Over the past decade, the methods utilized for deal sourcing have transformed. Some origination practices had to be altered in order for funds to stay successful amidst an increase in competition. Others changed by way of firms honing their investment strategy with technological advancements.
These changes have not subsided.
The way in which strategic deals are originating and transacting is rapidly evolving. Deal makers who combine new strategies with the right technology have the opportunity to identify deals faster, but understanding how to combine all the right pieces is critical.
Traditionally, PE and VC funds rely on connections to drive their deal sourcing strategy. Funds utilize their own portfolio companies, relationships in the market and intermediary connections for sourcing deals.
However, as more funds were established, the same methods and channels became less effective. With a growing number of private equity investors and advisors, it started to become unmanageable to maintain and nurture all those relationships.
Ten years ago, most advisors and general partners knew each other, but in today's larger market, it is increasingly difficult to keep front of mind with the intermediaries. The original process of relationship building with intermediaries started taking longer, which brings risks of falling behind the competition.
Not only does this shift in the market present an obstacle related to time, but also one in regards to financial investment. Using advisors or investment bankers for deal origination requires money, so when you're allocating your time and resources toward these intermediaries, it can get very expensive.
These changes spurred the first major shift in deal sourcing strategy, toward one of direct origination. Over the past 10 years, firms have increasingly been going direct to privately-owned bootstrapped businesses to source more deals and at a better price.
The amount of dry powder today and increasing asset prices are pushing funds to go directly to business owners in order to avoid competitive auction processes. By reaching out to businesses directly that fit specific investment criteria, firms are able to circumvent the issues of time and money associated with forging relationships with intermediaries. Plus, they can focus on the relationships with the executives with whom they wish to ultimately partner
In the current market, the opportunity costs that firms need to consider when analyzing different origination strategies fall back to the two factors mentioned previously - time and resources. If you compare the outcomes of traditional sourcing methods to those from direct origination, what are your time and resources really producing, and is that the most effective strategy?
For example, if you're spending time reaching out to intermediaries, you know what the outcome will most likely be. You're going to face a lot of bank processes and will pay the market rate because you're not the only company looking at that asset. On the other hand, the direct approach gives you the agility to find firms when they need to do a deal, as opposed to those who have done deals before or have already been in the market.
It may appear that money and resources spent on direct origination could equally be applied to hiring external advisors or a buy-side investment bank. And although immediately appealing when the latter appear to bring fast results, it comes at a cost and often doesn't foster relationships with business owners over the long term for a time when they're ready to transact.
The payoff of direct origination is proving to be much more lucrative in the long term. Stronger opportunities can be uncovered through proper time and research invested in identifying the right companies and starting conversations directly with business owners to assist them at the current stage in their life-cycle and be on hand for future capital needs.
The time and resource allocation within your sourcing strategy can now also be strongly augmented by technology. The right data can be a powerful tool to maximize efficiencies and hold a competitive edge in the market.
Origination intelligence such as Sourcescrub empowers your origination strategy with that data. Once you've identified an investment theme or target segment, Sourcescrub can quickly pull a list of all businesses operating in that market. Whether you're interested in CRM software businesses in the U.S. or fertility clinics in Canada, Sourcescrub has aggregated data within every sector, which gives you the information needed to determine the best targets.
All pertinent company information is included, from current employee count to past growth to executive contact information. Moreover, details about past funding rounds are outlined as well. Many existing databases are already good at providing data on companies that have transacted in the past. However, what will give a firm a competitive edge is data on companies that haven't raised outside money before. With all of this data in one place, a firm's ability to identify the best investment opportunities quickly becomes even stronger.
The data that firms can glean from Sourcescrub equips them to act dynamically. Firms are able to:
The cost of integrating Sourcescrub into an existing investment team is minuscule compared to the investment required for other strategies.
Additionally, you empower investment professionals with the right information to directly source their own deals. This builds excitement around the deal, increases retention and skill-base of junior deal makers and creates the environment for millions more dollars in new deals.
With the landscape of the industry consistently changing, firms need to identify the most effective strategy for their origination research in order to beat the competition and avoid negative opportunity cost. Those that leverage data to supplement direct origination strategy will be uniquely positioned to maximize ROI and source significantly more and better deals in the future.