One of the biggest differentiators between private investors and fund performance is their deal flow. This fact is especially true today, as more money has moved from the public markets into venture capital through micro-VCs, crowdfunding, and corporate venture capital arms. This competition for deal flow gives the founders of a startup an advantage when choosing an investor. There is so much capital from which to choose, so VCs need to find access to the best deals. This post will walk through some strategies for sourcing deals and why investors need to focus on their sourcing process.
Venture capital is inherently a people-focused industry. The network a VC creates will probably be the most critical aspect of their fund’s performance. This network includes the limited partners who invest in the fund, the industry experts who can advise portfolio company’s boards, and the founders themselves. Many folks in the industry are familiar with the “warm introduction,” a network-driven approach to making contacts. The warm intro is still king in VC dealmaking, and there are critical ways to position yourself to receive an introduction. Essentially deal flow can boil down into two strategies for investors that all revolve around building and engaging with a network.
Just as the name implies, inbound sourcing allows the deals to come to you from an external source. Based on your investment thesis, which we talked about here, you probably invest in a particular company stage, vertical, or region. It’s best to use that thesis to drive your strategic partnerships within the ecosystem. Below are some sources that a VC should consider building relationships with to increase their inbound deal flow:
- Accelerators: Many startups will participate in an accelerator program to help further develop their businesses. Some of the top known programs are Y Combinator, Techstars, and 500 Startups. Beyond these, there are plenty of verticals, business competencies, or regional-specific programs in which startups can apply. As an investor, it’s crucial to have relationships with the managing partners of these accelerators. Not only will you get first invitations to the startup demo days, but it’s also very likely that you will get early access to the companies in each cohort. These sneak peeks allow you to have the opportunity to invest before others even see the pitch.
- Angel Investors: Angels are the individuals writing the first checks for a startup, and therefore you want them to pass their deal flow onto you. Many angel investors are former founders or experts in a specific industry. Some may even be an entrepreneur in which you’ve previously invested! You want to be the investor on speed dial when an angel investor has a company in their portfolio that can be a success.
- Other VCs: For the same reasons you want to have partnerships with angels, you also want to have a network of venture capitalists earlier in the company pipeline than you are. If you invest in growth-stage companies, it’s essential to know the VCs who invest in the early-stage and can pass deal flow onto you. A separate note on this is to have relationships with VCs in a further stage than you participate. These relationships are vital for you to continue to pass your deal flow along and make introductions as your portfolio companies continue to grow.
- Local Entrepreneurship/Government Programs: Many states and municipalities have government programs to help spur entrepreneurship and create jobs. In some cases, these are private/public partnerships, and many are in emerging markets where venture capital is nascent. It’s not uncommon for incubators and accelerators to have a partnership with these programs as well. These relationships provide access to early founders and allow you to bring expertise into policy-making as well. This influence helps the overall ecosystem and creates more incentives to establish a startup in your locality.
- Universities: Many universities have research laboratories and entrepreneurship programs where founders and startups begin work. It’s a good idea to familiarize yourself with the top university programs within your specific vertical or region and build relationships with their programs. In some cases, if you have a close relationship and are respected in the industry, you may contribute to building their curriculum to ensure that they are spinning out the best companies.
Many founders are looking for funding, so you will likely get bombarded with cold emails, LinkedIn messages, and other means of contact. Often, founders may not research to know if they even fit your investment thesis, vertical, or company stage. Like a company’s marketing and sales funnel, a VC can tailor that outbound sourcing to ensure that they provide value to the community and attract companies that are a good match.
- Content Creation: A VC can and should be active on social media platforms and engage their audience in various ways. Many VCs, such as Fred Wilson, have blogs that discuss startups and venture capital. Other firms, like A16Z, have podcasts that provide information on pertinent industry news. There are several benefits to this strategy. By engaging with individuals within the startup ecosystem on various platforms, you can stay updated on trends and be a more informed investor. By offering up your opinion and insights on things, you show a founder that you could be a value-add investor in their company. Lastly, you increase your firm’s reach, allowing you to broaden your network and increase deal flow.
- Founder Email Template: A simple yet effective tactic is to publish a template or form in which founders can reach you. This method streamlines the process of getting in touch with you and removes the need for an introduction.
- Hosting/Attending Events: It will be pertinent to host or attend industry events to expand your network and meet founders or other investors. Some events include demo days and industry conferences.
- Online Resources: There are several resources online in which you can subscribe to learn about new companies. Crunchbase and Pitchbook are both useful for staying up-to-date on deals happening within the ecosystem. Some of these companies may post their pitches on YouTube for you to watch. It’s also a good idea to sign up for industry-specific newsletters and create custom Google Alerts for news updates.
VC is a relationship and reputation business. To get access to the best deals, you need to know the right people. Not only will this give you access to the startups who will likely grow and have a successful exit, but you will become a value-add for your network and portfolio companies by making introductions to others who can help. Lastly, on reputation, make sure you provide as much value to your network and relationships as possible. Partnerships are a two-way street, and if you are consistently looking for access to deals without giving anything in return, then your network you worked so hard to create will quickly disappear.