Personal story: How I built my deal flow from scratch?

Looking for peaches but finding lemons?

I often get asked about ways to attract more and/or better deal flow so I went ahead and created a step-by-step introduction on how I did it.

A few years ago, I started as the new head of M&A and start-up investments in a relatively unknown corporation looking to go through a complete transformation of its legacy business. I “knew” all the companies in the old space but most of them were irrelevant to what we were trying to achieve.

We were entering new waters. We were known only by our grey corporate past and very few ever thought we would be able to pivot from our slowly but surely declining core business. Who would’ve thought this dinosaur was a potential investor in a newborn start-up?

I took the challenge of generating deal flow almost as a bizdev challenge and created a playbook to build deal flow from scratch. Result? In just three years we were able to cover close to 100% of the relevant deal flow in our region.

Here’s what I did to make it happen

Step 1 — Make sure you have more than one goodie in your bag

Scarcity of capital is an issue only to the long tail of potential deal flow. That’s why you need to have a defensible story which also resonates with founders & sellers so that they want to deal with you. Once that is established, everything is sooo much easier.

If the only thing you have to offer is plain cash, you’re set for discovering lemons, not peaches.

In our case, the not-just-cash proposition included flexibility, freedom and other non-monetary benefits. This made us a very attractive investor for precisely the kind of targets we were looking for while rendering us entirely irrelevant for the non-relevant ones.

This turned out to be a very powerful magnet to increase both the quality and quantity of inbound deal flow. To give you an example; we could provide typical assets like an established customer base, a known brand, funding and international credibility with complete isolation from jumping corporate hoops.

Step 2 — Get known & found

When you’re the new kid on the block as an investor, it can take some time to build awareness among the target companies, their board members as well as other key people in your target market. Regarding people, staffing your operations with people already in the game will undoubtedly help as those personal relationships take longer to establish.

For the first few weeks, I just called, met and contacted my network to let them know about my new role and — more importantly — what we were looking to achieve. I deliberately communicated our investment focus as very broad since we were genuinely looking for new ways to grow and transform our business. For this purpose, narrowing down your investment focus would severely hurt your new business generation.

As expected, people tended to be surprised about what we were doing and spontaneously started referring relevant deals to me. In such a situation, building and maintaining relationships to people who get asked for help, helps you too. Opinion leaders, advisers, mentors, and gatekeepers appreciate the fact that they have meaningful directions to point aspiring entrepreneurs and sellers.

Step 3 — Say “No” the right way

One of the things you end up doing a lot is saying “No”. At the end of the day, a no is a no but saying it the right way will pay you off generously in the long run.

It is incredibly easy just to forget to reply. Also, there is always the temptation of not responding “to keep the door open” or taking the risk of later finding out you explicitly said “no thanks” to a future blockbuster. It’s always better to give a clear answer so that everyone can move onward with their thing and stop wasting mental bandwidth.

When saying no, I always tried to be honest about the reasons why we were saying no. Not many things are as annoying as trying to figure out why an investor says no. For you, it will also cut the non-productive follow-ups (by the sellers) to just a fraction.

Point the seller(s) somewhere. You’re supposed to be an expert in your field. If the deal candidate had any merit to it, you should always spend 10–20 seconds to guide the seller onward. If the deal is too early for you, just point to a good accelerator / early stage investor. If their business is not a good fit, lead them to a player you know would be interested. If you think their business model sucks, you can let them know but make sure to communicate it as your OPINION and not as a fact. In the long run, the seconds you spend here will create a lot of goodwill and attract more deal flow later. I promise you that.

Step 4 — Stay on the radar

Just like in any other, more traditional marketing activities, make sure you stay on the radar. By now, you should have already established some social media presence. Keep building your network of followers and contacts. Publish news. Comment LinkedIn posts. Go to events. Volunteer for panel & speaker slots.

Make sure you’re on the short list of the right companies when they are putting together their short list of potential investors. If they don’t remember you, you won’t be on the list when they are working on their growth or liquidity plans. See also Christian’s great post on entrepreneurs’ shortlists here.

Step 5 — Practice what you preach

It’s pretty easy to tell everyone how great you are. Delivering on these promises and claims can be hard work, though. Don’t fall into the common trap of overpromising and underperforming. That’s what you expect from the target companies, too. Right?

Your value added (besides cash) will be proven over the years and is crucial for the performance of your inbound deal flow in the long term. As a corporate investor, we made great efforts to help and push our portfolio companies forward. In our case, operative folks also made this effort — not just the transaction team.

If you promise isolation from jumping corporate hoops, don’t invite the target companies to any steering group meetings or request reports, consulting or participation beyond general board level reporting. They are not your team or resource.

Step 6 — Fix your processes to cope with the deal flow

In the big picture, all deal flow processes tend to have these general stages: Deal sourcing, first evaluation, negotiation, due diligence and closing. If you have just one team member and a few dozen deal candidates yearly, all of this can be managed without any real process or tools.

However, the moment you i) have a second person in the loop, ii) need to communicate about your operations to internal or external stakeholders or iii) see hundreds of deals annually, you’ll inevitably end up sketching a process diagram and maintaining a list/database of your potential investment targets somewhere. I tried various tools ranging from Trello to dedicated tools but always ended up going back to Excel which certainly has its own merits (and shortcomings).

In the end, however, I followed my vision of developing precisely the kind of tool I would’ve wanted to have and quit my job to launch my own business. At Zapflow, our sole focus is developing tools for managing deals and deal flow, but that’s another story altogether.

Summing up:

  • Always add value beyond cash
  • Make sure the relevant market knows you exist
  • Say “No” swiftly and graciously. Not responding is not saying “No”.
  • Stay on the radar, add value and create connections within your market
  • Get processes in place to deal with your deal flow (pun intended)

I sincerely hope reading my story was useful — looking forward to hearing yours!