Recently, I met with the principal of a multifamily office who for the past couple of years had begun making direct private venture investments in early-stage companies on behalf of his clients. The benefits to his practice were quickly realized. The open posture that his practice assumed toward venture investment opportunities increased his firm’s visibility within the entrepreneurial, business and high-net-worth communities, which in turn has created many new client opportunities.
However, once you hang out a shingle as an investor or potential capital resource for early-stage companies, you will likely find your inbox besieged with unsolicited invitations, executive summaries, business plans and PowerPoint “decks.” My friend was seeking counsel on how to best develop a process to organize the inquiries he was receiving.
Advisors should take control of deal flow by establishing and adhering to their own rules of engagement by which they receive, consider and evaluate private opportunities.
To begin with, when an entrepreneur or issuer solicits you to consider a startup or early-stage company seeking financing, you must avoid the “send me something and I’ll take a look at it” approach. This should be your first rule of managing deal flow—don’t open up your inbox to random solicitations that have not had some preliminary vetting, as that email will invariably be the first of many more (unwanted) emails to come. To the contrary, establish the protocol that your inbox should only receive invited deal flow.
All the “send me something I’ll take a look at it” approach does is fill up your inbox with emails to which proper business etiquette and professional consideration obligates you to respond. As an alternative, I prefer to give an entrepreneur, issuer or promoter five minutes—right here, right now—to pitch his venture or idea. I find this approach to be an efficient use of my time, respectful to the entrepreneur, effective as a preliminary screening protocol and a great way to act as gatekeeper for my inbox.
Furthermore, the “send me something” approach is counterproductive for all parties concerned. Rather than receiving an email intro to a new business venture, I prefer having the initial opportunity to engage directly with an entrepreneur to hear his impromptu elevator pitch. It is an excellent chance to assess the clarity of the business idea and vision, the interpersonal and communication skills of the founder, as well as the passion and commitment that he brings to the table.
So, I will typically say, “Let’s talk right now. I have five minutes.”
In the course of the five minutes that follow, I suggest that you control the time according to the following five questions:
- Please begin with the elevator pitch—the short version of what your company will make or do.
- What is different, unique or exciting about what your company will make or do?
- How will your company make money?
- How big is the opportunity?
- Why are you and your team capable of pulling this off?
Personally, I find that the answers to questions No. 2 and No. 5 are the most important to my screening process. Every promising venture must have an “edge” (preferably something proprietary) and, above all, an extraordinarily accomplished and qualified team capable of pivoting, adapting and executing their business plan. The impromptu, succinct, decisive and persuasive manner in which these critical questions are addressed should be sufficient to determine if you wish to evaluate the opportunity in greater detail.
If the opportunity does not resonate with you, a prompt and gracious response that the venture falls outside of your area of interest will end the dialogue. If the opportunity strikes a chord with you, though, you still shouldn’t open up your inbox. (Don’t let him send you his deck or business plan, yet.) Ask the entrepreneur for his contact information, let him know that you are interested in what you heard and that you will send a broader list of questions as a follow-up.
This allows you to maintain control of your inbox, your deal flow due diligence process and maintains your focus on the criteria that are important to you in evaluating venture investment opportunities for your clients.
Oh, and those follow-up questions that you send over? We will cover that topic in next month’s column.