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Deal Pipeline, Market Analysis

The Art of Investment Decision-Making: A Structured Process

07/03/2024

Success in making investment decisions can often hinge on a structured process and diligent evaluation of key factors. At DCA Asset Management, we work through a structured Deal Flow review to methodically assess potential early-stage investment opportunities. Consistently following this structured process has allowed us to optimize our investment process over the years.
This Deal Flow process is the result of many years of experience and iterative workflows. We’re excited to peel back the curtain and share it with you today.

Structured Evaluation Process

  • Cadence and Objectives: Our team meets weekly for 90 minutes to review deals in our pipeline. Our objectives are to educate the full team on what we know about a potential investment, assess the opportunities and risks, and decide on the next steps – either to continue the conversation or pass on the opportunity. We target 3 deals weekly, spending about 20 minutes on each deal.
  • Presentation and Overview: Material is sent out in advance on each company being reviewed so that DCA members can be prepared. During our Deal Flow meetings, a DCA team member gives a short presentation of each prospective deal, including business overview, market landscape, financials, and growth projections, along with a summary of our latest communications with the company’s leadership. These steps set the foundation for a thorough evaluation and ensure that all stakeholders are well-informed from the outset.
  • In-Depth Discussion: Next, we open things up for discussion, giving all team members a chance to articulate their questions, concerns, and insights regarding the presented deal. We depend on our team’s insights and experience to evaluate the opportunity from every angle, including critical aspects such as valuation, risks, and fit with the organization’s investment objectives. When needed, we also seek the opinions of outside parties to get additional objective opinions or special expertise on a given matter.
  • Zoom Poll for Consensus: After each discussion, the team leverages a Zoom poll to decide whether it’s worth exploring the investment opportunity further and determining the next steps. Every team member ranks their interest in moving forward with the investment on a scale of 1-10, and we only proceed with those with an average consensus above 6. At DCA, we understand that each team member brings a unique perspective to the table. An anonymous Zoom poll ensures all perspectives are heard and helps to avoid groupthink.
  • Alignment on Next Steps: Post-poll, we confirm our alignment on the next steps, setting clear action items for team members in touch with the organization and any follow-up activity from the discussion. This evaluation process continues for companies where we have a continuing interest, and those businesses are reviewed again in subsequent Deal Flow meetings. A typical opportunity will be reviewed multiple times by the DCA team before a final decision to invest is made.

 

Decision Factors Evaluated

We use this Deal Flow process to work through the following key factors before arriving at investment decisions:

  • Management Team: What experience, expertise, and capability does the management team bring to the table to drive the business toward success?
  • Market Potential: What is the market size, growth trajectory, and competitive landscape within which the business operates?
  • Technology and Intellectual Property: Evaluating the business’s technology and intellectual property assets and any associated risks or legal issues.
  • Financials: What do we know about the company’s financial performance – including past results, key revenue streams, required cost structure, and future projections?
  • Risk Analysis: What risks are associated with the investment, spanning from operational to financial and market risks?
  • Valuation: Does the company’s proposed valuation align with market expectations and comparable investments?
  • Alignment with Investment Strategy: How well does the potential investment align with the fund’s objectives and overall investment strategy?
  • Exit Strategy: What are the potential pathways for exiting the investment, including the timing and potential returns?
  • Legal and Regulatory Compliance: What are the legal and regulatory issues to consider for identifying potential liabilities and compliance risks?

 

Our Investment Criteria:

The DCA Asset Management team is able to move efficiently through this process because we are aligned with what we are looking for in an investment. DCA typically invests in private companies that have some or all of the following attributes:

  1. Revenue-generating with a proven product and established customer base.
  2. Led by dynamic founders who are determined, take risks, and possess the vision to succeed.
  3. Developing proprietary technologies that lead to a wide moat.
  4. Compete within large and growing markets with the potential of capturing a meaningful share.
  5. Have the potential to generate profitability or be cash flow positive, but are investing in growth.
  6. Well-positioned to secure future funding based on reaching tangible milestones.
  7. Have the potential for strong IRR and Cash-on-Cash returns across the typical venture time frames.

 

In Conclusion

It’s always interesting to peek behind the curtains and see how investment decisions are made. At DCA Asset Management, our team evaluates investment opportunities using a structured and disciplined Deal Flow process. By taking a methodical approach and considering all key factors, we aim to make more informed decisions that best align with our investment objectives.

We believe a structured evaluation process is key to successful investment decisions. Taking a meticulous approach and performing thorough due diligence before investing is always critical. This disciplined approach helps us navigate the complex landscape of investment decisions to achieve greater returns.

*One of DCA’s guiding principles is that we will communicate with our investors and prospective investors as candidly as possible because we believe investors and prospective investors benefit from understanding our investment philosophy and approach. Our views and opinions regarding the prospects of investments and/or the economy are forward looking statements as defined under the U.S. federal securities laws, which may or may not be accurate and may be materially different over future periods. Generally, the words “believe,” “expect,” “intend,” “estimate,” “anticipate,” “project,” “will,” “may,” “should,” “plan,” or the negative of such terms and similar expressions identify forward looking statements. Forward looking statements are subject to certain risks and uncertainties that could cause actual results to materially differ from an investor’s historical experience and current expectations or projections indicated in any forward looking statements. These risks include, but are not limited to, equity securities risk, corporate bonds risk, credit risk, interest rate risk, leverage and borrowing risk, additional risks of certain investments, management risk, and other risks. We disclaim any obligation to update or alter any forward looking statements, whether as a result of new information, future events, or otherwise. You should not place undue reliance on forward looking statements, which speak only as of the date they are made.

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