Q&A: 15 years as IB ANL/ASO, HF ANL/PM, Start-up Corp Finance Executive

~15 year career as an investment banking analyst/associate in ECM (SPACs) and leveraged finance/restructuring, hedge fund analyst/portfolio manager and currently as a corporate finance executive for a fast-growing start-up (led $70mm equity raise process).

Have interviewed and spearheaded recruiting for investment banking, hedge fund and start-ups. If you're trying to break into investment banking, can give you mock interviews. Love mentoring young professionals and learning from others.

Am decent with excel modeling, but am aware why model assumptions are way more important than the actual model itself.

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Want to work with me? Check out my profile here.

 

For IB - my advice to undergrads and MBAs is that if you're not from a target, you should network like crazy to get informal intros/interviews. Very few people actually do it. And even if you are from a target, you should still network to get an edge. Submitting an app into HR/online is a black hole that's 50/50 hit or miss even if you're coming from a target.

 

Thank you for the advice. In terms of networking, what is your take on when someone should start networking for soph SA/Junior SA? People on this forum say network as early as possible(because they can only pick up so many coffee chats/phone calls). However, others tell to wait a little bit as you might be perceived as a super hardo/ not taken as seriously?

Thank you for doing this, it is much appreciated!

FYI: Incoming freshman at a semi-target/target range

 

Thanks for doing Q&A!!! 

1. What's it like working in a start-up company?

2. What led you to transition from IB to HF then in Corp Fin?

 

1. It's awesome. I love it. The equity upside obviously is attractive. Need to do your diligence before joining a start-up just like an investor would. You don't want to join a company that won't be able to raise capital or will run out of money. Sometimes hard to judge that but you can mitigate that risk by joining later stage start-ups or those that are profitable/closer to profitable as there's less cash burn.

2. IB is awesome. Loved working on deals. However I wanted to put capital/risk to work, so I went to the buyside. After that, I wanted to have equity upside which is hard to get from the buyside, though you can get cash carry.  

 
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I think it really depends. It's like looking at a bond vs equity investment on a risk-adjusted basis. An IG bond at 4% (typically 1-3%) is a better risk-adjusted return say vs equity at 8% (typically 10% or so). On a risk-adjusted basis, IB can be pretty lucrative. I say risk-adjusted because your salary is high and upside is somewhat capped until you get to very senior levels, but there is arguably some stability; IB is probably lower-risk than the buyside or start-up. On the buyside, you really need to have a lot of things fall into place - partners retire/your investments have to do well; it's higher comp from the carry potential, but it's riskier - look at how many analysts (i.e. a lot) come into any buyside shop any year and how many new partners are promoted each year (i.e. very few). Start-up wise, if you're a founder or equity owner, that's the highest upside potential of all, but clearly the riskiest. So in the end, on a risk-adjusted basis, we're probably back in the same place for all of them. The market is probably pretty efficient here.

 
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I think it really depends. It's like looking at a bond vs equity investment on a risk-adjusted basis. An IG bond at 4% is a better risk-adjusted return say vs equity at 8%. On a risk-adjusted basis, IB can be pretty lucrative. I say risk-adjusted because your salary is high and upside is somewhat capped until you get to very senior levels, but there is some arguably some stability; IB is probably lower-risk than the buyside or start-up. On the buyside, you really need to have a lot of things fall into place - partners retire/your investments have to do well; it's higher comp from the carry potential, but it's riskier - look at how many analysts (i.e. a lot) come into the buyside of any buyside shop every year and how many new partners are promoted each year (i.e. very few). Start-up wise, if you're a founder or equity owner, that's the highest upside potential of all, but clearly the riskiest. So in the end, on a risk-adjusted basis, we're probably back in the same place for all of them. The market is probably pretty efficient here.

That's the best way anyone has ever explained this to me!

Thank you.

989o989o99oiiooo9999kok999kk999koo9o9o
 

Vesting schedule for startup / equity component vs TC? 

How do you feel about the decision given where we all know we are in the cycle?

Recently made a similar move and fairly happy with it despite everything. 

 

Vesting schedule for startup / equity component vs TC? Not really an expert on this but my rule of thumb was I wanted base salary to be around base comp in IB/buyside.

How do you feel about the decision given where we all know we are in the cycle? I am very happy with the decision. I joined a goldilocks scenario where the company is highly profitable and growing quickly - this means there's no need to raise capital for a long time, regardless of economy. Perhaps some cash burning unicorns are faster growing / potentially more equity upside, but this is good for me for my risk tolerance.

 

How well does an investment orientated thought process translate to a startup? I’ve always imagined PE-> Startup to be quite a natural progression but am a bit more confused with HF-> Startup.

Thanks for doing this btw!

 

No problem! 

That's a great question. I actually worked in PE as well, so can speak to that. You're right that there's perhaps more of a natural progression from PE/VC to start-up/ops. But that's not exactly true. My HF background was as a fundamental investor - so I looked at fundamentals of companies to arrive at their fair value. So it depends on what kind of HF strategy you're involved in. If it's pure quant or commodities or macro HF, perhaps there isn't as an intuitive of a segue to understanding ops. But I'd say none of that really matters, because running a start-up is so hard, that it's not like a PE guy really has an edge. I believe Bezos was a DE Shaw quant hedge fund guy. At the end of the day, running a company is more execution oriented than writing a check.

 

You hit the nail on the head when it comes to working for a startup of any sort, it's a grind. I worked at a fintech startup for 2 years in their business development and I was exhausted almost every day after work. The numerous amount of meetings I was in almost drove me insane. I found myself up until 1-3 am every night just trying to catch up with work because at often times many of my meetings would go over the time limit that was set.

 

I always found a common connection or interest to be a good topic to bring up. Keep it short and sweet. If you see they are at the same alma mater, fan of same sports team, from same hometown/home state - these are all good to note. The best approach in my opinion is a warm intro via a mutual connection. So you have to look at not only your connections but your connections' connections.

i.e. Subject: Big State University alum reaching out
i.e. Subject: Referral by Bob Smith

 

Absolutely. I really believe my IB experience and skills working on deals helped me become a better investor as you get to see companies under the hood. Also, I think being at a HF was hugely valuable as it's important to know how the market views your company as an entrepreneur - what will make it more or less valuable in the eyes of the market?

Most relevant today for my career, learning how a deal process works from start to finish in IB helped me run the process to raise almost $100mm of equity for our start-up.

IMO, there is no better job in terms of attention to detail/formatting and cranking out monkey work in excel/ppt than IB analyst/associate. That's why we hire former IB analysts. Is it the best or only path? Of course not. Perhaps consulting achieves something similar. But once you're an IB anl/aso, you have that monkey modeling/pitch deck toolbox for life, i.e. you don't need an analyst to do all that work for you as you can do it all efficiently yourself - as an entrepreneur that's hugely valuable in early stages when you're scrapped for time/resources.

 

Is it easier to lateral to IBD industry coverage from ER or CM?

Even though I have read that CM doesn't really model, I feel that it's closer to the industry coverage group (since it's on the private side of the wall).

Some firms classify CM under IBD too.

On the other hand, ER does the modelling but it doesn't deal with private information.

Could you share some insights/advice on this?

 

You're spot on. My initial response is that CM is probably an easier lateral because it straddles the public and private side (IB is all private side), whereas ER is all public side. 

As you know, a Chinese wall divides ER and IB. My experience has been that CM (if it's an IB function like ECM, DCM or Lev Fin Cap Markets) is an IB division or something that straddles the wall. In Lev Fin, on the IB side we may get a company/client that wants to raise a bond - we'd then go to our Lev Fin Cap Markets bond guy who's over the wall and show him a cap table to show current and pro forma leverage for the deal - then that guy provides a quote for the bond based on market comps. Then IB goes back to the client with an indicative quote range for coupon / tenor / structure of the bond.

So CM really is sponsor/corporate client-facing just like any IB group. ER, the client is institutional investors to whom they act as megaphones for companies they cover.

The one caveat where ER may actually be a better lateral to IB is for nuanced industries like FIG and perhaps HC (given regulations, FDA approval schema etc.) - I am talking out of my butt here re: ER, as I've never been in it, but that's my guess.

 

Would you mind explaining why the assumptions are so much more important than the model itself? Thanks!

 

To follow up on this - the point was that nat gas was assumed (by the range of sensitivity of IRRs to varying nat gas prices) to not fall below $6.00 as shown in the presentation advocating for the largest LBO in history. That assumption ended up being way wrong as nat gas collapsed below $2.00 post LBO and TXU went Chapter 11 bankrupt. All those pretty slides / fancy modeling didn’t end up mattering. Only one single input - the price of nat gas mattered. I find that to be the case in almost any investment thesis. There are usually only one or two major assumptions / model inputs that will drive 80% or more of your outcome.  

 

I’d say I spend a lot of my time thinking about organizational structure, which is key for most companies.

In IB, org structure is pretty vanilla as it’s layered from ANL to MD. And teams are temporarily structured around specific deals.
 

In corporate, there isn’t a specific deal as much as departmental functions. I find it much more complex and harder to maximize collaboration and incentives in a corporate setting. As specific deals deliver specific fees and P&L - the benchmarks are very clear. In corporate, how do you benchmark, much less structure and properly incentivize the HR department or the accounting team? I find it more nuanced and wish I had more training on that. I think culture is a big piece of the puzzle, but I’ve never been taught how to proactively foster a certain culture. 

 

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