I had a recent question on this blog as to what I am talking about when I say we should network for bankers. Investment bankers? Commercial bankers? Mortgage bankers? Merchant bankers? Piggy bankers? I should always remember that even the most basic questions can be extremely useful. When I was barely out of school I once asked my father who was CEO of a commercial bank: Dad what is an investment banker? His answer was too complex. He talked about floating stock issues and making markets and things that didn’t really connect any dots.
A traditional role of a major investment banking house (such as Morgan Stanley, Goldman Sachs etc) is to raise capital for clients by creating securities and selling them. This can be stocks, bonds or nowadays derivatives etc. They also facilitate the making of active markets in those securities. So essentially they act as a “bank” by taking investment capital from the public and investing it in their client companies. A high risk proposition for investors as there are no guarantees that they get their money back and the client companies often have no track record.
Commercial Banking is the low risk version of investing in companies. They take insured deposit dollars from the public and lend them out conservatively and collateralized to companies that do have track records. When we network for bankers we are generally looking for commercial bankers. Commercial bankers (like Wells Fargo, BAC, Citi etc.) are in the business of making small business loans such as LBO’s and understand how the acquisition process works.
That doesn’t mean they always do the deal. That also doesn’t mean we don’t love the idea of using investment bankers. Hey, float a stock offering, get rich, right? Wrong. Investment banking happens at a very expensive level and with companies that generally have cutting edge growth prospects.
However, we can use a certain type of investment banker that does operate at the small level. More than a broker but less than an underwriter, these are sophisticated dealmakers usually operating in “boutiques” or small offices that handle of variety of transactional disciplines that can assist the entrepreneur. For example they may not underwrite but they can find investors for your deal. They can also find buyers and sellers of companies and help with structuring and negotiating. In short they can do a lot of what the big boys do but at the mid to small levels. And their prices are affordable by the aspiring buyout artist.
So keep in mind both: the commercial banker and investment banker – they will be your main sources of capital and in many cases your deal flow as well.
