Your deal flow isn’t simply a matter of quantity. Instead, the quality of deals in your pipeline is the more important. As an investor, there isn’t a set number of opportunities you should consider simultaneously. It’s more about whether those on your radar are the caliber you seek. And your definition of high quality may differ from the investor sitting next to you.
Nonetheless, investors need to evaluate each deal’s potential financial gains. Those gains could be projected to come soon or down the road a bit. The type of deal, such as an initial public offering versus a merger, can impact return prospects and timelines. However, the quality and quantity of prospective deals in your pipeline are bigger influences than deal type.
You can’t capitalize on high-quality proposals if you never hear about them. If you can increase your exposure, you can evaluate the opportunities most likely to meet your investment goals. Here are three ways to unleash your deal flow potential to achieve financial gains.
1. Know Your Strategy
Before you evaluate proposals, map out your investment vision. Your strategy should consider your risk tolerance and the type of deals you’re comfortable with, whether company acquisitions or real estate syndications. You’ll need to gauge how well your expertise matches the level of involvement you’ll be expected to contribute. Your return expectations and terms of the deal are crucial, too.
As Lifestyle Investing expert Justin Donald notes, “Before investing money, you need to identify your investing goals, the timeframe in which you need or want to achieve them, and your risk tolerance.” Donald also advises dividing your objectives into long-term and short-term goals. You can think of long-range objectives as milestones you’ll need at least five years to achieve. Short-term goals usually take less than that.
Remember that many proposals in your deal flow will involve longer timelines. When you invest in a real estate syndication deal, you don’t necessarily need to contribute to the property’s day-to-day operations. However, you may need to keep your money invested in the property for five years or more before it sells. While holding the investment, you could get smaller, passive income distributions.
Your percentage of the profits is likely to be pro-rata. The amount of returns you gain equals the percentage you invest in the property relative to your co-investors. But if you’re the sole investor in a startup, your return potential would be negotiated in the deal with the founder(s). In this scenario, your involvement might increase as an advisor and board member. Plus, you’d want to ensure your vision as an investor aligns with the founders’ vision for their company.
2. Connect With Your Network
Your network, including former work colleagues, is an invaluable source of potential investment opportunities. Network contacts can increase the quality and quantity of your deal flow. They may know about other entrepreneurs who align with your investment philosophy, strategy, and goals.
These deals could be in the earliest stages, representing opportunities to get in on the ground floor. Your contacts will likely introduce you to founders needing your expertise. A startup’s founders can be a significant factor in the quality of a deal and impact an investment opportunity’s financial potential.
Harvard Business Review’s survey of venture capitalists discovered that founders significantly influence which deals investors pursue. An impressive 95% of venture capitalist firms said a company’s founders were an important factor in this decision. Business model came in second, with 74% of venture capitalist firms saying it was critical to their choice to invest. Sixty-eight percent stated the market was important, followed by 31% indicating that the industry was a determining factor.
These survey results make sense when you consider that founders are the individuals primarily responsible for driving a company’s performance. Their skill set and vision shape the company’s—and your investment’s—future. You may be there to guide them on strategy, but you’re not the one executing it. Your contacts are some of the people who know you best. Whether you’re new or seasoned, they can provide referrals to founders you’ll consider a high-quality match.
3. Establish an Evaluation System
To determine whether a deal is worth pursuing, you’ll want to use quantitative and qualitative metrics. When your pipeline flows steadily, you’ll see more proposals than you can invest. Even if the flow is down to a trickle, you’ll still want to pass on opportunities that aren’t good fits.
Without an evaluation system and process, you may make decisions you regret later. A deal could look OK on paper but be misaligned with your strategic goals. For instance, an acquisition of a company might appear as though it will produce a solid financial return. According to the spreadsheets, the value of the company you want to acquire will probably grow exponentially.
But how will this company’s offerings and resources extend your vision? And do you have the capacity to realize the financial projections? When Google acquired social media startups Dodgeball and Aardvark, both forays ended quickly. In contrast, the company’s acquisition of Android was successful because it expanded Google’s market leadership in the tech space. With the investment, Google was able to enter the wireless phone market and integrate its technology and services with the Android operating system.
A combination of financial and non-financial data points likely determined Google’s decision to acquire Android. You can do the same to make more informed evaluations of your deal flow. Some investors are leveraging artificial intelligence to help them, using data-driven investing platforms. However, if you know what metrics are paramount, you can create your evaluation process to detect the right signals.
Unleashing Your Deal Flow Potential
As any investor worth their salt knows, every investment carries some degree of financial risk. At the same time, no one wants to lose everything they put in. Avoiding that fate starts with recognizing which deals in your pipeline best fit you. You’ll raise your chances of finding such deals by employing methods to increase your exposure to promising investment opportunities.
Unleashing your deal flow’s potential isn’t always about turning on the fire hose. It’s about discussing which deals can meet or exceed your goals. You need to know your strategy, leverage your network, and create a workable evaluation system to do this. Once you do, you’ll stand a much better chance of realizing the financial gains you want to achieve.
