“Week 2 of VC School: Venture Capital Deal Sourcing” is part of a ten-week series from the interns at Bowery Capital. The series will cover lessons learned and concepts covered during the weekly “VC School” meeting, a program taught by the Bowery Capital team designed to teach interns the fundamentals of the venture capital space. This summer, we want to open our doors and share these lessons with the broader community.
Venture Capital Deal Sourcing
Week 2 of VC school focused on the first step towards building a successful portfolio: venture capital deal sourcing. Sourcing is vital — it is truly the lifeblood of any VC firm. It helps to think about sourcing in two major categories: inbound and outbound. Inbound sourcing includes all deals that come to the firm through entrepreneur networks, fellow VCs and angel investors, firm team and portfolio members, and cold inbound communications from founders. Outbound sourcing includes focused outreached to specific companies, general networking and focused networking (demo days, conferences, etc). It is important to remember that timing is always paramount, and that not all forms of venture capital deal sourcing are created equal. As such, the most effective forms of sourcing are inbound from team and portfolio members, inbound from an entrepreneurial network, and focused outbound outreach. Below are the key takeaways from the lesson.
1. Focus on building your network with entrepreneurs in and out of your portfolio. Entrepreneurs that are in your portfolio and have a good relationship with your firm are great resources for sourcing as they will generally want to connect you with fellow founders. Make sure to build relationships within an entrepreneur network outside of your portfolio since founders are often turning to one another for fundraising and other startup advice. Pro tip: schedule a biweekly time in your calendar to reach out to entrepreneurs to touch base and share deal flow.
2. Don’t forget about cold outbound communications. Though often overlooked, developing an outbound motion can assist in identification of deals you wouldn’t see otherwise. A good strategy for outbound efforts is to dive deep into 2 or 3 sectors and become an authority. Through your research you will be able to discover new and varied companies and leverage your writings to build relationships with entrepreneurs. Pro tip: regularly compile a list of recently founded companies from Pitchbook or CBInsights and reach out through email to the companies that could potentially fit your thesis.
3. The best investors to source from are angel investors. Angels are often the first investors in startups — they are a great resource for deal flow as they want to see their companies succeed and raise the next round(s) of funding. Focus on building your relationships with angel investors, and similar to your founder network, schedule biweekly time to touch base and share deal flow. A great method for identifying potential relationships is to look at the cap tables of portfolio companies and reach out to their angel investors. It is important to build relationships with fellow seed investors but remember they will probably not share their best deals which they will keep for their firm. Similarly, Series A+ investors can be helpful, but their priority is to find companies that will fit their own objective, so pay close attention to whether they fit yours too.
4. Try to avoid spending too much time on generic inbound and general networking. Deals that come in through cold contact are generally negative indicators. It is perhaps not a good sign if the founder didn’t make an attempt to get an introduction and simply pitched through a cold email. Furthermore, most partners in firms are weary of deals coming from this channel, rendering them unlikely to gain approval from the investment committee. General networking, such as networking events and parties, will help you meet entrepreneurs and investors but can be a disproportionately tiring and time consuming experience.
5. Be organized, set goals, and stay positive! It’s important to maintain a personal CRM to track your connections and have a set routine for maintaining your deal flow. Especially when you are first starting out, it is important to set personal goals in order stay focused. Try to set a number for monthly outbound outreaches to force yourself to build a process that works. Most importantly, don’t get down on yourself. Who cares if someone didn’t respond to your email or want to meet you? Keep pushing and you’ll eventually succeed. Remember, it only takes 1 deal.
1. CBInsights, Pitchbook. These are great websites to search for researching deals and companies and getting your outbound deal flow working.
2. Deal Sourcing. These articles from Danielle Morrill, CEO of the startup research company Mattermark, Noah Jessop from Founder Collective, and 500 Startups breaks down the basics of venture capital deal sourcing.
3. The Venture Capital Deal Funnel. This article from CBInsights breaks down how the deal funnel works across the venture ecosystem and shows how difficulty it is for startups to make it through each round of financing.
4. Meeting VC Associates. This blog post, though focused on the entrepreneur’s perspective, gives the argument for the importance of meeting and maintaining relationships with lower level VC employees.
Check in next week for our first session on due diligence!
If you liked “Week 2 of VC School: Venture Capital Deal Sourcing” and want to read more content from the Bowery Capital Team, check out other relevant posts on the Bowery Capital Blog.