Finding & Funding Investments with High Return
It would appear that some Family Offices are now showing a predilection for direct investing to diversify portfolios and build new equity investment. Deal flow is a popular term amongst investors such as venture capitalists and describes the rate at which new business ideas and proposals are presented. Whether investors are motivated by high returns or not, it begs one important question: how best to enter the deal flow slipstream?

By Francois Botha
Published on Simple October 4, 2020

Growing, cultivating and leaving a legacy starts with one thing. Savvy longterm investment. And that’s achieved by investing capital at the most appropriate stage of the development of a company such as venture or growth. It’s about knowing why investment is wanting to be made, how much is being placed on the table, the vertical industry in which the investment is being made and the anticipated outcome. It’s about defining the investment parameters and then entering the investment pipeline.

What’s considered to be a high return to one investor doesn’t necessarily have the same connotation to investors and managers of Family Offices and Private Wealth Owners or Ultra High Net Worth Individuals (UHNWIs) for example, where a high return may mean something completely different. The latter tend to take a longer term view regarding investment. The intent behind the investment leans towards nurturing and growing an established Estate for future generations. This is why many Family Offices and wealth owners tend to invest in companies close to listing or perhaps on the brink of buy-out. They tend to be safer bets that require a substantially larger initial outlay.

Explaining Deal Flow

Investors are investors regardless of whether he or she has a pocketful of cash or owns the printing presses on which that cash is printed. Yet, an investor wouldn’t be an investor without the ability to invest. Whether the high return is expected to come with a high risk or whether the goalposts are slightly longer term, one conundrum remains the same: Where to find these worthy high return investments?

Growing, cultivating and leaving a legacy starts with one thing. Savvy longterm investment. And that’s achieved by investing capital at the most appropriate stage of the development of a company such as venture or growth. It’s about knowing why investment is wanting to be made, how much is being placed on the table, the vertical industry in which the investment is being made and the anticipated outcome. It’s about defining the investment parameters and then entering the investment pipeline.

What’s considered to be a high return to one investor doesn’t necessarily have the same connotation to investors and managers of Family Offices and Private Wealth Owners or Ultra High Net Worth Individuals (UHNWIs) for example, where a high return may mean something completely different. The latter tend to take a longer term view regarding investment. The intent behind the investment leans towards nurturing and growing an established Estate for future generations. This is why many Family Offices and wealth owners tend to invest in companies close to listing or perhaps on the brink of buy-out. They tend to be safer bets that require a substantially larger initial outlay.

Explaining Deal Flow

Investors are investors regardless of whether he or she has a pocketful of cash or owns the printing presses on which that cash is printed. Yet, an investor wouldn’t be an investor without the ability to invest. Whether the high return is expected to come with a high risk or whether the goalposts are slightly longer term, one conundrum remains the same: Where to find these worthy high return investments?

Regardless of the playing field, locating and then making the investment or the deal is where it begins. It’s about finding the proverbial needle in the haystack. The term ‘deal flow’ has nothing to do with the term cash flow. Not in the immediate future anyway. It refers to the number of deals presented to the potential investor.

Quantitative Deal Flow

But deal flow is a bit like cash flow to some in that it is king when it comes to finding and investing in a worthy startup or business idea. The quality and quantity of the flow of potential deals is vital to finding the best opportunity and that is dependent on several variables such as the type of investor. For active Angel Investors, deal flow investing is a bit like golfing. The more one sees and practices, the better one becomes. Here the focus tends to be on quantity and a broad spectrum of ideas. This is generally because the value of the investment is lower and the ability to exit easier.

Qualitative Deal Flow

However, Family Offices and UHNI’s are more inclined towards qualitative proposals that often need to meet preselected strategic criteria to enhance a certain portfolio. The spectrum of pitches tend to be more constrained. This is more often than not attributed to the scale of the investment which are substantially higher than say that of Angel Investors. Chances are that for every 100 pitches investors receive only one investment is expected to be made. Costs such as time, research and due diligence invested in selecting the one winning proposal, it is hoped, will be offset by the eventual gains and returns.

Growth For The Sake of Growth

Family Offices, it would appear, have taken the Chinese proverb “be not afraid of growing slowly, be afraid of only standing still” to heart. It is true, they have been slower to enter pipeline investing preferring private equity investments most of all. That said, a younger generation of Family Office investor has emerged and is showing a predilection for deal flow investing. It is assumed that this is spurred on by the proliferation of technology start-ups and the app-driven economy. This is no surprise.

The Cyclical Nature of Deal Flow Investing

A bit like the economy, the rate and spectrum of deals is often cyclical in nature. A good deal flow is dependent on the state of the economy and robustness of the equity markets. Where technology hardware with preinstalled software of yesteryear was daily fair for most investors, today, startups who provide Software as a Service and other Cloud based computing solutions are preferred. Futurists suggest investing in Artificial Intelligence and Connected Devices looking forward, if the technology is an arena that has been decided will add value to the portfolio. And, so the cycle spirals.

Accessing the initial deal flow portfolio has its challenges notably where and how to find them.

There are three ways to enter the deal flow slipstream and start identifying and accessing potential investments leads.

The Inbound Deal Flow Model

First, the Inbound Deal Flow model. This relies heavily on working and growing personal networks. The initial influx of potential investments may be lacklustre. Perseverance, patience and trust is required. It asks equity investors to network with the winners including professional investors, likeminded entrepreneurs with proven success, and even trusted extended family.

As the name suggests, Inbound Deal Flow places the Law of Attraction into practice. It’s about chumming the waters and then fishing where the fish are before casting your net wide to select a certain type of morsel. As one starts to see small successes, so word spreads and the rate of the deal flow increases.

The Outbound Deal Flow Model

Second, the Outbound Deal Flow model. This requires a different set of rules and is often preferred over the more sedentary methods of the Inbound Deal Flow model by Family Offices and UHNI’s. The mantra here is “a hunting we will go”. It requires Family Offices to pinpoint targets with a rifle as opposed to a shotgun approach to entering the flow. It’s more constrained and dare we say a little more refined. It relies on the Family Office or UHNI reaching out to make the investment.

Apropos, there are various ways to invest in suitable ventures and startups using the Outbound Deal Flow model:

  1. Investing Directly: This requires the Family Office to purchase direct equity in the business where terms are negotiated for shares in or a portion of the company upfront.
  2. Limited Partnershipping: This is achieved via placing funds in a Venture Capital Fund which is sometimes also referred to as an Angel Fund. This fund is then managed by the Partner. The implication is that capital becomes pooled to create a larger resource which is then managed by a third party.
  3. Equity Crowdfunding: Some platforms such as Fundedbyme, SeedNet, Equitynet and AngelList are a few examples of trusted crowdfunding platforms that vet the service, product and business plan before calling for investment from the public or the ‘crowd’. It’s similar to an incubation and kick-starter business concept where investment is made at the very early stages of the business in exchange for long-term equity.
  4. Syndication: This relies on the concept of co-investing with other Family Offices to dilute the risk and also free-up cash flow for other investments. This Outbound Deal Flow investment model is often preferred by Multi-Family Offices. The implication is that decisions around the investment are brokered and made via consensus.
  5. Angel Groups and Networks: In this instance, Family Office investors can expected to be vetted and accredited as an investor within a specific region or business region along with other investors. Potential deals and investments are reviewed as a group while the investment decision remains with the investor for more autonomy.

Building a Proprietary Deal Flow Model

The final deal flow models involves confidence. It asks Family Offices to create its own deal flow pipeline. This requires investors to build a reputation through the gamut of marketing disciplines such as PR, Advertising, Word of Mouth, Out of Home etc. It doesn’t immediately follow the min-max rule of effortless ease but if done correctly over time with consistent messaging, may attract and create a favourable deal flow investment pipeline.

It requires a much longer view on creating deal flow investing but one that the Family Office or investor will own. It will require an increase in initial overhead expenditure while building the reputation – we know this because creating any brand simply doesn’t happen in a vacuum. It requires constant nurturing. When considering this type of deal flow investing the intention behind creating it is everything.

It prompts Family Offices to ask the what, where, when, who, why and how of investing and then recruiting specialists in the field. And, like anything in life, creating owned business such as deal flow pipelines, starts with honesty. Not by asking why the investor motivated to create a deal flow pipeline but HOW – through honesty, open-mindedness and willingness. Because by Jove, once it’s built, it will require your ongoing input.

Dave McClure, San Francisco based Angel Investor who founded the business accelerator 500 Startups said it best, “Wait until companies have an initial prototype, have shown that they have the capacity to be profitable and have the ability the scale. That’s the best time to invest.” Sound advice indeed when looking to make return investments from the deal flow pipeline.

About the Authors

Francois Botha

Simple Founder. Strategy Advisor

Francois believes that the next generation of family leaders need new, simple tools and trusted experts with a fresh outlook.

Connect with Francois Botha View Francois Botha Profile

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