2024-09-24 13:15:45 :
Banks that have entered the financing space in recent years include Sprout Capital, Merisis Advisors and Dexter Ventures. Technology-focused IndigoEdge plans to launch a $40-50 million fund to invest in 8-10 late-stage startups, two people familiar with the matter said. Mint. IndigoEdge declined to comment.
One potential area for boutique investment banks lies with holders of employee stock option plans (ESOPs) and early-stage angel investors looking to cash out.
“IndigoEdge’s investment thesis is based on the fact that there are multiple small secondary blocks as ESOP holders and angels look to gain liquidity. This will not interest big investors and founders will not want to go to wealth management firms, This provides an interesting opportunity,” said one of the people cited above. “This is a function of deeply understanding the company and solving problems for the company. The founder has the potential to create value and create a win-win for all parties.”
Avendus was one of the first funds to spot this opportunity. It started as an investment bank and eventually branched out into financing, becoming a full-fledged financial services company. In addition to financing instruments, it also has a lending arm.
While boutique investment banking can expand revenue streams, it also opens up more avenues for startups to raise capital with smaller checks. However, venture capital and private equity firms remain the major investors in the space, with boutique investment banks stepping in only on a smaller scale to help close a funding round.
conflict of interest
Bankers point out that true value unlocking occurs by continuing to invest in a company, as its valuation compounds over time. This becomes even more important when a company raises capital and is advised by the same entity. However, there may be limitations to such initiatives, including potential conflicts of interest that need to be noted before providing advice and investing, especially within the same company.
Avendus recently advised investors in Lenskart on its $200 million second round of funding and is also an investor in the eyewear retailer through its investment arm Future Leaders Fund. Like other similar examples in its portfolio, the fund holds minority stakes in companies with average check sizes between $10 million and $30 million, typically targeting industries such as digital technology, consumer and financial services.
In this case, the investment bank ensures that all legal disclosures are in place. To be sure, this trend is more prevalent globally, with even established Indian advisory banks like IIFL and Kotak operating in these two segments.
Now, this has trickled down to smaller investment banks looking to invest in some of the most valuable companies that they also advise on. The logic is simple – the services provided by investment banks are complementary to those of fund managers. Investment banks that help startups raise capital at the right valuation face the same risks as investors and perform the same due diligence processes.
“Essentially, an investment bank (IB) operates similarly to a venture capital firm during the initial stages of a deal. Given that both involve similar time commitments, opportunity costs and due diligence processes, it is important for the IB to make the investment and leverage the future earnings of the business. It makes sense,” said Sumir Verma, founder and managing director of Merisis Advisors.
Merisis launched the Merisis Opportunities Fund in 2022, nearly a decade after the launch of its investment banking arm. with a $Merisis aims to execute 10-15 deals and exit some investments before raising its next fund early next year, worth Rs 100 crore, with an expected range of $400-500 crore.
It also invests in certain companies through its financing arm and has its advisory team responsible for IB mandates, but only upon completion of the transaction. This approach allows Mersis to come in at the same valuation as other new investors, and it serves two purposes: reassuring both new investors and founders that the bankers share the same valuation view, and easing the burden on the fund’s limited partners. Potential Conflicts of Interest. Companies may feel uneasy if they invest in advance to obtain authorization.
Merisis’ first investment was $6 million in Beato’s Series A in 2022, which grew 2.5 times in 11 months, and $33 million in Series B. Both IB transactions are operated by Merisis. Its most recent investment was in Eggoz, which was not mandated by IB.
Many introducing brokers have been investing in companies through their balance sheets for quite some time. But setting up a fund is more of a formalization of the process because their deal flow is more predictable. These introducing brokers benefited from a surge in trading during the peak funding period during the pandemic, when capital was more readily available, creating higher demand for their services.
Seasonal Consultant Role
Since then, funding levels have declined, as only companies with a clear path to profitability attract investor interest. As a result, consulting business has become more seasonal. The advisory arm, however, allows bankers to understand where growth and later-stage investors are looking to invest.
Sunil Jain, who founded Sprout Capital in 2012, said: “We set up an early-stage fund to find early winners in the industries we advise – consumer and technology.”
Five years later, Sprout launched a micro-venture capital fund that invests about $100,000 to $500,000 in startups.
“Another motivation for IBs to set up a fund business is to build a fund-based revenue stream in addition to fee-based revenue (advisory),” adds Jain.
Dexter is also an IB with its own funds. While it typically advises through Dexter Capital and funds early-stage companies through Dexter Ventures, its rule of thumb is that it will never lead a funding round through its investment arm if it is also advised by the investment arm.
It advises D2C startup The Pant Project and invested in the company in June. Dexter’s financing arm was established in 2013, approximately seven years after the IB arm was established, and invests in conjunction with Lets Venture and Anglelist.
Much like other departments, Sprout and Dexter have separate teams overseeing the two departments to avoid potential conflicts of interest. However, Sprout’s advisory services cover companies in Series B and beyond, while the fund focuses on companies in the Seed to Series A stages. Sprout has invested in companies including Pixis, Ripplr, advantageClub, and also provided advisory services to Ocean Beverages (Series B), Fashor (Series A) and Eggoz (Series B).
As the entire ecosystem matures, Merisis’ Verma expects there will be an increasing trend for investment banks to establish their own funds, given the natural synergies between the two industries.
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