“Know thyself,” the ancient Greeks advised. And indeed that philosophy carries a lot of weight in the business world, all these years later.

A quick online scan will reveal ample entries regarding the ways in which a company might evaluate its employees, or how employees might examine themselves to better build upon their strengths and improve upon their weaknesses. 

But how can companies — particularly private equity firms and finance companies — assess themselves? 

It is a question that was raised in a conversation I had not all that long ago with a buddy in the business, and it is not easy to answer. He wanted a surefire method for assessing and quantifying the health of his investment firm’s business-development function. I gave that a lot of thought, and the result is the 20-question list you see below, which I believe would be useful to any investment professional.

The argument could be made that many companies focus too much on the bottom of the funnel (i.e., on deals closed) rather than at the top of the funnel, with deals received and term sheets issued. At Saratoga Investment Corp., for instance, we close only one or two percent of the deals we consider. It’s a very mathematical formula: If we source 1,000 deals, we might issue 80 term sheets and close 20 deals. I would argue, then, that you’re better off looking at all the stages of the funnel, not just the bottom.

That was my mindset in compiling this list of questions. Some of them involve subjective measures, some objective. They cover a wide variety of topics — deal flow and execution, marketing, technology, resources and networking. All of these things are pieces to the larger business-development puzzle, and combined they tell the tale of just how well a given investment firm is performing.

Particularly telling are the questions dealing with objective measures — the ranking that is used to determine who the team builds relationships with; the method of reviewing and executing NDAs; the means of tracking conversion rate in a company’s deal pipeline; the proprietary deal flow from non-traditional referral sources; and the effectiveness of marketing campaigns.

At Saratoga, we use two variables — relationship importance and relationship status — to track our referral sources, of which there are approximately 130. Our best referral sources are assigned A-1 rankings, with corresponding grades for those who are less so. These can all be tracked by your CRM.

The importance of self-assessment cannot be overstated. Our firm reviews its referral sources every month, and every quarter we do a broader business review, where we review strategy, determine upcoming city visits, conferences, etc (at least in non-COVID times). That is also when we review the aforementioned drivers — deals sourced, term sheets issued and deals closed.

The list I have compiled below offers further food for thought. These are things I have often taken into account, but never before put into writing. I think any investment firm that is looking to determine how they’re doing would find it a valuable resource. 

Business Development & Deal Origination Assessment

Below are 20 questions to help you determine the effectiveness of your business development and deal origination efforts and if they are in alignment with your organization’s goals.  Place an “x” in each column that corresponds to your answer. After answering all the questions, add each column by using the point value of each column (e.g., strongly agree = 5 points). Once complete, add the sum of all columns for a total score. Use the table below to determine your overall effectiveness.

The most significant and lasting cultural fingerprint I left on my father is his love of Seinfeld.  Whenever we’re together, the topic of one favorite episode or another pops up in our conversation.  It just happened when we were together recently.

My dad was asking about my job and how things were going.

“Let me get this straight,” he began. “You guys look at 800 to 1,000 deals a year to only make 15 to 20 investments??”

“Yes,” I nodded.

“Wow, that’s under a 2% close rate.  You must be an expert at not telling people their baby’s ugly!  Ha! Do you remember that one Seinfeld episode . . . “

Cue the tape!

“A little too much chlorine in that gene pool.”  The best.

OK – back to work.

Yes, my dad raises an excellent point.  As most Business Development professionals will tell you, one of the most uncomfortable things to do is turn down a deal, especially when it’s with a close relationship or big name private equity sponsor that you’d love to do business with.  This problem especially plagued me when I got my start in the business.

I hope to provide some of the best techniques I’ve developed to make sure that when you need to say ‘no’ the person receiving the decline should want to do business with you again.

First.  No Happens.  That’s this business.  You need to get really good at giving and taking rejection when you’re a private equity professional.  This industry is filled with many direct people.  At first, I hated it.  I was a nice Midwestern kid who didn’t like making others upset.

Second, don’t waste people’s time.  I’ve worked with people that will do an hour call with an investment banker just to tell them at minute 57 that this won’t fit our mandate because [ insert reason below  ]

. . . too little revenue.

. . . check size too small.

. . . we don’t touch the industry.

. . . we don’t invest in that part of the country.

. . . I hate the company’s logo.

. . . I used to date the CEO’s wife. (Well, that one may require a management meeting to confirm.)

See a pattern?  Yes, these are facts that 95% of the time should appear in the deal teaser and 100% of the time will be in the Confidential Information Memorandum (CIM).

Meaning that the person reviewing the deal should know within 5 or 10 minutes whether the deal is Dead on Arrival (DOA).  I get it, I’m a CIM junky.  I love learning about new and interesting companies.  That’s what attracted me to this profession.  But don’t waste the banker / lender / buyer‘s time just because you want to learn for learnings sake.  If a deal is not within your firm’s basic investment mandate, kill it quickly!  You’re more likely to see the next deal if you do!

“A fast no is a good no,” meaning that people appreciate a thoughtful and rapid decline because that person does not need to circle back and worry that they might be missing people that actually are interested.

Respecting someone else’s time also means never asking for additional materials when the rejection was self-evident from the outset. Take the time to review the teaser thoroughly before requesting an NDA. If something basic isn’t right – the industry, size, business stage or geographic location – that should be obvious right away. Establishing an NDA is a time-consuming prospect for everyone involved, and if it’s evident that the deal should be declined after reviewing the teaser, it’s completely unnecessary.

So how do you know which deals you should spend time with?

First and foremost, it’s wise to have a very clear sense of what type of deals you’re looking for. Define what your ideal opportunity looks like and, understanding that most investments won’t meet the criteria exactly, use that ‘perfect deal’ as a lens to analyze the ‘interest level’ of new deals. This allows you to act quickly and avoid the protracted world of ‘maybe.’  Focus on bringing in the best deals first.

People not only appreciate speed, they appreciate a definitive answer. A quick and absolute no, while disappointing, is nowhere near as dreaded as never-ending uncertainty. Whenever possible, avoid telling someone maybe, and if you must, try to ensure that it’s a short-term answer that can be tipped one way or the other swiftly. Giving people insight on how your view of the deal will be swayed will also help them guide you to the likelihood that ‘you’re going to get there.’

A business development best practice should include providing an honest explanation for why the deal isn’t a good fit. Never let silence serve as a stand-in for a response, and try to avoid using vague and meaningless language, explanations like: “it’s not a good fit for us at this time.” Entrepreneurs can learn a lot from rejection, so be sure to give them the opportunity to cull actionable data from the exercise that they can leverage to make future pitches stronger. They may need to better research their target investors, address a flawed business model, or make changes to their team. Whatever it is, give them the gift of your feedback and the opportunity to learn from their mistakes. And someone who isn’t enthusiastic about constructive feedback usually isn’t the kind of person you’d want to partner with, now or in the future. Follow the famous adage ‘give to get.’

I frequently will offer suggestions on other investment firms that may have an interest in the deal. Firms are varied, and as long as the opportunity isn’t fundamentally flawed, there’s likely someone else out there that’s filling that particular capital niche. One firm’s trash can be another’s treasure. Providing suggestions of alternate targets is one of the best ways to decline. Closing one door by opening another creates goodwill and ensures that there are no hard feelings. And wherever possible, offer referrals. If the other firm(s) are legitimate suggestions, you may have more than one person thanking you for it later.

And those aren’t the only ways to help companies who seek your financial support. For example, if you pass on investing in a great software company because they’re based overseas and you don’t invest internationally, that doesn’t mean that you can’t recommend the company’s product to your own IT department, your portfolio companies, or other business contacts. There’s no shortage of ways to pivot a rejection into a helpful and positive experience for everyone involved, so try to think of them as the first step in the formation of a strong new relationship, or the deepening of an existing one.

Let’s wrap this up so I can get back to watching more Seinfeld.

Here’s what we learned.  A key to successful investment (and perhaps life in general) is turning down opportunities that aren’t the right fit. Every investor is familiar with the scenario: we can only accept a very small percentage of the opportunities that cross our desks, and sometimes that involves passing on solid companies for reasons that can feel arbitrary. Because so much of what we do involves saying no, one of the most important skills to cultivate is the ability to tactfully pass on deals that don’t fit the bill. With practice and effort, it’s possible to deliver rejections in a manner that not only preserves key business relationships, but grooms them to become more fruitful down the line.

Relationships are paramount to our success, meaning all referral sources and business owners must be treated with deference and respect. By being upfront, honest, and considerate, you can ensure that your contacts will continue to send deals your way, that those deals will become better over time, and that business owners who are grooming your next star investment don’t write you off because of the inconsiderate way you treated them or a friend previously. By delivering your rejections with compassionate honesty and useful insights, you’ll be setting up yourself, your firm, and your contacts for greater success.