely don’t need a CFO, nice offices, etc. Just get the product out of the door!

Once your product is out of the door, test your go to market strategy on a limited scale – for instance $10k in Google Adwords advertising — until you can show your model works, then use your connections to approach a VC and raise the money you need.

Good luck!

Side note: The above is somewhat specific to consumer facing ideas. For a softeware company selling to coropoates, the model can be a bit different as you can get an early customer to pay you to develop your product and then use VC money to scale the company…