Dec 18, 2023

The Founder’s Guide to Outsourcing vs Hiring Capital Markets

Arc Team

Go-To-Market

There comes a time in every founder’s journey when it makes sense to outsource or hire a dedicated individual to own and run the capital markets function. Typically this juncture is reached when a startup needs to raise its first significant debt capital and the founder doesn’t have the necessary expertise or experience to run the process. Early-stage startups most frequently outsource this function (as it is more cost-effective), while later-stage startups with more complex capital requirements and ongoing needs typically open a role internally. In this guide, we break down the capital markets function, exploring what the key responsibilities entail, what factors to consider when deciding to hire or outsource, and what “success” looks like. Ready? Let’s dive in!

What the capital markets function does (and doesn’t do)

The capital markets function in a startup is multifaceted and crucial for the company's financial health. While the specific responsibilities vary based on the startup's stage, outlined below are some of the common responsibilities associated with the function.

Investor Relations: Maintain relationships with investors, private equity firms, investment banks, bank and non-bank lenders, and strategic partners.
Fundraising Strategy: Develop and execute fundraising strategies aligned with the company's growth plans. This may involve a combination of equity financing, debt financing, and other capital-raising activities.
Financial Modeling: Create financial models to assess the impact of various financing scenarios on the startup's financial performance.
Deal Structuring: Structure deals that are favorable to the startup while meeting the needs and expectations of lenders.
Capital Structure Management: Optimize the company's capital structure by evaluating and selecting appropriate financing instruments. This includes managing equity, debt, and convertible securities to achieve a balanced and efficient capitalization.
Risk Management: Assess and manage financial risks associated with capital markets activities. Develop strategies to mitigate risks and ensure the startup's financial stability.

You’ll notice that some of these overlap with the finance function—that’s intentional, as capital markets and finance teams should work hand in hand when raising debt or managing an active debt facility. That said capital markets teams typically do not manage the day-to-day finances: they’re not responsible for budgeting, expense & spend management, or facilitating payroll.

The responsibilities of capital markets teams vs finance teams

As mentioned above, while there is some overlap between the capital markets and finance functions, there are some distinct differences. Outlined below are the key differences between the responsibilities of capital markets and finance teams in a startup.

Capital Markets Function Responsibilities

External Financing: Capital markets teams primarily deal with external financing and fundraising activities. They are responsible for raising capital from external sources, including equity investors, debt markets, and other financial institutions.
Investor Relations: Capital markets teams establish and maintain relationships with external investors. They communicate the startup's financial performance and strategic initiatives to lenders, analysts, and the broader financial community.
Capital Structure Management: These teams focus on optimizing the startup's capital structure. They assess the appropriate mix of equity and debt financing, as well as other financial instruments, to support the company's growth objectives.

Finance Function Responsibilities

Day-Day Activities: Finance teams within a startup focus on internal financial management, such as budgeting and financial reporting.
Cash Flow Management: Finance teams closely monitor and manage the startup's cash flow to ensure that the company has sufficient liquidity to meet its short-term obligations.
Expense Management: Finance teams work with different departments to manage costs and ensure that expenditures align with the company's financial goals.
Financial Reporting and Compliance: Finance teams prepare financial statements and reports to ensure compliance with accounting standards. They communicate the financial performance of the company to internal stakeholders, such as executives and board members.
Treasury Functions: Finance teams manage the company's treasury functions, including banking relationships, investment decisions, and foreign exchange risk management.

What success from the capital markets function looks like

Ultimately, the goal of a capital markets team (whether internal or external) is to secure additional capital for the startup and ensure that it maintains compliance with the stipulations of the deal. Outlined below are some of the other factors that determine if the function is “successful”.

Optimal Capital Structure: Success is achieved when the capital markets team establishes and maintains an optimal capital structure (which varies by company). This involves balancing equity and debt components to support the company's growth while minimizing financial risk and it sometimes involves pursuing a recapitalization.
Strategic Partnerships: Success may involve establishing strategic partnerships with financial institutions, investment banks, and other key players in the financial markets.
Effective Deal Structuring: If the startup engages in debt issuances, success is achieved when the capital markets team effectively structures the deal: favorable terms, pricing securities appropriately, and enough capital received.

Outsourcing vs hiring for the capital markets function

Similarities and Differences Between Hiring vs Outsourcing

The key similarities of outsourcing vs hiring for the capital markets function

Strategic Alignment: Both hiring and outsourcing aim to align capital markets activities with the startup's strategic goals and financial objectives.
Market Expertise: Whether in-house or outsourced, a successful capital markets team requires expertise in market dynamics, fundraising, and financial strategy.
Goal of Financial Stability: Both approaches share the common goal of achieving financial stability through effective capital markets management, including fundraising, lender relations, and financial planning.

The key differences between outsourcing vs hiring for the capital markets function

Control and Oversight: Hiring provides greater control and oversight as the capital markets team operates within the company, while outsourcing may involve relinquishing some control to external service providers.
Cost Structure: Hiring typically involves fixed costs such as salaries and benefits, whereas outsourcing often offers a more variable cost structure, allowing startups to pay for services on a project or contractual basis.
Flexibility and Scalability: Outsourcing provides more flexibility and scalability, enabling startups to quickly adapt to changing capital markets needs without the challenges associated with hiring or downsizing an in-house team.
Speed of Decision-Making: In-house teams may facilitate faster communication and decision-making, given their proximity to internal stakeholders, while outsourcing may introduce communication challenges due to geographic distance.

The Pros and Cons of Hiring vs Outsourcing

Hiring for Capital Markets Function - Pros

Better Alignment: In-house teams can better align with the company's culture, values, and strategic goals, fostering a more cohesive and integrated approach.
Faster Communication and Decision-Making: Direct communication within the company can lead to faster decision-making and better coordination.
Immediate Access to Information: In-house teams have immediate access to internal information, financial data, and key stakeholders, facilitating quicker responses.

Hiring for Capital Markets Function - Cons

Higher Initial Costs: Building and maintaining an in-house capital markets team can lead to higher initial costs, including salaries and benefits.
Limited Needs: Most early-stage startups simply do not have enough capital markets work to justify bringing on a full-time hire.
Dependency on Individual Talent: If key members of the in-house team leave, there may be a temporary loss of the function until it can be backfilled.

Outsourcing the Capital Markets Function - Pros

Upfront Cost Savings: Outsourcing can be a cost-effective solution, as the startup pays for services on a project basis or through a contractual arrangement, avoiding the fixed costs associated with hiring full-time employees.
Access to Specialized Expertise: Outsourcing allows startups to tap into a pool of specialized talent with a wealth of experience in capital markets in specific industries, providing a higher level of expertise than single-member in-house teams.
Highly Flexible: Outsourcing allows the startup to easily adjust the level of support based on changing capital market needs without the challenges of hiring or downsizing.

Outsourcing the Capital Markets Function - Cons

Communication Delays: Communication challenges may arise due to geographic distance and time zone differences, impacting the speed of decision-making and responsiveness to market changes.
Lack of Company-Specific Knowledge: External providers may lack a deep understanding of the startup's unique history, culture, and industry, leading to a less personalized approach to capital markets activities.

Costs associated with the capital markets function

Bringing on an experienced Head of Capital Markets for your startup will cost between $150,000 - $250,000 depending on your stage and the candidate's location. Generally speaking, the later your stage, the more expensive this individual is going to be because they’ll be faced with more complex issues (and thus need more experience). Eventually, you’ll need to bring multiple people into the capital markets team with specific expertise in each of the functional areas, which compounds the costs.

Outsourcing a single capital market raise is a much more cost-effective alternative for early-stage startups that only require short-term help. Depending on the size and location of the firm, it can range from 2-5% of the capital raised. Boutique firms with industry-specific expertise typically charge more for their services than larger, more generalist firms. Outlined below are some of the common fees that you may encounter when outsourcing.

Retainer Fees: Capital markets firms typically charge retainer fees, which are upfront payments to secure their services—these can range from a few thousand to tens of thousands per month.
Success Fees (Transaction Fees): A significant portion of the compensation for capital markets firms often comes from success fees, also known as transaction fees. These fees are usually calculated as a percentage of the total amount raised and are payable upon successful completion of the debt raise.
Advisory Fees: In addition to success fees, some capital markets firms may charge advisory fees for their strategic guidance and expertise throughout the debt-raising process. Advisory fees are separate from success fees and retainer fees and may be structured as a fixed amount or a percentage of the transaction.
Expense Reimbursement: Clients are typically responsible for reimbursing the capital markets firm for various expenses incurred during the debt raise process. This may include travel expenses, legal fees, and due diligence costs.
Legal and Compliance Costs: These costs cover legal services related to drafting documentation, ensuring regulatory compliance, and managing legal aspects of the transaction.

Wrap-Up - outsourcing vs insourcing the capital markets function in 2024

Capital markets is an increasingly important function as a startup scales its operations. Deciding whether to outsource vs hire someone internally to run point, is a question we often get asked. Hiring someone dedicated to the function can lead to better alignment and faster communication with lenders which can help improve the odds of success, however, the higher initial costs and lack of ongoing work can prove challenging to swallow.

Outsourcing the function is more flexible and cost-effective as it is typically project-based, so startups only pay when they need help, however, the costs add up over time (e.g. 2% fee of $10M is $200k, the same as it would cost to hire an FTE). Ultimately, we believe that until startups are large enough to have ongoing capital market needs, it makes more sense to work with an outsourced organization. If you’d like an extra set of eyes (or hands) with your capital markets strategy, or if you need introductions to lenders, we’d be happy to help—get in touch with us.