By Scott Meacham
High-quality deals spell out a clear path to exit for investors.
The reality of private equity markets is either the story of capital chasing deals, or of deals chasing capital. So, it is no surprise that when venture capitalists and others in private equity get together to talk business, capital and deal flow dominate the conversation — and not necessarily in that order.
The critical importance of deal flow may seem slightly counter-intuitive in Oklahoma. Here, the venture capital side of the equation historically has been stubbornly hard to come by and, because of that, receives so much emphasis.
Critical deal flow
Speaking from the perspective of an organization that for the last 20-plus years has battled and succeeded in the uphill fight to create a state-wide continuum of investment capital, I say, emphatically, that high-quality deal flow is every bit as important, and probably more important, than capital under management when it comes to building an innovation economy — especially in a state like ours.
Most everyone knows what capital is, but just what do investors mean when they talk about deal flow? Deal flow is the rate at which business plans and pitches of concepts that are capable of becoming high growth companies are received by potential investors. Investors need these plans because they want to put their capital to work.
However, know this, not just any deals will do.
Opportunities to invest come from many different sources. They represent businesses in many different stages of development and growth — from spinout technologies from laboratories and biotechnology, to artificial intelligence algorithms created and tested at our universities, to problem-driven solutions that are born in the brains and guts of soon-to–be entrepreneurs who set out to solve problems plaguing them and their co-workers as they perform their every day jobs.
Of these, proposals from startups or entrepreneurs who have achieved success with a previous investment, or where there is already a business relationship or industry connection, often attract the most attention from early-stage investors and venture capitalists.
Everything affects the quality of deal flow — from the industrial mix of a state’s economy, to the businesses that line Main Street; from the number of self-made millionaires in the Chamber of Commerce to the number of cashed out entrepreneurs eating in local eateries; from the proliferation of broadband internet access, to the number and density of STEM (science, technology, engineering, and math) graduates.
All of these things matter when a state seeks to stimulate deals.
Clear path to exit
Certainly, there is goodness in having a pipeline of many deals. Goodness turns to greatness when those deals are well-vetted, geographically close, and based on a market-validated business plan that credibly frames the potential to produce $10 to $30 million in annual recurring revenue. High-quality deals spell out a clear path to exit for investors via IPO, acquisition (with identified purchasers), or partnership with strategic industry leaders with whom the startup has proven synergy.
In Oklahoma, deal flow tends to be sporadic. It isn’t because of things we have not done or should be doing. It is the reality of our market — a low population state without a deep concentration of research and development. There is no single lever for us to push, no spigot waiting for just the right turn. We have to work on many fronts — from applied research to prototype funding with OCAST TBFP. Unlike other states with deep benches and a lot of research, we have to focus more on building out concepts and teams to create investable deals.
Before we can chart the course, we have to be realistic about the journey we are on.
Scott Meacham CEO of i2E Inc., a nonprofit corporation that mentors many of the state’s technology-based startup companies. i2E receives state support from the Oklahoma Center for the Advancement of Science and Technology and is an integral part of Oklahoma’s Innovation Model. Contact Meacham at [email protected].