Technology has been one of the most dominant industries over the last few decades, and it’s no surprise that investment banks wasted no time building their own division dedicated to tech advisory to get a slice of this lucrative business. So how exactly does technology investment banking work?
Technology investment banking refers to an industry group advising tech companies on debt and equity issuances, private placements of capital, and strategic transactions like M&A and restructuring. Its main focus are software, internet, hardware & equipment, semiconductor and IT services markets. Some investment banks have dedicated technology groups, while others put them in the larger Technology, Media & Telecom (TMT) subset.
Due to how most big tech companies are clustered in North America (particularly the US), technology investment banking is the most prominent in this region. Asia is also home to tech powerhouses like Samsung, LG, TSMC, Alibaba, Tencent. Europe’s tech game isn’t as strong as the other two, with one truly memorable name being Spotify.
1.1. Technology, Media & Telecom (TMT) vs. technology investment banking
TMT investment banking includes media and telecommunication industries rather than just tech. This subset exists because these three are connected to each other: Media companies produce content, telecom companies deliver the content, and tech companies provide the necessary software, hardware and equipment for the consumption of content.
In recent years, there has been increasing convergence between companies in this segment. The most notable are Netflix and Disney. Netflix began as a tech company that brings others’ content to the public, but has shifted to creating original content. Disney also started out making cartoons, but is now also a broadcasting powerhouse.
1.2. Sub-sectors within technology investment banking
Technology can be divided into five smaller sectors: software, internet, hardware & equipment, semiconductor and IT services. Investment banks may split tech into dozens of subsets, but these five should be the most common and easiest to understand.
Software is one of the most diverse fields, with mature companies like Microsoft, Oracle, Adobe, rising stars such as Netflix and Spotify to countless start-ups. Most software companies today offer software-as-a-service, where customers pay monthly or annual subscription fees to use the software. This makes metrics like Customer Acquisition Cost, Lifetime Value and Unearned Revenue more common.
Internet is includes a wide variety of services like e-commerce (Amazon, Alibaba, AliExpress,…), social networking (Facebook, Instagram, Twitter,…) to search engines and “do-everything” (Alphabet (Google), Weibo,…). Most companies focus on user growth, monthly active users and average revenue per user. Some companies like Facebook and Google heavily rely on advertising revenue and microtransactions, while for marketplaces like AliExpress and Amazon, gross merchandise value (GMV) is crucial.
Hardware & equipment include companies like Apple, Samsung, Tesla, Dell, Foxconn. They are essentially manufacturers, making their operation capital-intensive, and more similar to industrial companies than the previous tech sectors. Gross margins and cash flows, therefore, are extremely important.
Some hardware & equipment companies are consumer-oriented, providing services to end-users like Apple, Samsung, Dell,…), some are business-oriented, providing manufacturing services for other enterprises like Foxconn).
Tesla is a special case. Some consider it a car company (because it builds and sells cars), but Tesla is heavily involved in developing batteries, solar panels, and most importantly, self-driving car software (which is also pursued by Apple, Microsoft and Google), making it more tech-focused than a conventional car company.
Semiconductor is another capital-intensive tech industry. These companies build the insides of equipment like CPUs, RAM and graphics cards. In general, semiconductors are very similar to hardware and equipment, though the industry itself is highly cyclical. News about new products, or the recent supply shortage can easily shoot up demand. An example of a semiconductor company is TSMC.
IT services consist of two smaller subsets: the data processing & outsourced services (Visa, MasterCard, ADP, Western Union) and the IT consulting services (Accenture, IBM). For data processing & outsourced services companies, key drivers include the data they can access, or consumer spending for Visa and MasterCard. For IT consulting firms, business spending and outsourcing are the major drivers.
2. Why Technology Investment Banking?
The most convincing argument for joining technology investment banking is simply how big tech is. Big tech companies are dominating the market, while tech start-ups never stop growing. The market is always lucrative, with diverse deal types from billion-dollar M&A to IPO or private placements. Their dominance has survived the test of time, and is not easily replaced.
2.1. Big tech companies are dominating the market
Over the past decade, tech companies have dominated the US and global stock markets. The industry has been one of the most lucrative for investors and investment banks. In fact, eight out of ten largest global companies are tech:
The largest companies by market capitalization
Recent tech stars are also among the fastest growing companies. Just look at Tesla, whose share rose from around $60 in early 2019 to $700 in September 2021. That’s over 1100% gain in less than two years!
Tesla’s stock growth from 2019 to now (Source: TradingView)
Not to mention the number of tech start-ups right now, looking either to go public or sell to the highest bidder.
The point is simple: Tech’s dominance presents deal varieties and opportunities for tech IB, from IPOs and raising debt for start-ups, to billion-dollar M&A for the big boys.
Market share of technology investment banking only falls short to financials (Source: Financial Times)
2.2. Other industries may displace tech in the future, but tech will not go away
History tends to repeat itself. Tech was once dominant in the 90s, but then came the dot-com bubble. Energy later replaced it to become the biggest player, with the likes of ExxonMobil, PetroChina, Petrobras and Shell.
Today, in the age of Covid, the emergence of biotech may pose a challenge to traditional tech companies. Pfizer, BioNTech and AstraZeneca are taking the spotlight thanks to their vaccine success.
The Nasdaq index, where most tech companies are listed, during the 2000s dot-com bubble (Source: TradingView)
But don’t lose hope on tech yet. Here are three reasons why tech, and tech investment banking, are here to stay:
- Tech’s position is not easily challenged. After the dot-com bubble, tech rose back even stronger in the mid-2010s. Today 8/10 largest companies are tech. Even in another bubble burst, tech companies will find new ways to regain their place as the leading industry.
- Tech is always in fashion. It is ever-changing, and always has something new to bring. The industry itself is extremely competitive, requiring companies to adapt to stay ahead of the game. Not many industries have stood the test of time as good as tech (not even banking).
- Tech has few barriers to entry. You can easily start your own tech company in your garage and make a fortune (like Jeff Bezos did!), but to start a biotech company, you will face all sorts of restrictions from the government, the FDA and other regulators. That’s why there are so many tech start-ups, and so few biotech start-ups. It also means more deals in tech for banks!
3. What Does a Technology Investment Banker Do?
Tech investment banker’s job aligns with what a normal investment banker does: working on deals, pitch books and financial modeling. However, there’s a difference in what you will do in a small boutique bank and in a larger bank.
In small boutique banks, you will deal mostly with tech start-ups in funding stages. Expect to work mostly on small private placements. Modeling and valuation are limited. You can gain market exposure here, but won’t get anything useful for exit opportunities.
In larger banks and elite boutiques, you will really get to work with big tech companies on M&A deals and leveraged buyouts, with occasional debt issuances.
There are also differences between sub-sectors. For more mature sectors like hardware, semiconductors and IT services, you will focus more on profitability and cash flow. In software and internet, you will encounter both mature firms with stable earnings and cash-burning start-ups.
4. Salaries & Compensations of Technology Investment Banking
For bulge brackets and elite boutiques, annual base salary starts at $100k for first-year analysts, with 60-100% year-end bonuses, bringing total compensation to $150k-200k. For associates, annual base pay starts at $150k, and total compensation ranges from $250k up to $400k.
The work hours are still intense: expect to work up to 100 hours per week during busy deal times at junior levels. As VP, your annual earnings go up to the sub-$1-million, and as MD, you can easily earn 7 figures. But in reality, not many bankers actually reach these levels to enjoy the hefty pay.
For middle market investment banks, expect these numbers to be around 20% lower, and for regional boutiques, expect them to be at least 40% lower, but with better work-life balance and worse exit opportunities.
Here’s a table to sum everything up:
5 years with strong performance
Depends on performance
5. Exit Opportunities for Technology Investment Banking
Tech investment banking offers excellent exit opportunities thanks to its deal diversity. Private equity, venture capital, hedge fund and corporate finance are all the standard exits. Tech investment bankers can even jump into tech, or start their own company with what they have learned from the industry!
Private equity and venture capital should be the best exit for ex-tech bankers, simply because of how closely these industries relate to tech. If you are more trading-oriented, tech-focused hedge funds are also a viable choice. Bulge bracket and elite boutique bankers exit to mega funds, middle market bankers exit to middle market funds.
Joining one of your clients is also great if you are looking for a different experience. Financial analyst positions at big tech companies such as Google, Amazon, and Facebook offer competitive salaries with great work-life balance. Joining a start-up or starting one is another choice if you like taking small things to greatness.
6. Top Technology Investment Banking Firms – 2021 League Tables
Technology Investment Bank League Table:
- Qatalyst Partners
- Goldman Sachs
- Morgan Stanley
- Merrill Lynch
The best tech investment bank is arguably Qatalyst, an elite boutique located in the US tech hub of San Francisco. Its founder, Frank Quattrone, helped bring dozens of tech companies like Cisco and Amazon during the 90s tech boom. Other elite boutiques like Lazard, Evercore, Moelis, Centerview are also gaining more exposure.
All the bulge brackets are the most competitive tech investment banks. Goldman Sachs, Morgan Stanley, JPMorgan, Bank of America Merrill Lynch, Citi are all involved in tech mega deals.
Upper-middle market investment banks like Harris Williams, William Blair, Jefferies, Raymond James all have strength in tech.
7. Common Pathways to Technology Investment Banking
Tech investment banking follows the same standards as all investment banking. Your education’s quality, GPA, work experience and networking efforts all make an impact on your chance to get an offer.
A difference between tech IB and other IB is since the tech industry is so active with start-ups looking for funding, there are hundreds of tech-focus boutique firms. They can be a good entry point into the field, but you would want to avoid working there full-time due to the lack of deal and modeling experience.
Having tech background and experience (engineering, computer science degree, etc) is a plus, but not necessary. You will still need to focus on the financial aspect of the tech industry.
7.1. For undergraduates
As college students, your best chance to break into investment banking is through summer internship programs, and land a full-time offer after your internship. Start as early as possible because the recruiting process is now hyper-accelerated. Freshman and sophomore years are golden times to secure a summer analyst in junior year. Try to get relevant finance experience like private equity and boutique investment banking internships (there are no short of small tech boutique IB to find), then leverage on your experience and network to get a summer analyst position.
Middle market investment banks are another choice if you are unable to secure a bulge bracket offer. They are slightly less competitive, but you still need some networking and selling your banking experience. Big 4 valuation, private equity, and hedge fund internships can be viable options since they provide significant overlaps, or deal directly with investment banking.
7.2. For graduates
Graduate students from top MBA programs stand a good chance to get into bulge bracket firms, given the prestige and alumni network. Banks recruit on-campus at target schools. Your best chance as a graduate is to land a summer associate offer after the first year of your MBA. Networking and resume tailoring are prerequisites.
Graduates outside of top MBA programs can still land a bulge bracket offer, if they have good experience and network hard enough to get through. Other than that, middle market banks are more feasible options.
7.3. For professionals
Professionals with experience in Big 4, consulting, valuation firms, or even tech companies can hop to investment banking associate positions or customized professional programs. The key to win offers at big banks is to stick with a relatable practical work and an extensive network with investment bankers.
Your best shot if you are looking to move to banking from other industries is to join a middle market or regional boutique bank. Bulge brackets and elite boutiques are difficult, but not impossible, if you network hard enough to make your way through.
8. How to Get Into Technology Investment Banking?
Getting into tech investment banking is a long and enduring process. You have to do everything from tailoring your resume, gaining relevant finance experience, to networking past the screening round. After all of that hard work, the interviews are your final obstacle between you and that dream job. You will spend months, even years to prepare, but with hard work and determination, anything is possible.
Step 1: Gain finance-related experience
Try to get relevant internships like corporate finance, private equity or venture capital, or join banking student societies. As a recent grad, you will need a full time job that is related to finance. For MBA students, if your full-time experience is not related to finance, then you should do a pre-MBA internship before the MBA begins.
Step 2: Build an investment banking resume
The resume round is where 60% of candidates are eliminated, so tailoring yours to make you stand out is a crucial task. Bankers only spend a few seconds scanning a resume, so find what the bank wants, and show that you possess the attributes of an investment banker. Normally in your resume, show that you have:
- Proof of academic excellence: You went to a target school, had great GPA, graduated with honors
- Qualities of an investment bankers: You have strong numerical and analytical ability, have great teamwork/leadership and communication/interpersonal skills
- Interest in finance: You’ve done finance internships, did multiple finance courses, earned finance certifications, traded stocks, participated in finance competitions, etc.
The key to get your resume passed is to make it stand out. For more on that, visit BankingPrep’s article on how to write a banking resume here.
Step 3: Network to pass through the screening round
One of the most important parts of networking is to push your resume through the screening round. There can be thousands of resumes just like yours: Ivy League, 3.7 GPA, Honors, etc. Knowing someone personally from the bank can really make a difference.
Try to focus on your school’s alumni first so both have a connection. Find them on LinkedIn and your school database, and email them to ask about the recruitment process or conduct informational interviews.
Cold calling and cold emailing to ask directly for a job can work, but should only be used as a last resort.
Start your networking effort as soon as possible, since now the recruiting process is so accelerated it’s crazy how early you have to get ready for it. You might even have to decide from year 1 if you want to pursue banking or not just to catch up with recruitment.
For more networking tips, visit another BankingPrep’s article here.
Step 4: Complete the interview process
You will face two rounds of interview before getting an offer: the HireVue and the Superday. HireVue will focus on “fit” questions like why tech banking, why us, your strengths and weaknesses, etc. Try to be professional, articulately answer all the questions and you should be able to proceed to the next round.
The final interview round is called the Superday (Assessment Center in Europe). This is where your technical abilities and your mental stamina are tested to the limit. Candidates will have to get through an intense interview day (simulating real working pressure of a banker) with a myriad of questions hinged on their respective division. You may have to face up to 10 interviews in just one single day, so be well prepared for that.