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Lessons from a Thousand CEO’s

If you look at the funnel above and think, wow, that’s inefficient, you’d be right. Welcome to the world of proprietary software deals!

I’ve spent six and a half years at a buy-side deal generation firm focused solely on software deal sourcing and execution. We worked with a range of buyers like family offices, growth equity firms, and search funds, but a typical engagement was with a PE-backed strategic on a long-term agreement.

In addition to deal sourcing, we often acted as our client’s trusted advisors, taking the lead on due diligence, negotiations, and ultimately getting the deal closed.

A few notes on the above pipeline: 

  • I couldn’t get a precise answer on how many emails I sent that resulted in the 1,634 calls. Broadly speaking, I’d assume a 25% email-to-call conversion which means I reached out to 6,500+ companies over the past ~6.5 years. That’s ~1,000 companies per year, though my outreach was light early on and has paced between 1,200 – 1,500 companies in recent years.
  • Indications of interest (IOIs) are non-binding term sheets that often include a valuation range rather than a point valuation. When working directly with a seller, we sometimes skip the IOI step and move straight to LOI.
  • Letter of intent (LOI) is a binding term sheet with a point valuation and includes exclusivity. The stat I’m most proud of in this funnel is the LOI close rate of nearly 80%. Unlike some PE firms which have close rates less than 50%, we do a ton of work pre-LOI which results in a high close rate. We don’t retrade or change terms post-LOI, which I believe is the right way to do business and behave in the world.

I learned a lot about business and life in these conversations and thought I’d take an opportunity to share some of that here. But before I discuss what I learned, I thought it may be helpful to bust a few myths about proprietary deals. 

Myth: Off-market = cheap. Not even close! Most of the proprietary deals I helped buyers find went for “market” multiples. The advantage is developing a relationship with the seller and working together to construct a deal that makes sense for both parties. It’s really hard to do this in a typical auction process.

Myth: Proprietary search is not JUST a volume game. Both shotgun and rifle shot approaches can work in proprietary sourcing. The largest deal I closed was the result of targeted, succinct outreach across multiple channels (LinkedIn + email). My opinion today is that the best approach is a combination of both shotgun (consistent newsletter) and rifle shot (tailored cold email). 

Now that we have those out of the way, here are some things I learned that I hope can help you along the way.  

1. Persistence pays. Too many people send one email and move on. “They didn’t respond so they must not be interested.” That’s a bad assumption when you’re emailing the leader of a company. 

The most interesting companies I talked to responded to the fourth or fifth emails I sent.

2. Strategic rationale matters. I used to preach speed to close and majority cash deals. While those are important, people want to understand why they should talk to you before they understand the terms of your offer. 

Articulate this in the first few sentences, concisely. But please don’t write a half page on who you are in the intro email! 

3. Do your homework. Starting a call with “Tell me about your business” is a fast way to ruin a conversation. You’ve done the hard work to get them on a call, now show the seller you won’t waste their time. 

Something like, “I reached out because [I noticed you on Capterra’s list of X, see you’re based in Y.] I see you have [35] people on LinkedIn, were founded over [10] years ago and it doesn’t look like you’ve raised capital before. What I couldn’t confirm is [your business model] so maybe we could start with what a typical [customer/deal] looks like for you.” 

Showing up prepared sets you up to be able to ask important questions. 

4. Develop a scorecard. If you try to bid on everything, you’ll accomplish nothing. Clearly define your ideal acquisition criteria in a scorecard then rank the deal against your predefined KPIs. 

These could include things like gross and net retention, the typical product buyer (i.e. VP of sales (notoriously high turnover), chief risk officer, etc.), and architecture (single tenant, multi-tenant). 

No deal will fit every KPI but if all you’ve done to define an interesting deal is set a minimum SDE or EBITDA metric, there’s more work to do. 

5.  When in doubt, bid. Too many buyers overthink deal dynamics early in the process. Valuation expectations, competitive dynamics, etc. If the profile fits your criteria, make your bid and dig deeper when it makes sense.