The process by which investment bankers, attorneys, and other financial intermediaries’ originate’ mandates to advise on companies’ deals is known as M&A deal origination or ‘deal sourcing.’
Deal origination is critical for most investment bankers because it is their principal source of revenue.
Shikana Group has experience assisting companies with deal origination strategy services and managing their M&A pipeline.
What is Deal Origination?
The process of locating investment possibilities in the market is known as deal origination. This can apply to enterprises, private equity firms, venture capital firms looking for market targets, and investment bankers looking for possibilities to act as intermediaries in deals.
Small-time brokers sell family-owned local businesses for as little as a few hundred thousand dollars at the low end of the market.
Wall Street investment bankers sell multi billion-dollar companies with complex structures that employ thousands of people at the top end of the market.
What are the similarities between the two?
Each one of them will have done some form of deal origination.
Deal Origination process
Determining prospective client
Studying the existing business
Analyzing the going-forward strategy
Narrowing down types of investments
Finding investment opportunities to meet the criteria
What is the process of deal sourcing?
Deal sourcing can be broken down into two categories:
- You contact a market participant who is willing (or looking) to close a transaction;
- the participant from (1) contacts you about their willingness to close a transaction.
The smaller your business or investment bank, the more active you must be, and the more likely you will fall into category (1).
Small brokers, for example, send out direct mail campaigns to small business owners offering their services in the hopes that one of them may require intermediary services or at the very least be willing to talk about their plans for their company.
Similarly, if you’re a small business trying to expand through acquisitions, you’ll need to be aggressive in finding opportunities.
Investment bankers frequently approach large organizations about the possibility of acquiring businesses, but this is significantly less usual with SMEs. Good deals don’t just show up on your doorstep; you have to go out and find your own deal origination.
For larger investment banks, the same logic applies.
While they strive to originate deals (for example, by producing the pitches discussed at the beginning of this article), huge corporations frequently call them for advice on deals.
On the other hand, small boutique investment banks will aim to network with other banks, boost traffic to their websites, and otherwise be more proactive in locating deals on which they may function as intermediates.
Venture capital deal sourcing
According to a recent Harvard Business Review survey of almost 1,000 VC companies, over 70% of deals come through connections in their network.
This indicates that deal origination in venture capital differs significantly from deal origination in traditional private equity or mergers and acquisitions.
Above all, it necessitates that venture capitalists wear various hats, remain engaged at all times, and remain visible in the VC ecosystem.
Deal origination strategies to consider:
Develop contacts with possible VC partners: One VC fund leads the round in many (most) VC deals, with others joining in the funding. As a result, it pays to cultivate, nurture, and keep positive connections with other venture capital firms to source deals.
Attend/give seminars and Startup Battlefields: Going where promising startups go is a good approach to meeting them. You’ll need to attend workshops, startup battlefields, and even incubators to get your company’s name out there.
Get involved with Crunchbase: Crunchbase is the most popular startup listing site; thus, you should be active there. Make introductions and watchlists to help your company become more visible and relevant to the companies that suit your investing thesis.
Deal origination is critical to any financial intermediary’s performance. The good news is that East Africa’s leading legal consulting firm, the Shikana Group, is there to help with deal origination.
Our purpose is to ensure that our clients prosper, and we achieve this by offering unmatched, insightful, and relevant legal expertise and investment advisory services.