Issue #17: Evolving Deal Flow

An investment firm, especially in the early days, is built around deal flow. Whether they come from relationships, brokers, banks, intermediaries, or directly, deals are what drive a firm. How then should your deal flow evolve over time?

I think the long term aim is simple: develop proprietary, inbound deal flow where you are the desired buyer and the only one at the table.

This feels like an impossible task in the short term, unless you have existing relationships with many business owners who are thinking about selling and are good fits. In lieu of this deal flow today, deal flow can come from developing relationships with brokers and intermediaries. It will help to have a one or two page overview of your firm to offer them so they know who you are and what you’re looking for.

Another short term method is direct outreach to business owners. This involves list building, email outreach, cold calling, and even mail campaigns. These deals may take longer since most of the owners you talk with aren’t actively looking to sell, unlike those from your broker channels.

But while some of this work may help develop proprietary, inbound deal flow in the long term, there are other tactics available. Allow me to offer a few ideas.

First, develop a scout network and executive-on-deck program. Both utilize the existing, developed networks of other professionals who are already thinking about deals. Pay scouts a finders fee to bring a deal that closes. Have your executives on deck start sourcing efforts to find companies for them to run and you to invest in. This gives you the benefits of massive network while only needing to build a handful of relationships with smart, capable, and well known operators and scouts.

A second interesting source of deal flow is one I read about in the Citrin Independent Sponsor Report is CEOs of existing portfolio companies. Business owners know other business owners, especially those in the same industry as them. If you develop an expertise on landscaping, home services, software, or some other industry, the CEOs of your existing companies will know other targets and be able to evaluate them as experienced operators.

Third, you can start writing a weekly newsletter, blog articles, columns in publications, quarterly and annual letters, research, create a podcast, and share it widely. Adventur.es is a phenomenal model of how this kind of effort compounds over time to create deal flow. In a past interview with Brent Beshore on the Tailwinds newsletter, he said:

“Keep it simple. Say it simply. Repeat it often. It’s really just that easy. But, it takes time. We felt like we shouted into the darkness for the better part of five years before we got any traction. Direct sales moves the needle immediately, but ultimately scales linearly. Inbound marketing is slow to get started, but scales exponentially. It just depends on time horizon. It’s steak dinners versus content marketing.”

Adventur.es’ deal flow is all inbound today and the quality doubles every eighteen months. That is incredible! But like he said, it took them five years before it provided any benefit. This strategy requires the most long term view and focus because of how long it takes to make any perceivable difference in your deal flow. It takes consistent dedication from a firm’s partners to receive any benefit. None of it works or compounds if your team gives up writing and publishing content after two years. That is also why it can be the greatest advantage.

Capital Notes

  • This is a great profile of Heico and how they acquired companies.

  • In case you missed it (like I did) here’s a few takeaways from Harvard’s Search Fund Conference.

  • I loved reading this writing about investor updates and writing annual and quarterly letters. I’ve thought about assembling a core group of advisors, a board of directors if you will, and writing monthly updates. Not sure where that will go, but it’s a thought of mine.

  • Ben Rudman runs Charis Consumer Partners and writes a blog called The Idea Gallery. He wrote a thread on Twitter about PE firms adding value in the lower middle market. He’s a great follow on Twitter.

  • Speaking of Twitter, get on it and follow Tim Ludwig. Enough said.

  • I relate strongly to this post by Paul Graham about feeling like a noob.

  • Finally, here’s 100 thoughts from Twitter about running a sustainable business.

If you found an interesting article, podcast, or interview that I missed, please let me know, I’m always looking for interesting stuff!

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