Raising a large amount of capital isn’t just about approaching investors for funds. The process covers study, analysis of risk, negotiations, completing the required documents, compliance and respecting deadlines. Investment banks are there to help in these situations. The financial industry depends on the role of investment banks to secure funding when unicorn startups pursue mega rounds or mid-sized organisations expand into new markets.
This blog covers the ways investment banks provide assistance in structuring funding rounds and large capital raises.
What Is the Role of Investment Banks in a Large Capital Raise?
The role of Investment banks provides financial guidance alongside deal management services. Investment banks primarily focus on obtaining necessary capital for their clients through three main methods:
- Divesting business assets in exchange for capital.
- Receiving financial funds through debt
- Important low-time and low-risk instruments include convertible notes and others.
Investment banks manage the following for significant capital raises:
- Organising and setting up the funding round
- Locating suitable lenders or investors
- Terms of negotiation
- Managing legal and regulatory tasks
- Ensuring the funding aligns with current market conditions.
To put it briefly, they serve as intermediaries between businesses and capital, supported by extensive financial knowledge.
Also Read: Future of Investment Banking in India
How Do Investment Banks Assist in Funding Round Structure?
Creating funding rounds entails deciding what kind of funding will be raised, how much, from whom, at what price, and under what conditions.
Investment banks can assist with this in the following ways:
1. Evaluating Needs for Capital
They begin by assessing:
- How much money the business actually needs
- What it will be used for, such as working capital, R&D, expansion, and M&A
- Whether it would be better to use debt, equity, or a combination.
2. Selecting the Funding Route
They determine the round’s structure:
- Is private equity the best option? A matter of public concern? Convertible debt?
- What kind of securities or shares ought to be made available?
3. Pricing and Appraisal
Investment banks assist in making decisions in the following ways:
- What is the company’s fair valuation?
- For the required capital, how much equity should be given up?
- To determine a price that investors will accept, they employ a number of techniques, including precedent transactions, comparables, and discounted cash flow (DCF).
4. Setting Up the Rounds
Funding is frequently staged in tranches during large raises. Banks organise this so that:
- Reduces dilution
- corresponds with the company’s growth benchmarks
- Maintains Investor Confidence
In short,even a promising business may find it difficult to successfully raise significant capital without appropriate structuring.
How Do Investment Banks Find the Right Investors?
The role of investment banks takes more than just making calls to raise 500 crore or 1,000 crore; it takes targeted matchmaking.
Investment banks stay in touch with:
- Private equity funds and venture capital
- The funds of sovereign wealth
- Institutional investors
- Family Offices
- High-net-worth individuals, or HNIs,
They compile lists of investors using:
- Sector of interest
- Prior investment performance
- Appetite for ticket size
- The ability to tolerate risk
After that, they save time and improve results by pitching your business to the appropriate investors.
What Materials Do They Prepare for Fundraising?
To make your business appear investment-ready, investment banks create a comprehensive set of documents. These consist of:
- Pitch deck for investors
- Information memorandum (IM)-A lengthy business profile that includes financials, strategy, market outlook, and risks
- Financial model: Cash flow, balance sheet, and projected P&L
- Value sheet: Rationalising the cost
- Term sheet: The proposed deal’s draft structure.
In short,these documents are essential for establishing investor confidence and initiating due diligence.
How Do Investment Banks Manage the Actual Capital Raise?
Once the materials and strategy are prepared, investment banks:
- Present your opportunity to attract and engage prospective investors.
- Conduct investor meetings, presentations, and Q&A.
- Handle conflicting term sheets if several investors express interest.
- Discuss terms of the deal, such as control, valuation, and exit clauses.
They also manage public fundraising (such as initial public offerings) by:
- SEBI filings
- The cost
- Listing compliance
In essence, they ensure seamless execution by guiding you from planning to closure.
Learn About: 5 Fundraising Mistakes Startups Make – And How to Avoid Them
How Do Investment Banks Handle Legal and Compliance Aspects?
Large capital raises come with a heavy regulatory burden. Investment banks work with accountants and solicitors to oversee:
- Due diligence
- Agreements with shareholders
- Filings with regulatory bodies (e.g., SEBI, RBI, MCA)
- The structure of taxes
- Investor KYC and AML checks
They make sure everything complies with the law, shielding the business from disputes that may arise after the deal.
What Happens When the Market Is Uncertain?
Fundraising is more difficult in unpredictable or doomed markets. However, this is when experienced investment banks come in handy:
- They better time the hike, delaying or accelerating it in response to market cues.
- They modify the round structure to incorporate bridge financing or convertibles.
- They locate counter-cyclical investors through their networks.
Their job is not just to raise capital, but they also have to do it safely and intelligently, even under difficult circumstances.
How Do Investment Banks Charge for Their Services?
Most investment banks charge based on:
- A retainer fee (fixed monthly advisory fee)
- A success fee (usually 1%–5% of capital raised)
- Larger the deal, lower the percentage. But do remember that a good investment bank adds far more value than the fee they charge.
Why Can’t Companies Raise Large Capital Without Investment Banks?
Technically you can ,However, when businesses attempt to raise large sums of money without a bank, the following is what actually happens:
- Off-course valuation
- Inappropriate investors (or none at all)
- Poor documents don’t engender trust.
- Missed legal steps cause delays in the deal.
- Poor handling of dilution that compromises long-term control
What Are Some Examples of Investment Banks Structuring Large Rounds?
Here are some real-world examples from India:
- Morgan Stanley and Kotak structured Zomato’s ₹9,000 crore initial public offering.
- Avendus and others helped with PE rounds for Byju’s Series F (₹3,000+ crore).
- Axis Capital is in charge of organising Nykaa’s ₹535 crore pre-IPO round.
- Several investment banks are supporting Delhivery’s ₹2,346 crore initial public offering.
An investment bank typically does the heavy lifting behind every high-profile fundraising event.
Conclusion:
The role of investment banks in fundraising is a part of raising funds, particularly when structuring funding rounds and managing a large capital raise. For everything from choosing the right mix of equity and debt to picking suitable investors and buying necessary terms, investment banks rely on their expertise and main focus. They link companies to capital markets, so that the fundraising procedure is effective, legal and designed for lasting success.
Investment banks guide companies away from possible challenges such as getting undervalued, not matching the investors’ needs or running into regulatory problems. It is particularly important for them to get involved when markets are unstable, because the right timing, price levels and investors’ confidence are crucial. Thanks to their skills in handling documents, managing checks and directing the process effectively, investment banks finish large investment rounds without any risks.
An experienced investment bank greatly assists with the structuring of funding rounds, managing investor relationships, and executing large capital raises. Wise fundraising helps companies keep their future plans secure along with the finances. Any business that wishes to expand a lot, add new products or go public should make good use of the full set of investment banking services.
Bonus Tip: Are you a startup trying to figure out how to value your business and impress investors? Don’t worry — we’ve got you covered! Use our free Business Valuation Calculator and access free Pitch Deck Templates to confidently prepare for your next investor meeting.
Key Takeaways
- Investment banks help companies manage the difficulties of fundraising, especially when seeking huge amounts of money.
- They know how to organize funds that are ideal for each company and still fulfill what investors are expecting.
- An important benefit of using investment banks is their access to a wide network made up of many institutional investors and private companies.
- Investment banks also make sure that all legal standards are satisfied, appraisals are correct and business transactions are handled without problems.
- Any company aiming to expand its activities, go public or grow can benefit a lot from involving an investment bank.
FAQs:
- What is the role of investment banks in fundraising?
With the role of investment banks , companies can organise fundraising rounds, attract qualified investors, check compliance and negotiate the terms of finance. - How do investment banks structure large capital raises?
To reduce a decrease and increase efficiency, they evaluate capital needs, choose the best funding instruments (equity, debt, or hybrid), price the deal, and stage the funding round. - Why should companies involve investment banks in large funding rounds?
Owing to their proficiency in market strategy, investor relations, legal compliance, and valuation helps in making the process more efficient and fruitful. - Do investment banks also provide services for small companies seeking funds?
In general, investment banks specialise in medium compared too small, considering how hard and expensive larger transactions can be. - What are the typical documents investment banks prepare during fundraising?
They create financial models, valuation reports, investor pitch decks, information memorandums, and term sheets during fundraising.
