According to a recent study by KPMG, companies spend more than 6,000 working hours per year, that’s the equivalent of 3 full-time staff, to complete a deal. Tasks range from sourcing contacts, validating contact information, attempting to connect, engagement, due diligence and execution. Sources: 1
Combined with excessive asset allocation, this has made the use of capital a costly process, which can be quantified as one of the most expensive in the history of investment capital. As in many industries today, it faces an environment altered by increasing competition and digital innovation. Sources: 1, 3
In the next few years, there is likely to be an increased focus on early-stage start-ups and, in general, an increase in late-stage venture capital investment in companies. Sources: 4
Transaction flow has typically been constructed through two variables that impact venture capital: quality and volume. Quality for too long has been seen as a secondary to deal flow volume, but this is now changing as Venture Capital firms are typically seeing more opportunities that do not meet their investment criteria. Access to relevant networks is at the heart of improving the flow of transactions because it helps attract more relevant opportunities, allowing VCs to deploy more capital which in turn creates a better quality of transaction. Sources: 6
PE funds invest in a wide range of companies of all sizes, with many medium-sized companies pursuing founders and family-owned companies worth $100 million or less. Whereas start-ups tend to attract venture capital investment during an economic downturn, there may be a downward shift in valuation for late-stage start-ups, which are valued more frequently relative to the public market. Sources: 4, 7
Private equity (PE) investors are raising funds to become majority owners of companies that generate positive EBITDA. In many cases, PE funds will encourage business owners to maintain equity investments to create a common interest that supports future growth. Increased activity by corporate buyers pursuing a growth-oriented M&A agenda leads to increased competition for the most attractive assets. Sources: 3, 7
PE investors will target companies with positive EBITDA in the range of $100 to $200 million as they seek an exit. Sources: 7
The right IVC partner represents a co-investment opportunity and can help the CVC investment team analyze deals they receive from other sources. The network of trusted IVD partners should include both companies with which CVC has co-invested or intends to invest and IVCs in which the company is an LP. To identify candidates for an IVL partner, CVCs are forced to articulate the value they offer to IVF and understand which IVC will and will not be a competitor. For the first time in the history of the venture capital industry, the “right” IVB partner is important because it can offer CVM more comprehensive and tested investment opportunities than the other partners in its network. Sources: 2
In other words, a CVC must justify why IVC should share its high-quality investment opportunities with them. The primary focus of venture capital firms is to widen the top of the funnel by allowing more companies to fall into the fund manager’s hands. While each stage can be improved and designed more efficiently, there is a part of this funnel that needs to work optimally for the VC to be successful. Sources: 0, 2
In order to improve the efficiency of the first stage, updated information must be obtained so that they can find investment opportunities that fit their investment preferences. The investment team needs to complement its data-driven insights – with the latest research and data analysis tools and tools to help them tap into new investment opportunities. Sources: 0, 5
The acid test will come in the coming years, when managers can prove that deals done with innovative means benefit their investors. Increasing competition for high-quality assets is prompting investors to rethink their approach to deals and consider where, how and what to dig.
Article Sources
“Deal origination is a labour – intensive process, especially when conducted through traditional methods such as accessing business owners in the immediate network, screening inbound leads, engaging with investment intermediaries, and proprietary research for investable deal leads.” 1
“Studies show that a mid – market PE firm spends over 6,000 man – hours per year ( 3 personnel ) to complete only 1 out of the 80 leads it reviews.” 1
“This, in our view, is not sustainable; and as with many industries today, African private equity ( PE ) is facing an environment that is being transformed by increased competition and digital innovation.” 1
“The private equity ( PE ) industry continues to see record levels of inflows off the back of strong performance and growing investor demand for yields not available in lower fixed – rate investments and hedge funds.” 3
“This, in conjunction with inflated asset values, has made deploying capital a real challenge — one that can be quantified by the sheer amount of dry powder available globally — with more than US$ 600b in buyout funds alone.” 3
“Further, increased activity from corporate acquirers pursuing M&A – oriented growth agendas — and a new focus on direct investments by pension funds, sovereign wealth fund ( SWFs ) and family offices — is creating increased competition for the most attractive assets.” 3
“Private equity ( or, PE ) investors raise funds from institutions ( e.g. pension funds, endowments, insurance companies ) to take controlling ( 51%+ ) ownership positions in companies generating positive EBITDA and with strong growth potential.” 7
“In many cases, PE funds will encourage businesses owners to retain equity ( or “rollover” ) in the company to create shared interests in supporting future growth.” 7
“PE investors will usually target a 2 – 3x return on their capital over a 3 – 5 + year investment period before seeking an exit.” 7
“PE funds invest across a wide range of company sizes, though many “middle market” firms pursue founder or family – owned businesses valued at $ 100MM or less.” 7
“For those start – ups who are able to attract venture capital investment during the downturn, there is likely to be a downward shift in valuation, in particular for later stage start – ups as they are more often valued relative to public markets.” 4
“This could trigger down – round protection provisions, and founders and other ordinary shareholders should understand the impact on post – financing equity stakes – other options such as bridge financing or negotiating with investors to waive or partially reduce anti – dilution adjustments may need to be considered.” 4
“There will likely be an increased focus on business supply chain, operations and continuity due diligence, as well as the potential impact of COVID-19 on earnings projections, the execution of business plans, material contracts and general working capital and liquidity.” 4
“Deal flow is a product of two important variables that any venture capital firm needs to possess : volume and quality.” 6
“While quality is self – explanatory, a high volume is necessary because most startups you meet with will not meet your investment criteria.” 6
“At the heart of improving your deal flow is building your professional network, as this helps to bring inbound investment opportunities as well as unique insights into specific industries.” 6
“The following five avenues show effective methods of augmenting your sourcing capabilities and network as a CVC.” 6
“The right IVC partners are important not only because they can provide the CVC with vetted investment opportunities, they can help the CVC’s investment team analyze deals it receives from other sources, if they represent co – investment opportunities, as well as access high caliber management teams.” 2
“The network of trusted IVC partners should include the firms with which the CVC has co – invested, or would like to co – invest, as well as the IVCs where the corporation is an LP.” 2
“In the process of identifying candidate IVC partners, the CVC will also be forced to articulate the value it will be providing to the IVC and understand the IVCs that will be competitors.” 2
“In other words, the CVC must justify why the IVC should share with it the higher quality investment opportunities.” 2
“While each stage can be improved and made more efficient, there is one part of the funnel that must be working optimally in order for the VC to succeed.” 0
“The primary focus for venture capital firms is to widen the top of the funnel, allowing more companies to run through the fund managers ‘hands.” 0
“Improving the efficiency of the first stage requires obtaining consistent, updated information on market changes, prominent themes within a vertical, and key firmographic data so you can source investment opportunities that fit your thesis.” 0
“Where investment teams supplement traditional methods ( in this case relationship management techniques ) with data driven insights, to help them source new investment opportunities?” 5
“It is certainly a topic gaining more traction and several firms have claimed to have created just such technology.” 5
“Increased competition for high quality assets is making many investors rethink their approach to deal origination and how they can be smarter about where and how to dig.” 5
“The acid test will be in years to come when these managers can prove that the deals sourced through these innovative means have delivered positive returns for its investors.” 5
Cited Sources
https://www.sourcescrub.com/blog/how-to-improve-the-venture-capital-deal-flow-process/ 0
https://www.avca-africa.org/newsroom/afri-spective-an-inside-look-at-private-equity-in-africa/2017/deal-origination-20-digital-deal-sourcing-in-african-pe/ 1
https://www.cxotalk.com/article/corporate-venture-capital-s-role-innovation-part-4-setting-cvc-organization 2
https://www.ey.com/en_gl/private-equity/the-new-imperatives-for-deal-origination 3
https://hsfnotes.com/tmt/tag/venture-capital/ 4
https://www.mavencp.com/about/latest/717-could-ai-change-the-way-private-equity-firms-source-deals 5
https://www.plugandplaytechcenter.com/resources/5-ways-source-startups-cvc-investments/ 6
https://www.clearlightpartners.com/how-to-find-an-investor-for-your-business/ 7