Best investors often get access to good deal flow. Often that’s referred to as “sourcing” good deals. But the key to sourcing is not about getting a ton of deals your way, it’s also about getting the right kind of dealflow.
What that means is finding deals that -
Fit your investment thesis
Introduce you to a great founding team
Have the potential to scale in big & exciting markets
Building dealflow is not signing up on Angellist or going for networking events. As a new investor, this will be not differentiated and you won’t get a chance to build relationships directly with the founders. Below are few suggestions that would help you better which are:-
Joining the right networks to generate dealflow
Build a thesis as your investment criteria
Attract founders with your value-add as a potential partner/customer
1. Building a network to generate dealflow
You hear about networking as being one of the most important skills in venture capital. Does it mean you are out to events every night? Well yes and no. But mostly no. (You can’t even do that currently in the middle of a pandemic.)
There is a big assumption that a good deal comes from reliable and predictable networks (Google, Facebook, Stanford, etc.)
VCs already know how these networks operate and can reference people building companies from these “known” networks. As a new investor, getting in the middle of the best deal flow coming from these networks would be very important. If you have worked at these companies then you have a head start. Check your alumni networks as sometimes there are alumni angel groups.
Here are some university, company, regional angel groups or entrepreneur networks you can join if you are an alumni. You can find one or create your own-
Company Alumni Groups:
Xoogler — ex-Googler network
University Angel Groups:
General Entrepreneur Groups:
These are not exclusive, there are also local groups (e.g. Houston Angel Network) and sector specific groups (e.g. Element 8 investing in cleantech). Think of creative ways to join and find dealflow through these channels
I have also seen new investors pile capital into companies coming out of accelerators and incubators such as Y Combinator and others. They initially invest in companies that come out of these networks and gradually build a relationship with larger networks over time.
2. Use an investment thesis to get specific and quality dealflow
If you are an expert in a specific area, such as procurement, supply chain, manufacturing, dev tools, etc. you may have a strong point of view on areas you want to invest in. This allows you to bring in a unique angle in that space. You can then use this thesis in three ways
Filter and identify startups or founders that fit your point of view making your dealflow more focussed
Create and publish content in your area of expertise. This can attract the right founders get in touch with you.
After you build a convincing thesis as a next step, if you respect some people you think that might be able to build a good company then you can also convince them to leave their jobs and start the company while you can help them seed it. Also, you can help them because of your expertise.
3. Show founders and investors your value is more than writing a cheque
A founder always loves investors and advisors that can help them build their company and help with good customer introductions. Founders love strategic investors who can open doors for them.
If you are in a position to buy products for your company or help founders close new customers with your relationships then you have a great chance of being able to invest in that company.
You can also offer your help to investors and their portfolio companies. More specifically, you can offer to help the VCs during diligence in specific areas of your expertise. Every VC loves to add value-add investors to the captable. Your willingness to help them with diligence and after with the company will definitely entice them to make room for a check from you.
Getting a quality dealflow is more important than quantity. In a fund you typically only have an opportunity to invest in 25-30 deals over a few years. Also, competitive deals are hard to do so you want to make sure you invest in the best company in that category that you can continue to love 5-10 years down the road as well. That is why it’s important to do all this work in generating good dealflow for you.
Also, remember that investing is a long term game and it can’t be transactional. If you start building goodwill things will come back to you in many ways and people will reach out to you and include you in their deals. Good luck investing!