In today’s fast-paced world, there are plenty of opportunities for VC and PE. However, finding exciting deals before others do is challenging. Firms that are able to generate proprietary deal flow set themselves up for success. In this blog, we explain proprietary deal flow and how it can help you keep up with the increasingly competitive private equity and venture capital market.
What is proprietary deal flow?
Often referred to as a holy grail of deal sourcing, a proprietary deal flow strategy involves capitalizing on investment opportunities that are not (yet) available to other private equity or venture capital investors. In other words, proprietary deals are unique investment opportunities that enable VCs or PEs to access emerging markets with high growth potential. Oftentimes, proprietary deals are based on the particular fit between the investment target and the buyer. Since such deals are by definition presented to a buyer before other investors, getting exclusive access to proprietary deals comes with certain benefits that other deal-sourcing strategies lack.
Advantages of proprietary deal sourcing
When it comes to proprietary deals, one of the main advantages is the lack of competition. Since the company in question is not actively searching for an investment at the time, the buyer has a higher chance of negotiating a better deal. Given that there are no other interested parties to bid against, it allows you to acquire or invest in the company for a better price as competitive bidding can drive valuations up. Moreover, as a result of practically no competition, the buyer is also more likely to close the deal faster than usual.
Another benefit is that proprietary deal flow allows for a more selective screening process and increases your chances of a successful investment. Without the need to rush the investment process in a bid against other firms, more time can be spent on due diligence and collecting critical information.
How to become more efficient in generating proprietary deal flow?
While there are clearly benefits of proprietary deal sourcing for the venture capital and private equity market, this strategy takes work to execute. Whereas proprietary deal sourcing generates better deal flow, accumulating high-quality investment opportunities takes time. Since proprietary deal sourcing is a proactive approach and such deals are generally sourced via personal connections, in-person networking events or conferences, this strategy requires investing significant amounts of time and money in yielding results. Furthermore, sourcing deals via personal networks can result in limited diversity in the deal pipeline and a lack of exposure to investment opportunities in other focus areas with high growth potential.
However, once these limitations are overcome, a proprietary deal flow strategy is a great way to generate both volume and quality leads. Here are some ways to overcome the limitations of proprietary deal flow strategy:
Automation in deal flow generation
As already mentioned, generating proprietary deal flow can be both time-consuming and cost-intensive. Therefore, automating as much of the process as possible is key to gaining that competitive advantage over other investors. Regular company databases are generally useful deal sourcing tools but new companies usually do not yet show up in regular databases like Pitchbook or Crunchbase. On top of regular databases, you could consider deal sourcing software to help with the process of proactive deal flow generation and automating data collection. For example, our in-house software, Catalist, extracts companies from Google search queries or patent databases and these sources are actively updated, so the newest companies are automatically added. If you’d like to learn more about the differences between company databases and deal sourcing software you can read our comparison.
Custom scoring for data-driven target selection
Choosing a successful investment based on the ideal fit with the buyer is the key success factor of a proprietary deal strategy. Implementing a scoring system based on custom criteria will help to improve the flow of highly relevant potential targets. A big part of your selection process can already be done through using publicly available information. The following criteria could for example be helpful in different stages of your deal flow generation and screening process:
- Initial selection: FTE, company age, geography, activities, and technological capabilities
- From long to shortlist: previous funding, active investors, revenue, FTE growth
- Ranking the shortlist: management capabilities and previous success or proof of concept in the form of existing customers.
With Catalist’s auto-scoring feature, you only spend time screening companies that fit your custom criteria.
Keep up with the market trends and outreach
Another key factor in a successful proprietary deal flow strategy is keeping up with the latest trends in the market. Conducting market landscaping helps to identify the most important market trends with high growth potential within and beyond the industry. Regarding proprietary deal flow, timing is everything, and reaching out to potential targets at the right time can make or break a deal.
Set your team up for success with proprietary deal flow generation
As technology continues to advance, there is a growing trend toward adopting proprietary deal-sourcing strategies as well as automating workflow within private equity firms and their portfolios. Incorporating these approaches will result in saving time and costs while at the same time increasing the effectiveness of a deal-sourcing process and gaining a competitive edge in the venture capital and private equity landscape.
Venture IQ´s data-driven approach and proprietary software can help you find potential prospects tailored to your custom needs in an efficient and systematic way. Feel free to contact us and learn more about how we can help get more leads with our proprietary deal flow process.