For private equity investors, data quality is everything.
To find the right acquisition targets, dealmakers need as much information as possible on a company’s strategic and financial operations.
But this is often a huge challenge for investors focused on private middle market companies. The data is difficult to find, and the quality of what is available from company databases and deal marketplaces is often subpar.
Some dealmakers turn to generic large language models (LLMs) like ChatGPT and Midjourney to source private company data, but those applications can throw an even bigger wrench into the process with inaccurate or outdated information.
If your firm is focused on the private middle market, you’re essentially left with two choices:
- You can build your own proprietary platform to find and leverage the private market data you need.
- You can buy a subscription to a dealmaking platform and use it to execute on your proprietary sourcing strategies.
Deciding which path is right for you depends on your firm’s specific needs, engineering resources, and budget.
Below, we examine the benefits and drawbacks of each option.
Why Build?
One of the main reasons investors build their own M&A data infrastructure is to establish an edge with data that no one else has — or that no one else is interpreting correctly.
The truth is most company databases and deal marketplaces aren’t purpose-built for M&A workflows. For example, Zoominfo’s contact database offers 150M+ contact records, but those include limited company owners, founders, and principles, which are essential for M&A conversations. (Compare this to a platform like Grata, which offers over 8M verified executive contacts.)
Meanwhile, broad industry classifications and reliance on human processes limit how granular information from company databases like Sourcescrub can get. Middle market dealmakers can’t properly navigate the pool of 10M+ private companies without technology that allows them to dig deep. (Grata, on the other hand, uses a proprietary industry classification system — including industry-leading software classifications — powered by machine learning to drive deeper searches.)
If done correctly, building proprietary systems can fill in the gaps left by prep-packaged solutions and bring major benefits to investors:
- Dealmakers can tailor their systems to drill down into niche spaces. With more data granularity, investors can discover new market adjacencies that fit their investment thesis and identify more targets.
- Equipped with the right data, investors can reach target companies before their competitors, giving them an edge.
- Investors can say that they use differentiated sourcing, which is appealing to limited partners (LPs). LPs are interested in unique strategies because they want access to new pockets of their markets, which can yield high returns. LPs also want to back firms that can find deals at more attractive prices. If investors can make the case that their system can expose them to new market segments at an advantage over the competition, and integrate niche, verticalized, unique data sources, LPs will likely be more willing to open their wallets.
Some investors also choose to build their own data infrastructure for privacy reasons. Rather than relying on external data storage solutions, some prefer to house their data on their in-house systems for full control. In-house servers can also be configured to meet specific needs, which could be a draw for investors concerned about the customization abilities offered by third-party solutions.
The Tradeoffs of Building
So given the potential benefits, why wouldn’t you build out your own M&A data infrastructure?
Building is a massive — and expensive — undertaking. To truly pull it off, your firm needs deep data engineering, devops, data science, and AI and machine learning (ML) capabilities. Just assembling that kind of team can be prohibitively expensive — think upwards of $600k. Add in the cost of infrastructure and licensing datasets and you’re easily at $1M.
Some firms who decide to take the Build route opt to make a couple of senior hires for their in-house team, such as a product manager and a CTO, and then outsource the rest of the work to an overseas agency. This might be cheaper than building out a full engineering and data team, but it comes at the expense of data quality.
If you’re going to build your own solution, you have to commit to doing it right. Creating a data infrastructure that works poorly, or that doesn’t address the specific need you built it for in the first place, will cost you even more in lost opportunities.
If this all sounds like your firm would be biting off more than it could chew, it’s time to consider your buying options.
Why Buy?
Just because most firmographic databases and deal marketplaces aren’t custom-built for M&A workflows doesn’t mean there aren’t excellent dealmaking platforms out there. You just have to choose carefully.
Platforms like Grata are solely focused on helping private middle market dealmakers source and close deals. Clients pay for access to guaranteed expertise and dedicated engineering resources, so they get all of the benefits of a custom-built tool with none of the hassle of managing the infrastructure. That includes not having to worry about building the frontend to make accessing and interacting with the data a seamless experience.
Grata’s platform was built by 30 engineers and is supported by 40 QA analysts, so it reviews data at the rate of 3,000 analysts. Realistically, investment firms just can’t keep up. You will always be behind the market if you try to build this kind of infrastructure in house, and that will give your competitors space to pull ahead.
Because our experts understand the common data issues that investors face, we can help you avoid them. Our proprietary AI, ML, and natural language processing (NLP) tech automate deep company research to surface the details you would otherwise miss. Because our algorithms are in tune with the nuances of a business — regardless of how niche it is — they can surface companies similar to your targets, helping you explore the right adjacent markets.
Another often overlooked benefit of going with an industry-leading platform is that you can bring on new team members who have experience using it. Business development representatives who are familiar with platforms like Grata know how to use them to optimize their workflows to execute on your firm’s proprietary sourcing strategies, so you can find more deals.
In short, relying on data experts frees you up to devote more time to your expertise: investing. With Grata taking care of everything behind the scenes, you can purely focus on finding targets and closing deals.
The Tradeoffs of Buying
As with anything, there are some downsides to buying a third-party M&A data solution. Choosing this route can make your sourcing strategy appear less unique to LPs and the broader market, especially if you aren’t leveraging the platform you buy to support a differentiated, thesis-driven approach.
Not making the most of the platform you buy can also cheat your firm out of opportunities. If, for example, you’re searching for broad terms like “software,” you’re almost certainly seeing all of the same results as your competitors. Chasing more competitive deals means you’re more likely to pay a higher price — or even lose entirely.
Grata Gives You the Best of Both Worlds
The good news is that with Grata, you can strike the perfect balance between buying and building.
Several of our clients have Grata platform seats for their business development team (the Buy side) as well as a data scientist running Grata’s data warehouse or APIs on their proprietary models (the Build side). That way they have all the benefits of customization capabilities without having to reinvent the wheel when it comes to UI, infrastructure, and data engineering.
For investors looking to buy a subscription to a dealmaking platform, Grata has everything you need to gain an edge over your competitors and win more deals, including:
- AI-powered search
- The ability to curate your own target lists or to search through our List Library with pre-built lists from top industry sources
- Verified contact information for executives from millions of middle market companies
- Conferences and events relevant to your space
- Seamless CRM syncing
- Public, private, and VC & growth comp data
- Market fragmentation analyses
For those looking to build out their own solutions, Grata’s API lets you easily access all of the data and algorithms you need in your own systems:
- Search API: Ideal for building company lists and using keywords to find targets that match your investment thesis
- Similar API: Perfect for similar company discovery, comp set generation, benchmarking, and list creation
- Enrichment API: Designed for single company firmographic enhancement and using company domanis to add substantive profile data points
- List API: Allows users to tag companies into custom segments; create, update, and delete company lists; and exclude lists from Search and Similar Search calls
If you need bulk data feeds to enrich your firm’s existing algorithms and company data, Grata’s Data Warehouse can give you access to 25 data points on over 12M difficult-to-find private companies, including:
- The most accurate employee counts and private company revenue estimates
- NAICS6 classifications with over 95% accuracy and a custom taxonomy for software
- More than 35 categories for vertical and horizontal software business models
- Accurate and comprehensive business point of interest (POI) location data
- Contact information for 8M+ private company executives
- Over 7,000 annual events, along with conference attendee lists
- Private market transaction data for PE, corporate, and add-on acquisitions, as well as VC and growth rounds
Grata also captures all of the relevant real-time web data that you can’t get from LLM APIs. We use machine learning to ensure our data system is always up-to-date and that it meets diligence-grade standards.
Whatever your needs are, schedule a demo to see how Grata can help you leverage the best data to win more deals.
Grata has been shortlisted for Private Equity Wire's Best Data Provider Award! If you love Grata data, cast your vote here by August 16.
