No one understands the elation of a deal closing quite like a business development (BD) professional in private equity. To put it in perspective, the average software industry close rate is 22%, while recent research shows that just 1.48% of private equity deals sourced actually transact.
But while a firm's close rate is important, it is a small piece of the larger dealmaking puzzle "and one that is heavily impacted by the execution team. What sources did these deals come from? How many calls or emails did it take to get in contact with the right person? How long did it take to go from lead to transaction? Answers to questions like these help optimize business development (BD) processes and put firms on the path to success well before deals reach closing stages.
In a recent webinar from Private Equity Career on the Best Practices in Private Equity Business Development, Joe Burkhart from Boathouse Capital shared a wealth of advice on everything from sourcing deals to building teams. Let's dive into his tips for identifying the right KPIs to showcase and improve the success of your BD team's origination efforts.
Just as every firm has a different investment thesis, what constitutes success will differ slightly from firm to firm. However, here are a few steps that Burkhart recommends every BD team take to help them identify the metrics they need to highlight their impact and optimize performance:
High-level statistics about how many deals were sourced and their movement through the deal flow process are usually the type of numbers leadership teams look for to understand their firm's overall health and the BD team's contributions. However, it's important not to assume. Ask your firm's leadership what's most important to them, the context they need to make these numbers more meaningful, and whether they have any preference for how you report them (e.g. charts versus spreadsheets).
Next, determine what metrics the business development team needs to do its job better. While there may be some overlap with what your leadership cares about, there's a wealth of information they don't necessarily need to see. For instance, you will likely want to track how many calls the BD team makes on a daily or weekly basis to measure productivity and spot opportunities to coach individual reps. While it's helpful to show activity and give context for how much work goes into each deal, it's not essential for leadership to see every week.
While you'll want to track your key metrics consistently, not all of them should be reported on the same schedule or given equal weight at all times. "Private equity, after all, is a 'lumpy' business," Burkhart said. There are some weeks or months when very few or no deals are completed or advanced. Others will be particularly productive, especially during a month with a large conference. The key is to use your best judgment for when to highlight certain metrics to higher ups and when action is needed to correct course.
To help BD professionals get started on their metrics journey, Burkhart listed a few statistics that his team uses to measure success. "These are some of the key metrics I use, but take these all together "nothing should be used in isolation," he said. Some of the more straightforward metrics include the number of deals sourced, meetings with management with investment targets, and term sheets or letters of intent issued. BD team activities "phone calls, emails, etc. "should also be tracked and reported.
Your CRM is a powerful tool that can record the vast majority of these metrics. For instance, how many new contacts or companies is your team adding to the CRM from their research? How long does it take for leads to advance in the stages of your M&A deal flow? How many advance between those stages (i.e., your conversion rate)? All these metrics can help you understand not only what your deal flow looks like and how it functions but also where your team is successful "and where it has room for improvement.
Just be careful to balance qualitative and quantitative metrics. "It really is a quality business versus quantity," said Burkhart. High deal flow alone does not equal success: 100 low-quality prospects are worth less than five high-quality, high-interest ones. That's why Burkhart also recommends that BD teams harness the latest deal sourcing platforms to help them more efficiently research, pinpoint, monitor, and engage ideal targets.
The right people, processes, and technologies can help you capture all the information and data you need to go beyond measuring close rates and truly optimize your deal flow for success. But being a successful BD professional requires more than understanding your metrics. Fortunately, Private Equity Career offers a number of premium workshops on a variety of topics to help dealmakers get ahead.
Curious how Sourcescrub's deal sourcing platform helps power BD teams at leading private equity firms like LFM Capital, Boathouse, and Francisco Partners? Let's talk!