Generating Deal Flow

Historically, private equity investors, particularly angels, found their deals using such informal means as referral from family and personal contacts (e.g., friends, associates, and so on) or referrals from professional service providers (e.g., attorney, accountant, or investment advisers); or they may have received an unsolicited contact from a nonfamily representative of a company seeking financing. If this were true today, and these channels were the only means available, entrepreneurs would be limited to investor development approaches, such as networking with friends, family, associates, and colleagues of wealthy individuals; and cultivating referral sources among advisers to the wealthy, such as financial advisers, investment bankers, doctors, securities attorneys, accountants, tax advisers, certified appraisers, entrepreneurial finance consultants, commercial bankers, and preferred SBA lenders. In addition, entrepreneurs would rely on cold calling leads they generate as investment prospects to pitch their deal, an approach our research suggests may be successful less than 10 percent of the time. And desperate entrepreneurs also might be tempted to place classified advertisements soliciting capital, an error that could lead to sanctions and penalties.

However, based on our research, we find that investors today are shifting from informal to more formal deal flow development. And the reason for this is clear. In our earlier chapter titled "A Strategy That Works," we refer to the concept of the funnel, suggesting that entrepreneurs need a pool of investor prospects, perhaps three to four times as many potential investors believed to be necessary in order to complete their financing round. Similarly, investors need to generate significant deal flow, more so than is possible through informal means, to discover the few promising ventures that merit capital investment. Herein lies the opportunity for entrepreneurs seeking investors—each of whom cherishes privacy—to understand the channels used by investors to find their deals, and understand pathways best designed to identify and locate those qualified investors ready to invest.

The more formal strategies that investors use to generate deal flow we discussed earlier. These include listing in directories, printed and software-

based; participating in venture forums; joining venture capital clubs; participating in online and offline investor networks; participating in an advisory capacity for incubators; and becoming involved in public relations-based approaches, for example, publishing articles on angel investing, contributing to research studies, and offering interviews for business articles on venture capital.

A review of the major directories, such as Pratt's and Galante's, will surface institutional and a few smaller groups of private investors, for example "store-front" venture capital firms. Also, investors join associations and then become listed in regional association directories, like the one from The New England Venture Capital Association.

Most directories are available in software form, easing the search for investors whose investment criteria fit the entrepreneurs' deals.

Venture forums provide entrepreneurs the opportunity to meet investors, whether they present their company, exhibit, or just attend in the audience, taking advantage of networking opportunities offered by the organizers. Even if companies are not selected to present, investors are sometimes involved in screening committee roles and are accessible that way.

Venture capital clubs host monthly meetings. While some are closed to members only, others open their doors to nonpresenting entrepreneurs. Since these meetings usually center around breakfast, lunch, or dinner, opportunities arise to strike up conversations and initiate relationships with regularly participating active investors. Of course, this same strategy can be used at investment conferences that private and institutional investors might attend for professional development reasons to hone their skills, an important quality of many sophisticated investors. (The great Spanish cellist Pablo Casals was once asked why he continued to practice hour after hour, day after day, even after he had long been acknowledged as the world's greatest. His answer: "So I can get better."). Certain perceptive investors feel likewise; they too want to "get better" at what they do.

Becoming active in online and offline investor networks means listing your deal to gain exposure. Most online matching services are passive; that is, they list your deal, leaving it up to the investor to contact you. Such is not the case with offline networks, which conduct searches to find investors who fit your deal parameters and actively contact them for you in order to determine their level of interest in the deal.

A number of investors have elected to volunteer for advisory boards of incubators. This is an efficient way for investors to find early-stage deals in industries of interest and geographically close to home, an effort to minimize travel. The incubator provides extensive resources that to some degree reduce risks in company development. This fact is borne out in research showing that incubated companies have better survival rates than nonincubated ventures. The investor may get involved as a mentor, adviser, or board member. Incubator directors recognize the importance of capital for companies under their wings, and when they think they feel they have found a fit, will make the proper introductions.

On occasion, we have located investors for our research and for ICR's database through articles published by the investors, or locate them after having heard them interviewed, or noticed their being mentioned in an article or research study on angel or venture investing. Whether having published an article or speaking at a meeting, a number of investors realize that deal flow benefits sometimes outweighs their need for privacy, and they will put themselves out there. An online search done periodically for recently published articles and books on angel capital, venture capital, and early-stage or private equity investing offer the best method of finding article-based leads.

Last, but important, is an entrepreneur's source of investors, ironically, collected from other entrepreneurs. Why would other entrepreneurs pass along an investor referral to you? Simple. It may be that the investor is no longer willing to put any more money into that other entrepreneur's deal; or the investor may have rejected the deal but, in doing so, disclosed investment parameters closer to your deal than their own.

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