<p>Here is an example of what investment bankers do:</p>
<ol>
<li><p>Small company with interesting brands or technology needs capital to expand (spend on additional people, marketing, infrastructure).</p></li>
<li><p>Investment banker spends days doing “due diligence” on the company, interviewing management, examining products, analyzing markets: essentially building a case for value in the company.</p></li>
<li><p>Investment banker prepares forecasted income statements, balance sheets, and cash flows for the company based upon realistic assessment of company prospects drawn from due diligence and market analysis (essentially, are the company’s products or proposed products marketable at prices that provide a net profit to the company?)</p></li>
<li><p>Investment banker then determines, based on his/her judgement of quality of company management, credibility of projections, competitiveness of market impacting achievability of projections, what the risk of gain or loss of an investment in the company might be (remember, the company was seeking new investment in order to pursue its market opportunities).</p></li>
<li><p>“Risk” is a judgement call made by the investment banker, and is usually incorporated into a percentage figure known as the “discount rate.” </p></li>
<li><p>The discount rate is applied to the forecasted net income of the company and yields what is known as a “present value” for those forecasts. The present value of the forecasts represents the value of the business (a business is only “worth” to an investor what it can produce in the future in terms of future profits)</p></li>
<li><p>The amount the company seeks for investment is then divided by the present value of the company and the resulting percent indicates the amount of ownership of the company that the company will have to give up to an investor for the investment amount being sought. The company may or may not want to give up the percentage ownership as derived by the calculations and analysis made by the investment banker. But, there it is.</p></li>
<li><p>The investment banker then is charged with going out and actually raising the investment amount on behalf of the company.</p></li>
</ol>
<p>So: essentially what an investment banker does (at least in this particular incarnation, of which there are many) is to determine the value of an “investment” and then go find the money.</p>