Investment Banking Interview Questions - With Answers | Mock Interview

0:00 Working with over 150 founders across the world has given me the ability to look into what others often overlook. Let me put you a little bit on spot. We're not looking at a 50 cr to 500 cr range that you look at normally. We're looking at a relatively early stage startup and that is offloading 25% stake in a fund raise round. Now what does it say about the founders? If the founder is trying to offload 25% then has the company built enough value for him to offload 25% for that particular amount or say for example a founder personally guaranteed a large loan and that's not showing up in the financials. What do you do?

0:44 >> Pause. Stop the transaction. >> Which number do you think the founders generally tend to inflate? one is going to be their TAM because they like to believe that they have a $50 million market opportunity. >> If every founder had unlimited money without giving up ownership, what would go wrong? >> They would not have accountability. >> AI is able to write the perfect financial model and the perfect pitch deck. What do I need you for? So, So before we start with the mock interview session, let me tell you something. Ritwick has an experience of 7 years. He's been my student since 2018 and he has been working on multiple deals ranging between 50 to 500 crores.

1:37 Over the last 7 years after working with me, he joined a boutique investment banking firm that is Spectre and he's working as a partner over there. So it makes me even more happy to do the session with him. So you need to understand that this mock interview session is not what I'm expecting you maybe as a fresher to answer in the interview but what are the kind of answers you need to aspire for. So treat it as a model answer or a guidance or something and this is for an education purpose and not for entertainment. So understand that way if you're really serious about making a career in investment banking, financial advisory, boutique firms, private equity etc spaces. So then take this very seriously and understand how answers are given, how what kind of reading you need to do, what kind of news, blogs, economy updates etc. you need to have so as to be able to perform like this in an interview when you encounter. So don't get intimidated by the answers that Rywick is going to be giving but rather try to learn from it. So I'll give you a quick profile brief about Ritwick. He's completed CFA, FRM, graduation from Savior's College and he has worked for 7 years in the particular finance space.

2:44 Before that he's done multiple internships, worked in his family business as well which is into printing. So there has been a concoction of experiences. He's been engaged with a lot of volunteer activities and college activities. I know that because I've been closely working with him, following him, mentoring him throughout. So we'll jump right into the Q&A and a cutthroat interview without spending time on his resume. So you've been helping founders raise money. You've been helping company do acquisitions. So the first question is pitch yourself through in 60 seconds.

3:14 >> If I were to pitch myself as an investment opportunity, I would say I started learning about finance academically, you know, through courses like CFA, FRM, studying a lot of books on finance, watching YouTube videos. But when I actually got my hands dirty and stepped in the industry first working with you then independently in my firm I realized that transactions are more about psychology disguised as numbers. So understanding that psychology, understanding how a promoter goes from zero to a,000 cr business over years and years of effort that has helped me build my perspective across multiple industries across multiple sectors and working with over 150 founders across the world has given me the ability to look into what others often overlook. And I don't sell capital. I help reduce the distance between conviction and investment. And that is the best way that I could sell myself because in the end everybody's selling a story. my job is to make sure that your story stands out from the rest.

4:31 >> Okay. What are the challenges you face when let's say for example putting a pitch deck with a founder together? A lot of times it's mostly about getting the founder and the core team members to the table because everybody has different timelines. Everybody has different priorities especially when you're in that part of the year where there's a lot of work or that's just the business cycle for that particular industry. So continuously working at the back end and then bringing it back to the founder that's one of the challenges. Next, every promoter has their own story or vision in mind, but that might not be the best way to present it to the investor. So, translating that conviction and ambition into a language that investors trust, that becomes challenging and that takes a lot of working with the promoters, lot of guiding, lot of financial education also goes behind it for the promoter. So, that becomes sometimes it becomes challenging. But what I have realized is that the more time you spend with the promoter in understanding their business, the better the deal execution becomes because you become more wellversed with the business. So even if sometimes promoters tend to get you know very difficult, it's sometimes it's okay with the business. So when you talked about getting the coordination or getting everybody on the alignment and getting on them on the table, how do you tackle that problem?

5:52 >> So for all conversations we don't need the promoter actually. So in that case we encourage promoters to set us up with their core team members. So we'll spend more time discussing the business with the promoter at a higher level but the basics the fundamentals the numbers that could be discussed with the core team members. Fair. What are the red flags that you look for or you see or you notice and you just simply get out of the deal when interacting or when having a very cursory discussion with the promoters or the founders.

6:22 So if a promoter comes up to us and says that there is no competition in the market, that's a red flag because markets rarely exist in a vacuum. >> But you walk out of the deal. >> We don't walk out. We try to educate as much as possible. So that's one, right? Because every founder likes to believe that they have a $50 billion market opportunity. That's not that's not always true, right? When they say that I'm the first one to enter into the market, there's no competition. But there's always competition somewhere, right? Somebody must be doing it maybe in a small way, maybe in a bigger way, maybe in a different geography. So investors don't look for perfection.

7:01 They look for readiness, they look for awareness. And if a promoter does not have that awareness and if we are not able to put that awareness in, then we tend to usually back out. So with the number of deals that you've been a part of, what are the mistakes you have made while evaluating the opportunity? So the same industry will perform differently in different geographies. So we've come across a couple of opportunities that we thought were groundbreaking because they had revolutionary technology. They were able to you know capture a market in a different geography. So we thought that the same would probably work in a market like India. But we often tend to forget that India although is growing exponentially, India might not be ready for certain industries right away. It's on the path but we a couple of bets that we took did not turn out to be great especially in the tech domain because although AI and you know those those industries have now taken flight but they still have a long way to go.

8:04 A mistake that you would have made when putting the pitch deck together and that you regret that you know I mean there's something so simple and I should have done it better. In the early days of my career, I used to think that speed equals great output, right? And that that kind of impatience in the early days resulted in the story not being captured properly. And when you're pitching to an investor, they put the money not on the numbers, they put the money on the story and the the trust that the company gives to the investor, the founder gives to the investor. So, so how do we evaluate that trust or how do we understand whether we can trust or not or what is your observation as to how the investors able to build the trust or not build the trust? What do you think are the factors that an investor is able to?

8:55 >> So the way it works in the private equity space is that the first level of understanding the first level of analysis is always done by a 20-year-old something. >> Okay. So when a deck goes through the 20-year-old something has a checklist that you know these are the 10 20 things that I need to look at >> based on the investment thesis and everything and if that qualifies then it goes on to the next level. >> Now in that to cross that you have to have 10 20 things in your deck. So that we usually do >> to cross to the next level they you they want a call with the bankers.

9:28 >> So we are the first line of defense for any company that we're representing. We are responsible to instill that confidence and if we are able to do that properly then it goes to the partner level and then they have a call with the promoter directly. >> Okay. >> So it takes up to three rounds for a face toface call with the promoter and then we advise promoters not to talk about the numbers not to talk about anything leave their you know gut feeling in in the room and when they come for that call just talk about their story how they built it because that's what investors are looking for. They're looking to see how you were able to build something from zero to to you know 500 crores or,000 crores right and if they see that you're able to do that and if you can do that for the foreseeable future that's when they put in the money or that's where they that's when they actually think of taking the conversation.

10:17 >> So how do you tutor the founders or the u investy company? >> We typically spend almost a month understanding promoter objectives. So what's their objective? Do they want strategic capital? Do they want growth capital? Do they want global access? Do they want to, you know, streamline their operations? What is it that they're exactly looking for? And that often becomes the difference between a large investment bank and a boutique bank. You know, a boutique investment bank is able to put in that kind of attention and give that kind of flexibility to the promoter that a large a large investment bank won't. So we put in that time we put in almost a month in understanding what they want and once those are aligned then we reach out to the investors and that makes things easier >> and that's the reason why somebody would choose let's say an ITC would choose you a boutique investment bank over a larger investment bank for example >> because for a boutique investment bank when they're working with us they know that they're directly dealing with the senior leadership so they're not handed off to you know younger people in the team or you know who won't maybe understand the business right away or sometimes we also see what's the purpose is the purpose urgency are they running out of runway or are they you know they're entering the fund raise because they're looking at a larger picture they have a you know strategic need for capital okay so you're talking about the narrative being more important than the numbers but still you would have to put your projections and the financial model and all in place so what are the basics that you look for in terms of a healthy financial model. A lot of times a mistake that's made by people who are building financial models is that they focus a lot on what the model output is and don't focus on what the operating inputs are. So that becomes very important. We've seen companies build financial models where they go from a 10 cr revenue to 100 crore revenue in the second year. So that might be the case.

12:13 But >> so how do you vet those assumptions then? >> So it depends from industry to industry. For example, if you're in let's say biotech, right? Those numbers are very plausible. You could go from 10 CR to 100 CR in the next year because as soon as your R&D gets done, as soon as your you get your patent, as soon as your product gets approval, you get that accuracy that you've been aiming for, your product shoots up. There's a hockey stick growth. But if you're talking about a manufacturing industry, you can't go from 10 crores to 100 crores overnight. So understanding the sector and understanding how peers have performed in that sector over the years.

12:48 So unless you're bringing in some kind of revolutionary technology, you can't outperform your peers by 3 4x in one year. >> Okay. There's a profitable company and is struggling after making a poor acquisition. What would you do first? Pay down the debt or get rid of the bad asset. So we need to see whether after the acquisition every additional rupee that add every additional rupee of revenue that's coming in is destroying value or adding to value. Right? So no matter what you do in that case leverage is going to if if it's not generating value then leverage is going to completely derail the company. So in that case you let the bad asset go and then you pay off the debt. That's the typical horizon. But when an acquisition is you know in that particular moment if the markets are bad if in that moment there's stress then instead of taking on more debt you then infuse equity because in that case equity works but in that case if you again leverage your company then in that case it leads to catastrophic failure. Say for example a promoter is wanting to raise money but the valuation seems unrealistic and you personally cannot defend the assumptions taken in terms of the growth projections etc or you do not believe in those numbers yourself but he's adamant and he wants to stick to those numbers. Do you take up that that mandate or what do you do? How do you go about it?

14:18 >> So we don't leave the mandate right away. first we try to educate the >> not getting elevated >> then we try to understand whether that valuation expectation is coming from sentiment or from actual hard data >> sentiment >> in that case we try to do our own analysis we try to present the best picture we try to present the most fair picture and even if in that case the promoter is adamant then we walk away >> we walk away from that deal >> but you do not take that deal to investors and try to get it >> no no we don't because because In this industry, in in the investment banking industry, it runs on trust. So if I bring quality companies to to let's say a private equity fund, they would go through all my proposals and then it's not personal, right? Rejection is never personal in this industry. So if they say that, you know, this does not fit their mandate, it does not fit their mandate. But if the first four or five deals I take to an investor are of poor quality, then they would assume that every single deal I bring to them is of poor quality and then I'll never be able to raise money from any private equity fund. Say suppose there's an investor, there's a $20 million funding round happening and the investor is wanting to take up let's say pick up a 60% stake but then he wants a board seat and a veto power. What do you do? 60% is not of the company. 60% of the fund raise.

15:39 So let's say for example you're raising $20 million at let's say 100 million valuation or maybe $120 $150 million valuation. So technically you're offloading let's say 10% or so. So the investors willing to pick up 6% 60% of the 10% 6%. So but he does not deserve a board seat but you're finding it very difficult in the markets to raise that kind of money and for you it makes it very easy because there's one investor who's going to pick up $12 million off a $20 million fund raise. So what do you do? Do you convince your client that you know let's take it up, let him have the board seat or the veto power or something? The markets are bad. How do you maneuver in this situation?

16:17 >> So in these situations when you're when the investment that you're seeking crosses a certain threshold, board seats are pretty standard. So even if we were willing to part with the board seat, that's okay. But veto rights is something that any promoter will not go for. I mean unless you're giving up control, you won't give veto rights to an investor. And that's how we've seen historically a lot of companies fail. Take for example Snapde the the company that was actually making it difficult for Amazon to enter the Indian market, right? The I think it was Bansel and Agarval who were the promoters of Snapde. They diluted too much too early and if you do that a promoter loses operating freedom.

17:02 >> Yeah. So and if incentives are not aligned then the company won't grow, the investor won't make money, the founder won't get an exit himself in the business. So that kind of flexibility is important and investors usually understand that. Now if an investor is adamant then in the then in the long run it's better if the promoter lets go of that transaction. So assume everything is hunky dory and the company needs to raise fund. the company would be a growth stage company. what what what kind of funding or capital raise would you suggest a cheaper debt let's say the debt terms are not too exorbitant but it will have its own covenants and everything or diluting through equity which again of course you do not have an interest payout etc etc but at the same time you end up diluting control >> so we would look at it from both angles actually how much has the company already diluted so far? Has are the cap tables clean? Do they already have a lot of investors? Does it make sense to again onboard an equity investor? And if you're raising equity, how much dilution are we looking at?

18:17 Number one, compared to that, when we're looking at a debt raise nowadays, structured debt funds are very very popular amongst growth stage companies. So a good investment banker will be able to structure the transaction in a way that although the debt the rate the interest rate for structured debt funds is relatively much higher. It's usually 15 16 18% compared to a bank loan of probably 9 or 10%. But in this case they only have to pay up to 10% as regular coupons and the remaining 7 8% gets acred over the years. So for example if you have a tenor of probably six or seven years five years probably then that six or 7% gets acred over the years and then depending on what kind of structure you've created it could be an OCD or it could be a CCD. So depending on that it gives the investor the right and if you're going for an IPO only at that point will they convert your they convert the the ac crude up interest into equity. So in reality you're only diluting 5 to 6% of your company compared to 20% up front in an equity raise. So structured debt works very well if it's a growth stage company. But if it's a company that's already struggling with cash flows in that case going for a structured debt where you have to pay regular coupons that does not make sense. Say for example there is an imbalance. So one how do you evaluate the both the demand and supply side of capital in the markets for the ticket range that you have been looking at and how do you navigate through it if there is an imbalance.

19:45 So the ticket size that we look at it's a lot of the funds are very sector focused right so instead of going out to funds that are broader we then try to approach funds that have a very narrow focus a narrow investment thesis depending on the company that we're representing over the last 5 10 years investors have become more disciplined in terms of where they're investing money >> but capital is finite capital is not infinite >> right so whenever We have a company that's that has a very short runway that does not have a lot of capital left to continue operations. We advise them to take a take bridge financing. So depending on how much capital they're looking for, sometimes it can happen that the company is very good, the fundamentals are solid, but the company is just going through a rough patch and they need working capital because their cash conversion is relatively on the lower side. So for working capital we then advise them to go to any HNI or UHNI or you know get a bridge finance get a loan from a bank because these companies usually have very good banking relations. If all of those avenues don't work out then we probably look at you know look at plain vanilla debt you know from an investor.

20:58 >> Let's say suppose you have an opportunity you have a mandate and you feel everything is right but somehow the deal is not going through. you're not being able to get the right set of investors on board. you feel that the price that the client is demanding is very very justified but the offers you're getting because of lack of liquidity or because of lack of maybe because that sector is not doing very well. Say suppose you're looking at an edtech based company and edtech is not doing well and therefore you're not being able to fulfill the mandate although you genuinely believe in the company the assumptions the numbers and everything then how do you go about it in that case investment bankers often turn into management consultants so we we then work with the company to figure out if there's a way that we can pivot not pivot as in completely change what the business is doing but pivot as in how we are putting our product to the market, right? Because and and we'd also collect feedback from all the funds who've rejected because you know rejection is never personal, right?

21:59 They've rejected because they've either their either what we are offering did not align with their thesis or the ticket size was not a match or they've already invested in a company in this particular sector and they don't want to invest. Right? So there could be multiple options. So we try to talk to those 15 20 funds that we reach out to and figure out if there was if there was a problem with the company. If there was a problem with the company then we try to pivot. We work with the promoters. We try to say what if it's just that the sector is not working and investors just do not want to entertain that particular sector.

22:30 >> Then we try to look at different avenues of financing. As I said you know we could go for an equity raise but I've worked with a company where the company was doing more than 400 crores of turnover. They've built it from 15 crores of turnover to 400 crores in 7 years after taking it over from a company a management team that did not run the company well. Right? So if you look at it just in the last 7 8 years that company is doing very well but that company has 200 crores of legacy debt on its books. So one fund is going to view it as you know if you're going to raise 150 crores for example one fund is going to view it as growth capital the other fund is going to view it as test capital.

23:11 >> So understanding that mismatch in the market then going for different avenues of financing. So if equity is not working then we look at structured debt. >> So for this case what avenue of financing would you look at? We after exploring 15 different equity funds we got to know that this company can be classified as a distressed company. So we could look at alternative sources of financing. So alternate alternate debt or alternate equity where you have equity or debt structured in very different formats. Right? So that's when that's what we explored there. Alternate funds then come into the picture rather than plain monike. So you talked about working capital being a challenge at times for the companies and needing financing for that. So what if a company is stuck in a very very bad mess and probably you're looking at a restructuring of debt where you had say for example 3 years before you were the ones who had gotten the structured financing in the form of structured debt done for them and now your investors want a foreclosure. They want to you know redeem whatever they can. They want to liquidate the company or get it sold off to a strategic buyer, make the max out of it, get the debt restructured basically. Whereas the promoter is not willing to get out of it. What do you do in a situation of that sort?

24:26 >> A lot depends on the promoter's conviction and how they're able to convince us. So it's not like we could we could exit a deal at any point, right? If we've held somebody's hand, it's our job to see it through. That's what an ethical banker would do. We work with the promoter and we work with the other side with the investor. We bring them both to the table. We try to do that and we try to resolve everything in one room. And if again still things don't work out then the transaction naturally drags on. we try to look for somebody to refinance the debt because if both parties aren't agreeing we try to find somebody to refinance the debt and a lot of times it happens that you know both parties they don't agree with the terms that are there on the table and the transaction fizzles out the promoter is not able to do anything the investor wants the money back a lot of times the promoter then has to make a distress sale of their assets to pay off the investor a lot of times we've seen that a lot of times they've had to discount mount their existing bills so that they have enough working capital to run the business or to pay off their investors. We've seen situations where things have gone south very quickly. But more often than not, we try to convince both parties to give them probably an additional year or a couple of years of runway and if then things don't work out then automatically the covenants kick in, the terms kick in, then it becomes a legal thing and none of us can do anything about it.

25:52 >> Then it's murky what? >> Then it's so let's get into some numbers. Suppose your sales have tripled but your losses have quadrupled. Investors want a high valuation. How do you deal with a situation like this? >> First of all, I would look at which business this is, right? For example, if it's a business that requires stronger operating leverage, for example, if it's a software business into R&D, deep tech, if it's a platform building, distribution for example, in that case, temporary losses are okay, right?

26:26 because >> but it's 4x >> that's still okay even no matter how much the quantity the the no matter how big the losses are if it's temporary and if it's just because of the business model that's easier to explain but don't you think this was the kind of pitch for the of the past maybe pre2023 or the pre funding winter's time where this kind of narrative used to work that you know your revenues are growing your losses are quadrupling it doesn't matter as long as the revenue of the top line is going up.

26:57 >> No. Again, as I said, as long as that's a temporary situation, historically the company, >> how do you define it as temporary? >> If historically the company has been profitable, has been delivering profits and >> the company has not been profitable. They've been a growing company, they've been burning cash, they've been burning money, they've been investing, >> then we look at their working capital. I mean, if their working capital position is solid, >> let's say it's a SAS company, we'll give you the industry. Now, what how do you look at it? It's a platform based company. ES as company >> and your question was the sales >> the losses sales are growing but the losses are growing even further.

27:33 >> So what do you do? >> Then there has to be a forensic study of the company of the financials. So in that case the investor then either the investor hires somebody to do that forensic or >> let's say I've hired you to do the forensic. So what are the top three things you're going to be looking at? So we'll do an understanding of are we saying it's a debtfree company? >> Does it have debt? >> No debt.

27:59 >> If the company does not have any debt, then that means that the company has entered a a business slump where they're just not being able to generate enough revenue from their existing clients or if they're generating revenue then they're burning a lot of money. Then we we're going to understand where the leakage of cash is happening. So that could either be in marketing that could either be in development or you know tech spend for example if it's a SAS company they will have to do a lot of marketing they will have to do a lot of tech development and they would have to spend a lot lot on employees right so there lies our area for diagnosis so how big are the operations are the operations big enough that we could sustain letting go of let's say a team or B team or C team that would put that put some breathing room into the cash flows so In that case improving the cash flows becomes very important because as soon as the cash flows improve profitability automatically improves.

28:55 Now investors look at value of cash flows right. So when we are able to work on making operating cash flows positive. So that would often mean improving your cash cycles. So you're taking for example 100 days to convert any sale into cash. then you need to work on that and we've helped founders do that. There were there were promoters who you know used to take 120 days to convert their ca their their sale into cash. As soon as they brought that down to 90 60 and then 30 days they stopped credit sales altogether. They only worked on a cash basis. Their cash flows improved their profitability improved and they were profitable in the next two quarters. So it's a long game in in when we're talking about transactions like this.

29:43 They typically take 6 to 18 months. So we we can't expect and investors understand that they don't expect things to turn overnight. So >> okay >> they would probably give us a horizon that you know 3 months 6 months 12 months you name your horizon and if you're able to turn around in that time then great. >> Okay let me put you a little bit on a spot. We're not looking at a 50 cr to 500 cr range that you look at normally.

30:07 We're looking at a relatively early stage startup and that is offloading 25% stake in a fund raise round. Now what does it say about the founders? >> Now if they haven't raised capital before and this is their first round >> and the investor is asking for 25% that automatically becomes a concern because >> the founder is trying to offload 25%. The investor is not asked. You're dealing with the founder in the first instance. If the founder is trying to offload 25% then has the company built enough value for him to offload 25% for that particular amount or why does he want to down dilute so much so quick because for early stage companies especially for startups the more flexibility you have with the capital structure determines how longer your company is going to grow. Now let's flip this. Now, what if you're raising 25% for $10 million? Now, what's your answer? So, obviously, we're assuming it's going to be a relatively more mature, not mature, I would say, but relatively a growth stage company, not an early stage startup. So, if it's a growth stage company, that means that they already would have posted good numbers on their financial statements. They already have a business running, they have repeat customers, they have good retention.

31:25 So in that case 25% for $10 million would be great if we are looking at for example let's say a company that has an ARR of maybe 30 million or $40 million. So that means that they would not be giving away a lot of their equity for peanuts. They're giving away 25% for $10 million. That means that their value is significantly more than that. So in that case it's okay because the promoters will get strategic guidance from whoever is coming in. They will open many doors with that money that they're bringing in. They're they're offer they'll offer them access to global markets to distribution channels to different vendors that would bring in more money than what they're putting in. So I think in that case it's okay. So, for example, if a company is raising $10 million and giving away 25% at a pre- money valuation of $40 million, it's a fantastic deal. I mean, they're diluting 25% at a at a post money valuation of $50 million. That's very good. That's actually standard you know, almost at par with what private equity funds usually demand. So, 25% in that case, it's great. But a very early stage company diluting 25% of the cap that does not make sense.

32:41 Fair enough. So say for example we have two SAS companies and one has a customer retention of about let's say 90 95% and other one has about 70 75%. How would you incorporate this in your valuations >> materially? >> Yeah numbers we'll stick to numbers here. No, it's the valuation is going to differ materially significantly because >> retention is as close to compounding in a business, right? We talk about personal wealth being compounded by discipline. Similarly, in a business, retention is that compounding power.

33:17 Just because you have customers today does not mean you're going to have customers tomorrow or just because customers are bringing let's say x amount of revenue today, they're not going to bring in x amount of revenue tomorrow. So retention becomes very important. If a company is let's say retaining 90% of their customers that means that the first question that investors are going to ask what's going to be your revenue in the next year right what's going to be your revenue 2 years 3 years down the line what what are your future cash flows going to be and if to that investor you're able to show that your revenues for the next 2 3 4 years are locked down that gives them a positive indication because in this case it's probability it's predictability and if I'm being able to predict your revenues that means means my risk is lower and if my risk is lower I'll give you a better valuation multiple.

34:05 >> Great. So companies posting phenomenal growth 2x 3x 4x in terms of revenues and numbers and everything but they have barely one or two clients as in their revenue comes from barely one or two sources. How would you go about evaluating this company? How would you evaluate the risk? We understand it's risky because the source of income comes from barely a couple of people. But what are the other factors you're going to be looking at? >> We're going to be looking at the probability of that consu that that customer impacting my revenue going forward. It could be that in one year that customer is bringing in let's say 90% of my total revenues. In another year, you know, my revenue comes from another client. So what's the continuity of that one single client bringing in a chunk of my revenue? Next, if that client were to disappear tomorrow, how much of a hit are my statements going to take? And will I be able to >> if he's bringing 90% of the revenue, >> will I be able to replace that revenue you know in maybe >> if you can replace that revenue, why not double your revenue by getting another client right now?

35:09 >> Probably we don't have enough capacity. So, it could be it could be multiple things that could be playing that could be, you know, factoring into our decision of that particular client. But as an investor, as somebody who's valuing the company, definitely there would be concentration risk. And that concentration risk, if that client is bringing in 80 90% of your total revenue, that concentration risk would go up to 20 25%. And that would discount your company value by that much. Let's get into a little deep dive here. So say for example, you've got your financial model and projections ready. your forecast suddenly you know the sales growth rate spikes up in the second year but there's no new product launch or there's no new market that you've expanded into new geographies or anything what could be the other possible reasons or how do you question your assumption in that case or the model's assumption in that case so in that case we don't look at the model in that case we look at the business often what happens is that in the model if you're working directly with the promoter the promoter shares a vision And that vision may not always be realistic or financially solid. So in that case you work with the ground level team of the promoter to understand the bottom up figures. So not just looking at it from a top down perspective but working on the numbers bottoms bottom up right how many customers are there right now in the market? What's your market size? Are you able to grow those customers over the next 1 2 3 years?

36:39 what's the pricing in the market currently? Is that pricing expected to increase or can you increase that pricing? Because it could be that you are in a market where you can't overnight increase prices. You can't just transfer costs to your consumers. So are you able to do that? If not, then that growth is not justified. So that growth has to be revised down and that often works from the bottom of the pyramid to the top. You don't start directly educating the promoter. You start first building your own base. You start talking to let's say the operator or the salesperson. You interact with the chartered accountant of that company. You try to understand what the growth trajectory has been in the past and you work your way up. So I'll ask you a few crisp questions. Say for example a founder personally guaranteed a large loan and that's not showing up in the financials. What do you do?

37:27 >> Pause. Stop the transaction. Because if that has happened then we would start to think why did he hide that? What else could he be hiding? Because in this industry, in our industry, in investment banking, >> what if the transaction was related to a family business of his and therefore it was in his name and he is not currently involved with the family business? How do you defend the founder there? >> If that business has materially no impact on the current business and if that does not even come up on the books, then the investors are not interested.

38:00 We are not interested. But again, we would disclose it to the investors. Which number do you think the founders generally tend to inflate? >> Two numbers I think. One is going to be their TAM because they like to believe that they have a $50 million market opportunity. They would spend weeks trying to build up their market or trying to say that I have this big of a market but won't spend 10 minutes talking to 10 customers.

38:23 >> Okay. >> So that often in the early stages naturally. >> Yeah. >> and the other would be their cash runway. So realistically understanding how much cash the business has to continue operations they often tend to inflate that and overestimate themselves in the early stages. >> Say we looking at two companies and one is collecting cash in 30 days and the other in 120 days. where does this difference appear in terms of financials in terms of valuations?

38:48 >> Working capital >> how do you look at it? >> Working capital it it comes on your balance sheet. because if you're collecting cash in 30 days that means your working cycle working capital cycle is very crisp right you're rotating money very >> how much impact does it have on the value issues >> tremendously because when you look at no matter how you are valuing a company if you're valuing a company from let's say an ebida multiple point of view or let's say from from the point of view of DCF discounted cash flows your cash flows will materially be impacted by how quickly you're turning capital your working capital is a significant contributor to your operating cash flow and the first thing that investors look that before they go into all the present value of future cash flows and everything they look at whether your operating cash flow is positive or not or how long will it take for you to make those operating cash flows positive. So you mentioned about TAM being one of the numbers that these founders end up inflating. So my follow-up question to that is that how do you check or how do you look at the veracity of that number?

39:42 >> Investors are not interested in understanding how big the market is. They're interested in how much of that market will you realistically be able to capture. They're more worried about SOM. So if you explain that you know my market is let's say 500 crores but you're able to get barely 1% of that market that's a bad number to show to the investor that after 5 years you won't be able to capture 1%. That means that you're working in a market that's so crowded that no matter how much money the investor pumps in it's not going to make any difference in that case. what in what founders can do is they could work their way from the bottom to the top instead of going through market research reports and saying that you know >> okay >> so you work your way up you understand the market you say that there are I have let's say 100 customers and I know that the top 10 companies in my industry in my city have so many customers depending on what they bring in what the pricing is in the market then you build that market up rather than just quoting research report numbers let's get to a little bit about the markets right now.

40:41 So how do you look at the macroeconomics in terms of inflation and interest rate numbers because interest rates and the cost of money the cost of borrowing does impact the kind of liquidity etc that you have in the markets and the action that is in the market. So how do you look at the macroeconomics? Do you actually try to make projections about it or it is not that important for you? It's quite important because how the economy grows would in turn result in how my particular sector or the the sector that I'm working in for a particular company that's growing and that in turn is going to impact valuations because it's all connected.

41:17 For example, if we talk about the current scenario, rates are high, right? Rates are continuously being increased, right? In that case, opportunity cost of capital automatically increases. Now that does not mean that there is no capital. That just means for investors capital has become much more selective. So they value in this case efficiency. So Rossi return on capital employed becomes a very very important factor for any investor. So when they look at companies they have 500 companies to evaluate. In that case they're going to look at companies with the most efficient operations and the highest return on capital employed. I'll ask you a couple of quick questions. So we've seen a lot of startups moving their base. They were incorporated in Singapore, Mauritius, etc. And now moving base to India because they're looking at an IPO.

42:07 What do you take away from that? What is what is how does that work as an indicator for you? >> Two things. So India definitely has a much deeper capital market right now. >> Okay. So I would say if the if majority of that company's clients, their infrastructure, their operating base is in India, it definitely makes sense to relocate to India or do their IPO in India. If they have a lot of foreign clients and they just have a small back-end team in India, then it makes less sense to do that IPO in India because they don't they won't find that audience in India. but again, the Indian economy is growing very rapidly. the government is bringing in a lot of exemptions for companies, a lot of tax benefits for companies. so in the long run, nobody knows. But at just a broad overview, I would see where they're operating out of. Okay. There have been a lot of down rounds also that have been happening in past few years, especially since the funding winter if I were to say so. if a founder is looking at raising the next round at a lower valuation u what are your insights or advice to the founders? Let's say you have to advise the founder.

43:19 >> So I would say that valuation and often founders confuse valuation with selfworth and that's natural because they've put in years and years of effort and sacrifice into their business. So if somebody says that you are valued at 500 and you believe that you are valued at a th00and you'll take that as a hit on your self worth that you know value. So separating that from reality becomes very important. So you know helping the founder understand the reality that valuation is not you know a reflection of your selfworth that becomes >> could be interest rates risk >> could be interest rates anything. So we we've seen companies you know take a hit on their valuations raise again at a at a lower valuation and then build back up and that happens. If you don't do that then you'll probably end up like snap deal >> because then you end up you know begging for scraps just to pay your employees for their last 3 or 4 months. So we've discussed about structured debt and the popularity of it as well also the investors interest and the from the fund raise side do you think it is posing any kind of or is it exacerbating the credit risk in the Indian economy >> because they're not getting loans from the typical bank loans and the routes and the regular route of fund raise. So do you think that structured credit is posing a is going to be increasing the credit risk in the economy broadly?

44:48 >> So there are a lot of covenants in place when these structured fund structured credit funds they evaluate a particular company. So for example they would definitely look at how much is your EIDA going to service the debt that we bring in. So for structured debt companies raw seed is not very important. Neither is the valuation. They would give you whatever valuation you ask for. And that's my experience with these structured funds because they're not they don't care about the valuation. They care about the regular coupons that you're paying to them and after four or five years how much they're going to get after you get an IPO done. So at that time valuation matters. So what they look at is debt to eida that becomes very very important.

45:24 Is there already existing debt in the company? If there is will piling on more debt make the cash flows very difficult or very stressed. If that happens they'll not go for the transaction at all. No matter how much money that we show that they'll make they won't enter the transaction. So yes, structured credit funds do add a little bit of credit risk to the overall market but there are a lot of checks and balances in place and if the company has strong eida and their debt to ebida ratio is typically in the 2 to 4x range then it's a good call for that company to raise structured credit. If it's higher than four or five that's a red flag. So let me give you a couple of hypotheticals and let's see what's your reaction going to be. A client signs a private mandate with you but behind closed doors reaches out to the investor directly and I actually have an experience of this being done to one of my students that I know. So what do you do? How do you react to that?

46:27 >> It's always better to have a conversation than go the legal route. So this one instance I was talking about because my students are there they share and they seek advice and all. So he had to go for a legal route. So okay so if you're not taking the legal route route what do you do >> if I'm not taking the I never prefer taking the legal route right away. First instinct is to be to have a conversation.

46:51 >> What if that's not working out? I mean if if that does not work out then eventually it's the legal rule but the the first few steps are going to be to understand and usually you know as I've been saying from the beginning the entire investment banking private equity industry runs on trust so there's nothing that happens today that won't be known to the entire community in the future. >> So it's going to have a lot of repercussions. So, so since you talked about trust, >> I'll cut through and have another question here. So, what if there is a deal going on and it's almost at the, you know, you're just about to sign the term sheet, etc. Now, you get to know something about your client and if you disclose that to the investor, the deal might fall apart or the valuation comes down. What would you do in a situation like that? In that case I I think our responsibility definitely becomes to disclose that but disclose it intelligently. I mean, hiding information is much worse than bad information, especially when it's, you know, a few months into the process because if right now you're getting a value of 500 from an investor and if you hide something and that's material and it comes out two or three months into the process, your value would come down immediately to maybe 50 or 100. It's it's that impactful. But if you disclose it from the from from the beginning, right, then they factor that into your discussions and you are also able to >> but the founder is going to end up abusing you to get a lower valuation. So you handle it intelligently.

48:29 >> Yeah. >> But then the valuation goes down. >> That's okay. If it goes down, the founder has the option of firing us and hiring another banker, but they're going to tell them the same thing that u if you disclose that and if it comes up, then the banker is also in trouble. So you have to play the game ethically. So let me give you some interesting thoughts. If every founder had unlimited money without giving up ownership, what would go wrong? They would not have accountability. Restricted capital helps them allocate capital effectively.

48:59 There's something called u dry powder with investors that they have too much of idle cash. Similarly goes for companies. If you have too much of idle cash, you won't know where to deploy them. Especially if you're in your early stages. What if AI is able to write the perfect financial model and the perfect pitch deck? What do I need you for? >> Founders don't hire me to build a pretty pitch deck or to develop a very detailed financial model. Nowadays, we have so many AI tools. You have Claude, Gemini, Chad, GPT that could build much better pitch decks. AI reduces the information asymmetry.

49:38 It can't account for execution asymmetry. So AI can't go and run transactions in front of investors because AI is an analytical tool. It helps it it should be a tool. It can't be your entire >> Do you believe the numbers that an AI financial model throws at you? >> Absolutely not. >> Absolutely not. Because I've I've seen AI built financial models that >> So how do you use AI to your advantage when you don't believe the output thrown by it?

50:09 >> I use AI very systematically. I don't use AI to build financial models. so generally when you're working in an industry like this, you have a set template. You have a set model. and when you're building a financial model, you have to understand that your assumptions, revenue and expense sheet are the only sheets that you're working on. All other sheets should be completely automated. You should not have to edit a single number in those sheets. It has to be linked to your assumptions sheets. and your assumptions primarily are, you know, your growth drivers, expense drivers, and you know, your revenue and expense sheets. Now, if you've built that, you don't need an AI tool to work on that. If you're using an AI tool, you're just lazy in that. the time that I spend working with the promoters understanding their business and it's very interesting because I if a if a company has let's say five different product lines if they're working in five different markets if they have four different channels through which they're selling their products I sit down with the promoter and I understand each of those no matter how big the permutation and combination becomes because as I said if you're doing a private equity round the first line of defense becomes the banker so if you don't understand the business well then how Are you able to pitch to the investor about that business? And if you use an AI tool to build that financial model with you, you'll never be able to have that command over the numbers that you would have if you're building the model from scratch. I believe that the markets are changing too drastically.

51:36 Markets, economy, technology, the way you're working. How do you keep yourself at par? What do you do for your learning and development? >> Surround myself with the people who are more intelligent than me or who know more about life or markets than me. I try to spend time with promoters you know not because I have any transaction pending or I want any monetary value out of the conversation with them >> but you know often even after a deal is complete or even when the deal has hit a you know a slow phase I just sit with them and I I ask them questions that you know tell me something about a time that you know you thought that you might have to wind up the business and then how did you recover from that what has been the most challenging part of setting up this business or what what problems that you go through in your >> so these are the experiences and the sharings and all but apart from that in terms of maybe say for example macroeconomic variables so how do you stay at power or updated with that >> you read you watch news you don't just focus on the sectors that you are working in currently you keep yourself updated with whatever is happening in the market so I know that you know AI is going to play a huge role in in in finance in the entire finance industry going forward. So that would be very stupid of me to not start learning AI tools and how my work could be integrated using AI. But does that mean that I have to do everything using AI?

53:01 No. So it's it's all about adapting. It's about reading. It's about watching the news and it's about always forming scenarios. So if you're being curious enough, if you're seeing, for example, the the war that's going on in the Middle East right now, how that could impact something in India, a business that's being set up in India. So if you're curious enough to find that out, that's where you know, you're you're able to understand markets better and apart from that, that's just keeping yourself keeping yourself updated with whatever's happening.

53:33 Good. So I think I have asked too many questions. So do you have any question for me? >> What I would like to ask is I've already worked on so many transactions in the past. I've worked on different ticket sizes. I've worked with startup founders. I've worked with big promoters who scaled up their businesses. And I know that I will learn wherever I go. But I'm also looking for change. I'm looking for an opportunity to challenge myself. So what kind of opportunities do you think that I could get over here?

54:07 >> Okay, lovely. So I'm going to get back to you on that answer in terms of what opportunities to challenge you we could have over here. Thank you so much and all the very very best. So firstly I'm going to be extremely biased because it is Ritwick not only my student but my colleague for many many years starting with an internship but phenomenally answered all the questions and I'll tell you I'll take you through the small nuances that you might have missed out while hearing him answer the questions that I have been posing with one I was very happy that he talked about the psychology part of it because yes we do very often do not understand the importance of the soft skills and if you've noted in classes I have told you people number of times that you really need to look at psychology. I've told you this example from the point of view of understanding how Instagram or the social media works and how people play on our psychology in order to game us in order to make us spend our money on useless things or in order to draw a particular narrative. you might even want to look at a book called narrative with numbers. So Ashwad Damod had written about it in your left brain and the right brain and if you're good with numbers also brush up your narrative and if you're good with the narrative part then brush up on your numbers. So as investment bankers whether it's a boutique investment banking firm or a larger one you'll have to level up on both the fronts the numbers and the narrative. So if you want you can check that book although I've not completed the one but I'm somewhere in the middle.

55:27 Second is when you're looking at answering questions he had shared a lot of cases in one of the clients. So he's validating it with his experience. So even if you're a fresher but you know if you can take examples like a snap deal he took or a biotech industry he took. So try taking examples because that shows that you read, you observe, you're able to extrapolate those kind of situations in the industry to the question being answered. You have that presence of mind. You have that ability to recall things at the right time to connect multiple things together. You have that mental models going on with you. So very very happy about it. There are terms that you know for example he talked about using a hockey ch he talked about biotech companies having a hockey stick kind of a growth chart having that terminology also adds a little flavor to your conversation. So for example if you go to a Microsoft Excel or a PowerPoint or whatever and you see the graphs over there do you understand the difference between a bar chart versus a stacked bar chart stacked graph and versus a pie chart or whatsoever. So having the right terminology is also very important because when we are in the same industry let's say an investment banking space so is my language the same as yours because the moment you say a hockey stick you don't have to show me with a finger or something or you don't have to draw it I can immediately visualize that so do we have that or not second is if there are terms that you have not been able to understand for example a veto power or something go back and read upon it and it's absolutely fine to be able to say that I do not understand the term or a particular question in the interview that's absolutely fine. Of course, he was well versed given his experience and he was able to answer. So one treat it as a learning exercise for you where you go back and understand those answers and all. second is where he was talking about certain instances he did mention ethics and he did mention that he's looking at the long term that you know even if I lose a deal in the short term I have to maintain a repetition for me and my company in the long term. So that is something that has come out in a few answers. So you have to always you know portray not portray I would say rather you'll have to prove yourself and bring out that ethical quality in you to the interviewer. They need to understand that and if you're just trying to portray and you're not that person then obviously the interviewer is smart enough to be able to understand that part in a couple of questions if you would have noticed. So Ripik just simply clarified the question with me.

57:45 He asked me a couple of follow-up question. Do you mean this? Do you mean 25% or in some question do you mean that revenue is going to grow up or do you think that the promoter is involved or do you think so he's asked me a couple of counter questions one to have more information about the question and two to also buy some time he's able to buy some time by asking me counter questions or related questions around it. some very amazingly crisp answers given in terms of you know u there was one question where about we were talking about the customer retention and everything and he's giving you numbers in terms of you know that the probability goes down the risk goes up and therefore the valuation comes down because the multiples are going to be poor so you have to be very good with your fundamentals in such a way that if I'm asking you a hypothetical scenario based case based question you're able to apply that knowledge to your fundamentals and being able to give me those answers that you know and give me that chain that chain of thought which leads you to tell me that you know the valuation is going to be low because I want to understand how you think how you process those steps and how are you able to come to a conclusion for a hypothetical question that I'm asking you there's there's one so you have to be a little careful about your language so instead of a bottomup approach he ended up saying bottoms up so I'm not sure what kind of party life he's living but you have to be also very careful in terms of the kind of language and the common parliament you have. I hope you don't end up using a slang or something while you're you know interviewing for something and just to let you know that yes when you're being interviewed I'm giving a feedback over here because that's the reason why we are doing in order to educate you but the interviewer you might think that you've gotten away with a lot of things but u one you cannot fool a teacher and second is that the interviewer is going to be noticing those smallest of things even if you were just halfway there saying something. Second is he used the word tremendously in a place where I don't think that kind of a hyper bowl was needed. So where you're trying to say that you know something is high low don't try to use too much of hyperbols although it was barely one or two instances that he did but try to use less of hyperbols like tremendous extreme. So try to use less of those words because then the words lose meaning right in places again depending on the role depending on the person you're talking to. he gave a couple of lines in Hindi that's absolutely fine. Now if say for example I'm interviewing for a company where the clientele is going to be very foreign based and all in that case my English has to be absolutely immaculate but if I am interviewing in a role where the language is not a barrier it is the concept the terms you know the execution or whatsoever but not so much of the language be feel free to talk in Hindi provided the other person understands Hindi so you can just take permission the other person may not be well conversant with Hindi so you can do that but if you're more conversational in English that's absolutely fine again as I said given the kind of role you're applying for given the kind of clientele that the company works for another thing that if you would have noticed was his hand gestures so his hand gestures were absolutely fine it was not too much where it is coming in front of his face it was not so much that it is absolutely on the table mine were on the table because I'm kind of judging him at that point of time so your body language says a lot so my body language may not need to you know communicate a lot of warmth or something for him. Normally the interviews are pretty normal. It's not that somebody is going to be doing a rod show with you or something like that. But the interviewees body language is very important because I am the one judging. The interview is the one who is being judged. So having a little bit of hand gestures is good as long as it is not disrupting your flow of thought. I was feeling very proud in places where you know he mentioned about the sheets are so automated that there's only one or whatever x number of input sheets and everything else the process sheets are all automated and the output sheets are what we look at so I'm so happy to see him learn and put to use all the things and a lot of answers he gave and I'm just feeling very happy inside you know that I've taught him well in a lot of places so very very happy that we did this and I hope that you learned and you take away those smallest of nuances from the interview and don't get intimidated by the answers he's given but rather try to learn from it and try to understand what kind of questions can turn up what kind of answers you need to prepare what kind of reading you need to do in terms of the industry in terms of the startup space in terms of the macroeconomic side of things and also understand the importance of having conversations. So where he talks about you know meeting promoters and trying to get an understanding of why they took whatever decisions they did how did their story pan out. So talk to more people, take initiative, talk to people in your friends and family who are working in different profiles, who are doing businesses. Try to gather as much of their experience and learn from all of that as well. So make the most of your family functions etc and your social events as well. And all the very very best for your interview whatever you're preparing for and I hope you keep learning and keep investing in