Finding Your Deal Flow in Private Investing

Finding Qualified Deal Opportunities as a Private Investor

As of 2023, there are an estimated 24 million accredited investors in the US. Accredited investors are individuals eligible to invest in private offerings. Of those 24 million, only a tiny subset invests in private companies and real estate.

Why is that? In part, pursuing private investing can seem daunting and inaccessible particularly if you have not previously been an active investor and perceive that you do not possess the requisite skills to participate successfully. New investors may view private markets as ‘for insiders only.’ This is especially true if they lack direct access to qualified investments or ‘deal flow.’ Simply put, ‘deal flow’ is the pool of actionable investment opportunities from which a private investor has the ability to evaluate and ultimately choose. Investing successfully in private markets requires sourcing and selecting the right opportunities. Expanding the pool of offerings available will give you an advantage in selecting the right opportunities. The more quality opportunities from which you have to choose, the more likely you will be to pick a winner. Understanding how to access deal flow is critical to successful private investing. Several different approaches will likely yield the most successful ‘pipeline’ of deal opportunities.

The Old-Fashioned Deal Flow Method: Personal Referrals

The usual way to access private investments and real estate projects is through personal referrals. In 2013, the SEC lifted the general solicitation ban on private investing. This was part of implementing the JOBS Act, which aimed to jumpstart business startups. The new rules let investment professionals solicit accredited investors. Before the lifting of the ban, to access these private investments an investor needed to have a pre-existing, substantive relationship with investment firms, investment bankers, or the firm raising capital for a specific investment.  During this time, personal introductions were the only way for outsiders to access private investments, colloquially referred to as the ‘country club’ model.

While the new rules let investment professionals directly solicit accredited investors, the best way to generate deal flow is still the personal referral model. Let any of your trusted advisors (lawyers, accountants, or financial professionals) know that you’re interested in potential investments and provide them with your investment parameters.

However, relying on personal referrals alone will limit your options and often act as a self-selecting cocoon versus the wider universe of opportunities available outside of your personal network. If you don’t live in a big city and possess substantial investment capital, it is difficult to build an independent reputation as an active investor and obtain good private investment opportunities without a personal referral network. If you don’t possess such a personal network, you will need to expand your deal-sourcing methods.

The Current Deal Sourcing Method: Organizations, Groups & Associations

If your personal network is too small and lacks good deal flow, you need to expand it. Partnering with experienced private investors is a smart, practical approach. There are both formal and informal networks of venture capital, angel investors, and private capital investors that you can get involved with to expand your investment opportunities. These groups often act locally but are connected nationally and sometimes globally. They can offer members quality, verified investment opportunities. They can also share best practices, analytics, and other essential investment tools.

Affinity groups on investing or entrepreneurship can be your informal entry into the private market. Their core mission is to help business owners fund and grow their companies. These groups often host low-cost public events that allow you to network with experienced private investors to obtain qualified deal referrals. Local venture capital associations, business groups, and councils are also great resources for expanding your network and gaining referrals.

More formally, you can join an ‘angel group,’ which is a membership organization that focuses on investing in early-stage startups and small, high-growth businesses. The Angel Capital Association has more than 250 registered angel groups in its database, and there are even more globally. These groups offer education, mentoring, and a steady deal flow. This usually means frequent in-person pitches from local entrepreneurs. Think of a kinder, gentler, less dramatic Shark Tank. The Angel Capital Association helps find local angel investor groups. Prominent local groups are Tech Coast Angels (SoCal), Golden Seeds (NY, Boston, Silicon Valley, TX), and Alliance of Angels (Seattle).

The main drawback of these angel groups is their focus on funding only startups or early-stage ventures. This excludes real estate projects and later-stage companies. It also limits the diversity and risk of your deal flow. Some angel groups require members to invest $25,000 to $100,000 per year. This can pressure budding investors.

New Paradigm: Online Platforms

With the passage of the JOBS Act in 2012 and the subsequent lifting of the general solicitation ban by the SEC in 2013, the online investing industry (or ‘equity crowdfunding’) has emerged to provide investors direct access to private capital markets. Some of the better-known platforms are Kickstarter, GoFundMe, and Patreon.

Online access enables a long-overdue change in private investing by going beyond the somewhat exclusive world of personal referrals and closed-door pitches and providing almost universal access across geographies and industries.

By removing the need for geographic proximity, online platforms can widen your deal flow and provide access to opportunities in various investment types and at various investment stages across a diverse set of industries. Online platforms can also give individual investors the ability to control which types of opportunities they see. Want to invest in later-stage companies with longer track records of returns? Partner with a platform that specializes in those types of offerings. Interested in commercial real estate? Register for one that offers real estate deals, such as Fundrise. Moreover, online platforms usually have better search tools than personal referrals. They provide more efficient marketing and investment analysis materials.

Additionally, online investing injects greater transparency into the private market. The top platforms protect investors. They pre-vet opportunities and check issuers’ backgrounds. They also provide investors with key info to make their decisions. This includes company history, subscription documents, investment terms, and return projections. It’s all in one portal, with typically low investment minimums.

However, not all crowdfunding platforms are created equal. Investors should recognize their differences before relying on them exclusively for deal flow. Some function only as listing services. They do no due diligence and facilitate no actual investments. Others are like online venture capital firms. They present only deals in which the platform has a financial interest. Investors should check user reviews on Trust Pilot. Also, look for any complaints with the Better Business Bureau. Before investing on a site, research its partners, products, eligibility, fees, and revenue model. Investors must check that any platform they use does compliance checks on each opportunity.

Lastly, every accredited investor must understand their investment parameters. They must know their risk tolerance, target timeline, and expected returns. They must review opportunities found through their deal flow methods. This is true regardless of how they learn about each investment. Creating a diverse investment portfolio requires varied, curated deal flow and devising evaluation and investment protocols. Successful private investing requires deep education and market awareness coupled with robust and effective deal-sourcing methods. That said, no colleague, network, or portal can replace an investor’s own research and evaluation.

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[Editors’ Note: To learn more about this and related topics, you may want to attend the following on-demand webinars (which you can listen to at your leisure, and each includes a comprehensive customer PowerPoint about the topic):

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3. Dialogue on the Overall Due Diligence

This is an updated version of an article originally published on November 4, 2014 and updated on December 23, 2019.] 

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