DEAL FLOW
Accelerate your business with these expert tips on "Deal flow" - take a look and discover this TIP!
What are the sources of investment opportunities for business angels?
There are several sources of opportunities for business angels looking to invest in start-ups:
- Accelerators (+) e Incubators (+): These programmes provide financial support and mentoring to start-ups in their early years. Business angels may find interesting opportunities among the entrepreneurs participating in these programmes.
- MentorDay acceleration programme, organises an invest day every month with the best startups. Mentor Invierte (see+)
- Entrepreneurship fairs and networking events: these events provide the opportunity to meet entrepreneurs and startups in person and discuss their ideas and investment opportunities.
- We recommend the networking event organised by mentorDay on the first Thursday of every month (+).
- Referrals from colleagues and contacts: business angels can receive recommendations and referrals from colleagues and contacts who are familiar with the market and investment opportunities.
- Online investment platforms: there are several online platforms that connect business angels with startups and provide the opportunity to investing in them in a safe and regulated manner (+).
According to the AEBAN-IESE study on business angels in Spain 2022: When it comes to finding opportunities, investors continue to rely on business angel networks (see figure), which have become the main option since the first edition of the survey in 2016. These networks play a very important role in boosting the market. On the one hand, are a gateway to the business, allowing investors to learn and share experiences as they take their first steps. And, on the other hand, ensure the necessary visibility for those entrepreneurs who are less connected to the system and who have not gone through accelerators, events or other types of intermediaries or facilitators.
Friends, associates and acquaintances are the next most important source of opportunities. Almost half of the respondents have turned to them when identifying investment opportunities. At the same time, direct contact with entrepreneurs is becoming less relevant when it comes to closing deals, with 53% of respondents using this channel in 2020, compared to 38% of investors in 2021. This highlights the work of business angel networks and their work in filtering and analysing opportunities, which brings quality to the investment selection process. Events, which were not considered in previous years, have emerged strongly as a resource for investors. It is worth noting a source of investment opportunities that is not yet significant but will become increasingly important in the coming years, namely the technology transfer of scientific and research projects from universities, technology centres and science parks.
Deal flow refers to investment opportunities. Preferably investable startups that an investor reviews over a certain period of time to decide which one to invest in. At mentorDay (+) we receive more than 100 projects every month. And only a small percentage of startups meet all the requirements to be investable. The opportunities selected during the acceleration week that have the best valuations are presented to the investors invited to the investment forum called Mentor CONVIERTE. In order for your project to be included in the DEAL FLOW of an investor, first analyse whether you are investable by completing the following form this test (+).
DEAL FLOW. Importance of investor access to quality projects. Deal Flow.
The literal translation of the term is deal flow and refers to the investment opportunities in startups that can be accessed by different investment agents, business angels, investment clubs, funds, etc.
Deal Flow also refers to the quality of the projects being analysed. A flow is good if it offers good options with potential to invest in them.
From an investor's point of view, access to good opportunities is not a minor issue. On the contrary, in Spain it is not easy to find projects with investment potential. A good investment goes hand in hand with a good project.
The advantages of a good deal flow are among others:
- To achieve a well-diversified, balanced portfolio of projects with potential.
- It is an avenue for both expansion and specialisation.
- Gaining prestige and notoriety as an investor.
- Access to more investment talent.
The more projects or investment proposals, the greater the chance of success. Experts believe that at least a portfolio of 10 investments is necessary to increase the probability that an investee will be a success and allow us to obtain a return for the portfolio as a whole. The dealflow can be thought of as a kind of funnel through which a large number of opportunities are analysed and filtered until only those that are suitable for investment remain.
Investors seem to agree that there is a gap between entrepreneurs and investors, and this needs to be bridged by generating interconnections between them. To this end, platforms such as First Tuesday or StartupXplore, and accelerators such as Conector, Plug and Play, Seed Rocket, or Wayra, have been emerging to filter investable projects. But let's take a look at the most commonly used sources of flow.
Sources of project flows:
There are three main ways to find startups to bet on; in other words, three different ways of originating Dealflow: outbound, inbound and network.
Outbound:
Outbound consists of adopting a proactive attitude and moving in search of projects. It is the BA, fund or investors' club that looks for the entrepreneur. This option is necessary above all for those who are in the start-up phase and who are not yet recognised by the entrepreneurial community.
It is essentially about being present in the circles where investment opportunities arise. In addition, outbound activities add value because they allow them to take the pulse of the market, detect trends in the sector and discover segments they would not otherwise have been aware of.
Where to look?
- Events: Events related to the software world or sectors that are of particular interest to the fund (which will often be known to us as they are described in its investment thesis)
- Deal Databases: Specialised software that collects information about the sector and the deals between funds and startups that take place in it. Examples of such tools could be Crunchbase or Dealroom.
- Social Networking: Spaces such as Linkedin or Twitter are suitable and highly recommended for detecting entrepreneurial talent, which is increasingly sharing public information about projects.
- Press: Increasingly, both traditional and purely digital media are providing relevant information on activity in the entrepreneurial world, including the funding needs of some start-ups and profiles of their activity.
- Specialised deal flow platformsFirst Tuesday or StartupXplore
Inbound
In this modality, what is done here is to receive proposals and filter them. All investors usually have channels (e-mail, forms or office hours) to which entrepreneurs in search of funding go directly to submit their projects.
Investors in general receive, on a daily basis, multiple opportunities that they will have to analyse to determine the fit with their investment strategy. To achieve this flow of proposals, investors must take care to build their reputation and notoriety so that more and more entrepreneurs send them their proposals.
Why does an entrepreneur come to meet an investor?
For two fundamental reasons: Track record and brand.
CAREER
The prestige of the investor will be linked to the results of the fund (few entrepreneurs know the performance of a fund and the multiples achieved in the past) but above all to the way it conducts itself in the market. Its way of betting on entrepreneurs, and of building relationships with them and helping them in the development of their project.
Business angels as part of a Venture Capital fund can have both positive and negative effects on the companies invested in, and the voice and opinion of the entrepreneurs who lead these companies are a reference for others who, in due course, have to decide who will be their travelling companion.
BRAND
The values that the investor exudes undoubtedly influence the entrepreneur's decisions. For this reason, funds are increasingly trying to make themselves known (as people and professionals), explain their investment philosophy and explain their raison d'être. The reason is none other than to associate their way of investing with characteristics and feelings that may be favourable to some entrepreneurs and therefore attract good opportunities.
INVESTORS COMMUNICATE THEIR BRAND THROUGH THE FOLLOWING MEANS:
- Social networking.
- Podcasts.
- Q&A sessions.
- Workshops and events.
- Reports.
- Newsletters.
- Blogs.
- Webinars.
- Open pitch sessions.
- Public relations.
Track record and brand are two elements that will lead to receiving a higher number of investment opportunities, a higher quality of those opportunities and a higher probability of being chosen by the founders among many other funds with the same intentions and interests.
Network
The importance of being well connected. Investors in general are in constant contact with incubators, accelerators and other investors in order to take the lead in discovering potentially interesting companies. But opportunities will also arise from relationships with other founders or former entrepreneurs.
Some examples of networking:
PRE-INVESTMENT RELATIONS
- Access to early stage projects: Accelerators, incubators, etc.
- Those individuals and funds that invest and work at earlier stages than one will be well aware of the opportunities that, after a few months, will be suitable for their investment thesis. It will be really useful for such agents to provide their opinion on the most promising ones and to help uncover those that were not yet under the radar.
CO-INVESTMENT RELATIONSHIPS
In order to cover all financing needs, it is usual that agreements are made between different investors. Investment rounds will be met by several people or funds chosen by the founding team. Therefore, a fundamental source of opportunities will be the recommendation by an investment fund that decides to invest in a company and needs an ally to follow in its footsteps to join the project.
Quality and deal flow management
Quality Dealflow is that which is adapted to the investment philosophy and strategy of the investment fund (sector, stage, geographic area, etc.). An entrepreneur does not need to know what sectors a fund specialises in, what characterises them, what stages of investment they usually enter, or what their geographical area of interest is.
The entrepreneur should certainly be concerned about accessing all this information, but it is mandatory for investors to explain what they are looking for and to communicate this actively and clearly. Access to quality dealflow is a source of potentially successful opportunities and a significant time-saver in filtering projects.
Management
The dealflow is a kind of funnel from which startups go through different stages, from their discovery by the fund to the decision to invest. Recognised investors in the market usually receive more than a thousand opportunities a year, so it is advisable to use a CRM-type programme that allows a good database to be built and to monitor them, usually using CRM-type software that allows them to be channelled, filtered and monitored quickly.
IN RELATION TO TIME MANAGEMENT WILL BE KEY FOR TWO REASONS:
On the one hand, the screening and monitoring process should be as agile as possible to increase the likelihood of getting the deal. On the other hand, it should actively follow up to identify which of the companies seen in the past will be in need of capital in the future.
Business angels in Spain are looking for their opportunities (AEBAN-IESE study)
When it comes to finding opportunities, Spanish investors continue to rely on business angel networks (see figure 5), which have been consolidated as the main option since the first edition of the survey in 2016. These networks play a very important role in making the market more dynamic. On the one hand, they are a gateway to the activity that allows investors to learn and share experiences while they take their first steps. On the other hand, they ensure the necessary visibility for those entrepreneurs who are less connected to the system and who have not been through accelerators, events or other types of intermediaries or facilitators.
Friends, associates and acquaintances are the next most important source of opportunities. Almost half of the respondents have turned to them when identifying investment opportunities. At the same time, direct contact with entrepreneurs is losing relevance when it comes to closing deals, as 53% of respondents used this channel in 2020, while only 38% of investors used it in 2021. This highlights the work of business angel networks and their work in filtering and analysing opportunities, which brings quality to the investment selection process.
Events, not considered in previous years, have emerged strongly as a resource for investors' 27%. It is worth noting a source of investment opportunities that is not yet significant but which will become increasingly important in the coming years, namely the technology transfer of scientific and research projects from universities, technology centres and science parks.
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TASK
Now that you have read this TIP, can you answer these questions?
- Do you think there is a direct relationship between the quantity and quality of opportunities that investors can access, and their efforts to leverage deal flow? Reason it
- At what point in an investor's life do you think an inbound strategy should gain weight?
- Do you believe that all sources of deal flow deserve the same attention for the investor?
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Deal Flow definitely makes it easier for both those who want to invest in and support startups and those who are looking for investors for their projects.