These are unprecedented times for the investment banking industry. Profits and cash flows are historically high, interest rates are perennially low, and the industry is undergoing substantial transformation both across and within firms. Throughout all of this, technology has arisen as one of the greatest trends reshaping the space: never before has there been so much information and communication available online to research and conduct investment activities.
In this article, we provide an overview of how to make the best use of technology to drive your investment banking deal flow. From news to brokerages to deal tracking, we discuss some of the best tools and strategies for utilizing technology to give you an advantage.
Inbound investment banking deal flow
One relatively simple way to use technology to drive more potential deals is to set up an online inbound program for opportunities. At its simplest, this is just an email address on your firm’s website where anyone can submit an opportunity, either buy-side or sell-side. The concept is simple: put your contact information out there so interested parties can reach you.
Of course, Field of Dreams rules don’t apply online. You can’t just put up an email address and expect a deluge of high-quality deal flow. Good deals will only find you if you have a strong presence and brand online. That comes from things like SEO, social media marketing, newsletters, thought pieces, strategic outreach and a thousand other tactics within and around the domain of digital marketing. An email address or dropbox is a no-regrets move, but it does require substantial investment to yield high returns.
A somewhat more complex (but potentially higher ROI) strategy for driving inbound deal flow online is setting up a referral program. At its simplest, this is just an agreement that you will provide consideration and/or compensation in exchange for deals sent your way.
Referral programs may vary substantially based on what your specific goals are. If you just want as much deal flow as possible, then you may open the program to anyone and any type of deal, with the finder’s fee or brokerage fee set up as a simple cash transaction. If you want a more narrow–but higher quality–funnel, then you might thoroughly vet any parties interested in deal sourcing and only provide recompense for high-quality leads (i.e., ones that get a certain distance into your opportunity funnel).
Just as with the open dropbox, referral programs typically require some work to get going and provide results. You can’t just add a small blurb about referrals on your website and expect the leads to start flowing in. Referral programs work best when you actively promote them and regularly engage with your top referral partners. Depending on your sector, your network of private equity investors, venture capitalists, corporate development teams, or boutique investment banks outside of your areas of focus can all be fruitful deal sources.
A less formal version of the above is being proactive about building out and engaging your business development network. A few categories of potential sources:
- Service providers: accountants, finance professionals, lawyers, valuation providers and other professional services that work closely with business owners are likely to know if they may be going through a generational transition or are interested in selling.
- Financiers: private equity firms, venture capital firms, angel investors, and others who spend time scouting investment opportunities may have portfolio companies who may be interested in selling, or are aware of others that weren’t a great match for them, but might fit your mandate.
- Non-competitive banks: if there are boutique investment banks that don’t target the same kinds of opportunities as you, there’s a great opportunity to share deal flow. That might be based on industry (e.g., if they are exclusively healthcare-focused and you aren’t), size (e.g., bulge bracket vs. lower middle market), and transaction type (e.g., M&A deals vs. capital markets and IPOs)
Outbound investment banking deal flow
Of course, inbound deal flow isn’t the only way to increase the opportunities you’re seeing. You can also make use of the abundant amount of information available online to seek out opportunities proactively. One way is by keeping close tabs on funding announcements.
For instance, if you see that a middle-market company in your target range has raised a round of debt financing, you may decide that they could be a good target for discussing a follow-on private placement equity round. Or to be a little savvier, you may notice a late-stage growth equity startup hasn’t raised in a couple of years and may be running low on cash, necessitating either a new round of funding or potentially an acquisition process.
While you can try to keep tabs on all of these funding announcements manually, the reality is that unless you’re very focused, there’s just too much information to try to parse through. It can be invaluable to set up automated rules for evaluating funding announcements according to your firm’s criteria and only highlighting the select few that are high potential leads.
Similar to funding announcements, you may keep an eye on the news ticker more generally. Funding is a very important signal for the potential for a deal, but there are many others. Revenue, earnings, major customers, geographic expansions: these are all potential signals for some kind of investment banking opportunity, whether it’s underwriting, private placement, or M&A.
Since news as a category is much broader than funding announcements, navigating the various types of news requires a bit more sophistication and skill (and perhaps art). You must be more intentional about the types of news you find meaningful and better at setting up the automatic alerts that will filter out all of the noise that prevents you from focusing on the most important opportunities.
One benefit of building a robust network is expanding the number of potential introduction paths to companies that may be of interest to you. You can use online social networks like LinkedIn or more industry-specific platforms to do your due diligence on where you have connections, and asking for their help in getting in touch with the management team.
To increase your conversion rate, it’s often helpful to give those connections a template email they can use – which both allows you to control the message, and limits the work and social capital that required on their end.
In addition to the above, targeted and thoughtful direct outreach to potential clients can also be powerful. Databases like Pitchbook, Crunchbase, Capital IQ, and MergerMarket can help you find companies that match your size and industry preferences. From there, you can use tools like ZoomInfo and Hunter to find their email and other contact information. The pricing of these tools can vary depending on your budget – but the fee income from a single M&A process can easily be worth the spend.
Of course, no discussion of the role of technology for investment bankers would be complete without talking about the system of record: the CRM. While CRMs have been used for decades in sales organizations, their adoption by professional services firms like investment banks is more an innovation of the past decade or so. Systems that have historically focused on sales funnels have begun to shift their attention to matching the more varied and nuanced needs of non-sales organizations (like investment banks).
These newer systems (like 4Degrees), are more tailored for the needs of a mergers and acquisitions process vs. a standard sales pipeline. Moreover, they understand the different metrics that banks focus on, and how they differ by level (e.g., managing directors vs. analysts).
If you haven’t revisited your CRM decision recently (i.e., you’re on Salesforce or still tracking in Excel), it may be time to give some consideration to how you’re tracking your deal flow. A good process is the difference between good deal flow and great ROI.
4Degrees is a modern CRM solution specializing in relationship development and opportunity tracking for professional services firms, including investment banks, private equity, growth equity, real estate and venture capital. If this type of solution interests you, don’t hesitate to reach out to learn more.