By: Chris Tell at http://capitalistexploits.at/ [4]
Funny story. I spoke with a fellow angel investor recently who is now a successful investor but wasn't always. We were regaling past successes and failures. He told me a story of a terrible deal, which as he recounted the story involved a “Doctor”. The company in question was a start-up and was selling drugs to kids. Really!
Their products were basically generics made in Thailand and their field of “expertise” was in pediatric drugs.
There were 3 guys running the company with one of them based in Thailand procuring supplies and managing the order flow. The other two guys were based in Australia and they were going to sell drugs to pharmacies and try to expand into Doctors offices.
What went wrong I asked? My friend laughed.
“Well when I ran DD on the deal I was really young and completely inexperienced so you'll laugh.”
Tell me.
“Well in the stack deck the one founder stated he was a Doctor so I Googl'd him and found his Facebook profile. Sure enough it said he was a Doctor. I never thought to check beyond that."
"Then there was the guy in Thailand. It said he was a Doctor as well. I figured two of the founders being doctors and launching a business in pharmaceuticals would be a winner. He was in fact a Doctor but as it turns out he was a Doctor of law. He knew nothing about medicine and really he turned out to be an alcoholic loser who'd fled Australia for the welcoming arms of Thai hookers."
"I found out in the most unpleasant way. I bought the story of course, and when they inevitably ran out of cash and needed further injections I rallied to the role of capital raiser because I didn't want to see my investment vaporize, though to be fair at this point I still thought they were on fire because of course they told me they were. Remember I'd done zero DD really and this was a long, long time ago. I'd checked Facebook and spoken with the partners."
Aye Carumba!
“Aye Carumba indeed, anyway I hit up a contact I'd been introduced to, who is a well known investor we both know. X took one look at this and said, “But these guys can't bring that shit into Australia. It's illegal. I was bummed. Really? No I said, they've got this sorted, I'm sure. I think the guy will lose his practicing certificate he said. Is it current? I had no idea."
"So when I left the meeting with my tail between my legs I rang up the “Doctor” and said hey can you send me your practicing certificate. He laughed. No he said, look I'm the marketing professional, I'm only a Doctor on Facebook."
This brings me in a roundabout way to what I was originally going to talk about today which is animal slaughter. Seriously!
The first step to eliminate dogs in your private equity portfolio is by creating an amazing network which brings you good deal flow. This is where my friend went wrong from the start. He didn't have good deal flow, and at that time he had little skill in evaluating deals and no mentors to turn to.
When I say "good deal flow" I mean proprietary, high-quality deal flow. This comes from strong networks, experience and having lost money in the past and “been around the block”. You don't want the deals that are being shopped around town. If it's been around for more than a couple months it's probably not worth doing.
Many years ago when I first got into this I was searching for deal-flow. Now people beat a path to our door and we have the opposite problem. Which brings me to the next step.
Filtering Deals
Even with good deal flow you're going to have to learn to say no...a lot. Only the best can get through, and you get a feel for it over time. You simply can't even bother taking a 30 minute call with someone, let alone flying across the world to meet with them and begin thorough DD if it's going to waste your time.
Part of this process is “training” your deal flow network. People in your network will bring you deals they think are good but you need to train them as to what YOU want. Remember they don't have the same filters as you do.
I don't have time to vet deals which are not a fit, even if it only takes me 10 minutes to realise it. That is 10 minutes of wasted time and of no benefit to either myself or the party bringing the deal. Remember you're going to be seeing hundreds of deals. Get brutal fast.
Deals brought to me need to be invest-able and they need to be invested in by my source. If a strong contact in my network brings me a deal I don't want to see it unless he's willing to place capital in it himself. This allows for an automatic filtering of deals.
Why do this? Because what you find is that it's easy to pass OK deals on to other investors in your network. Entrepreneurs will always want you to do it, and I get it. If I'm a founder raising money and the first Angel I speak to says no, I would definitely also ask him if he knows of anyone who would potentially like the deal. That's the entrepreneurs job. It's not my job though, and I can't risk my credibility on deals I've not done deep dive DD on.
The same therefore applies in reciprocity. Now I never pass any deal on. My network is too valuable to do that to them. The only legitimate deal outside of this is where for instance someone in our network says, “Hey I'm interested in this deal but need help evaluating it. If it stacks up I'll do it.” Fine.
This is how you build an amazing network. You have to have strict criteria otherwise your network will reflect your lack of judgement. In other words a crappy network will bring crappy deal-flow.
- Chris
"The currency of real networking is not greed but generosity." - Keith Ferrazzi