Different Levels of Placement Agents, Part 1

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The first tier

As in most business enterprises, the investment-banking sector is divided into tiers. At the top are the creme de la creme: Goldman Sachs, Morgan Stanley, Credit Suisse First Boston, and other multinational firms often referred to as bulge-bracket investment banks. These banks act as placement agents by handling major public and private offerings; they also engage in an advisory capacity for mergers and acquisitions (very lucrative), and, in some cases, retail brokerage, and they trade securities for their own accounts.

These companies have billions of dollars in capital, offices around the world, and partners who take home high six-figure (and often much more) compensation each year. Increasingly, they're allying with other financial institutions, primarily commercial banks. The focus of their activity is in New York and London, but their representatives travel in every conceivable market to find and service customers. Many are publicly owned; a few, such as Bear Stearns, are still private.

For most entrepreneurs, first-tier firms are not an option. Although these top firms are capable of raising billions of dollars for financial institutions, their services generally are not available to entrepreneurs seeking early stage capital. Occasionally, individual partners may be angel investors on their own time and with their own money, but that doesn't mean that the bank itself is likely to sign up as a placement agent.

Bulge-bracket firms often sponsor the organizational ally of private equity funds venture capital and buy out and participate in their management. One of the oldest is the alliance between Sprout Capital and Donaldson, Lufkin, & Jenrette (now being merged into Credit Suisse First Boston). However, in early stage financing (an angel round, for example), soliciting the likes of Sprout Capital is not a productive use of your time.

Here's a checklist of the kinds of deals that first-tier placement agents handle:

Established firms with strong track records
Funding minimums of $25 million
Institutional investors as the target audience

The second tier

Below the bulge-bracket firms are a group of firms that once acted as placement agents for early stage financings but have shifted their efforts to the big leagues. These firms, starting with Hambrecht & Quist (which is now owned by Chase Manhattan Bank), grew up in the venture capital/high-tech arena. They include the likes of Robertson Stephens, Alex Brown, and SG Cowen upstarts that began as so-called boutiques, specializing in high-tech and usually located on one coast or the other. These firms are, by definition, interested in new ideas and new technology. However, they by and large have graduated to spheres beyond the angel round.

In terms of raising private equity for emerging growth companies, they set their sights on financings at or above the $15 million (plus or minus) level, which ordinarily implies a good deal of maturity for the issuer (the company seeking capital) in terms of customers, revenues, and net earnings. Moreover, many of these firms have been acquired by major financial institutions for example, Alex Brown by Bankers Trust and then by Deutsche Bank and are therefore opting for major-league rankings, all of which takes them above and beyond the seed and early stage financing sectors.

Here are a few things to remember about second-tier placement agents:

They deal with emerging growth companies.
They work with funding minimums of $15 million (more or less).
They focus on companies with breakthrough products.
They're technologically sophisticated.
They're becoming as elitist as the bulge-bracket firms.

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