Meditations on Modern Deal Flow
A famously cryptic warning that some say is falsely attributed to St. Augustine of Hippo reads:
Do not despair one of the thieves was saved.
Do not presume one of the thieves was damned.
The quote has been a source of bemusement for scholars for a very long time and the opening line from the movie Calvary-which if you haven't seen I highly suggest.
I mention it here for a reason. We should be thankful for these two thieves. For they, in the nuance assigned to them by Augustine or whomever, say much about the variance between trust and negotiation we enounter in deal flow. I associate the first thief with the impulse that is commonly associated with money or our time, but we ought to be more cautious of the second thief. The second one that is dead-set on obscuring the truth and chasing away potential in the process. As the saying indicates, we can learn a bit from both, and the internal and external pressures they put on successful deals. Either way, deals tend to bring out all manner of human contrivance.
During the course of 2015, I turned down no less than five offers for investment, partnership and equity in smaller firms. It was not a "fun" year-it was a difficult year with many challenges. Besides the fact that two of the five parties misrepresented their actual financial health, two more were woefully out of touch with the reality of the vertical they wished to ascend, one was out of touch with the marketplace entirely and maybe a little nuts, and the fifth was simply unrealistic about terms of compensation.
In other words, I spent more time in 2015 thinking about the costs of not saying no, then saying yes. To the point of my opening line, I couldn't despair for the parties I refused, though they did not fair well; nor could I presume that without me some of these parties would fail. In reality, I'm happy to say some of them continue to do quite well. Such is the nature of the deal.
The market has expanded frantically to offset the losses from 2008-2012, and I'd say about 75% deals I am exposed to have baked in them the obscuration of the whole truth. It is sometimes astonishing to me how much rampant bullshit there is in the business world. Many people play petty mind games. I had a very young, very arrogant start-up client tell me endlessly that he was "ten steps ahead of me". I don't see how this made sense-considering I was hired to advise him. How quickly this young man blanched when the tables were turned and I revoked my interest, not partially due to comments like that one. There are too many charlatans and false prophets operating in business for one to lose sight of caution, no matter what we hear from Silicon Valley and Wall Street.
A wise man in Indonesia once advised me, "Don't keep company with fools, leave their presence like an elephant leaves an empty village; quietly and carefully." My friend's somewhat crytic advice was meant to remind us that elephants are large, but shy creatures, whom, he cautioned, can easily crush things if they are startled. Saying “yes”, is sometimes akin to the response of a raging elephant.
I believe it's important to remind ourselves that the basics of deal flow are no different than the most commonplace of exchanges.
For instance, when you agree to call someone back in a half hour, meet for coffee or take a look at his or her resume, you are asking someone to trust that you’ll do it. You are entering into an agreement. No matter how small and insignificant it may seem-it's an agreement. A cursory look at basic deal mechanics makes it clear what "Yes, I'll do that," really means. When you say you are going to call someone, or show up someplace, help out or do XYZ, that is an "offer." When a person considers it, they are taking your offer into "consideration", and when you agree to perform what you offered, that constitutes "acceptance." You are in a contract, and we enter into them all the time.
This may sound over-simplified, but I'm driving at what happens when we commit to a deeper, more profound practice and understanding of the inner function and the outer role of the deal flow as it relates to our personal ethos.
First off, we can feel better about ourselves (the internal function) and we are more likely to enter into a deal that offers greater overall utility for all parties (the outer function or result). This is not how deal flow usually unfolds; but it is how integrity works. If you say it, then do it. There is no wiggle room. People who wiggle on terms and agreements for too long are not making an innocent mistake; they are dodging you. Drop them. Run from them like the elephant.
Just this weekend a long-time colleague who has been struggling to secure investment for her start-up asked me, "How do you take serious decisions nowadays, in deal-flow especially, how do you know whom to take seriously?” I paused to consider her question. I took a deep breath and fiddled with my tea cup for a minute while I searched for a response. This is a great question that I pose to the reader to answer in the comments here as well.
Before I could answer, she blurted out, “You just answered me." Laughing, she continued, “You’ve taken some time to stop sand focus. Ten years ago, you’d have rattled off the first answer that popped into your head.” My friend is right. I have a tendency to answer things spontaneously and often very candidly. This can work for, and against you in business.
I’ve written before about how difficult it can be to achieve clarity these days. I've talked about the basics-like making a deliberate effort not to react but to respond before making any decision. I am somewhat obsessed with the notion of coherency in our business dealings. We are better off when we stop and reflect on what we have to gain or lose when we cut our losses or embrace opportunities as they are presented.
What hazards exist at the core of deal sourcing and flow?
Exposure to everyone from bulge bracket investment banks through middle market advisors to boutique advisory firms to start-ups--tell me that due diligence on appropriate financial and strategic buyers is, of course, a must. The time, money and opportunity costs associated with investing in things that don’t work out are the sharp needles that sting us when we fail, and what that keep us tossing and turning at night.
Here is a short list of internal/external considerations:
- Historical precedents: Do your potential partners have a track record?
- Revenue Potential: Do your potential investors have a record of successful deals?
- Market considerations: What markets are your investors most efficient in? How well do you know your own market? What will the market actually look like in the next 5-1o years?
- Emotional considerations : Find people that hold themselves, and you to a higher standard. How do you personally view growth in the market, what excites and frightens you about it? Ask yourself: Does the emotional calculus of properly aligning my commitment to this project make sense? How do I feel around this person or group?
Worst case scenerio: What happens if you say no?
If you liked this one, you might enjoy my piece, Negotiation and Brinksmanship.