Lecture 4 Flashcards
What is one of the most important qualities of a VC when it comes to deal sourcing?
magnet for deals
What is the main job of a VC?
Deploy capital
- raise more funds
- make more money
What are the steps to deal-establishment?
- Sourcing
- Evaluating
- Deciding
- Winning
How do VC’s typically divide their time?
- Sourcing deals
- Helping portfolio companies
- Managing the firm
What is the most important responsibility of a VC?
Sourcing a deal is the most important. Without it you cant help portfolio companies or manage the firm
Do funds follow a power law?
Yes, Because there are only a few
good companies, and you have to find them
Why can’t GP’s send surveys to founders to understand their experience?
Surveys create biased answers when given to entrepreneurs. Don’t want to say anything bad in case they need to do another round or need something in the future
Who is usually in charge of deal sourcing in a firm?
Juniors are most likely doing this because the upper management doesn’t want to bother with organizing the data (Partner & Successor Model)
What is a CRM?
Customer Relationship Management tool
–> Integrates with gmail
–> anytime an email enters your Gmail its organized
–> can measure quality of deal flow
The most common is called Affinity
What are the methods to get deal flow? And what is the quality of each one?
Inbound ( Low Quality)
Outbound (Average Quality)
Referral (High Quality)
What is an Imbound Method?
Nothing about it is personal
Received through email, website, phone calls, LinkedIn
Lowest quality deal flow
Why don’t VC’s like getting Inbound messages?
VC’s don’t have time to filter through all the thousands of messages
–> often are not relatable or personal
Finding an introduction (referral) is a test of an entrepreneur’s resourcefulness
–> easier to find an introduction then fire off a million likedin messages
VCs look for momentum behind a company
—> inbound is a sign that this company is desperate for cash
How can inbound drive quality?
VC spends a lot on brand building
- content (social media, marketing, podcast)
- portfolio (“I worked with Uber”)
- knowledge from prior deals
- prior work experience
How can an entrepreneur effectively spark interest with inbound messaging?
Dont mention companies and just share ideas
–> This will kill the power dynamic
–> shows you are just brainstorming
–> helps build a relationship without going straight into a favour
Don’t send messages to people you have never met or if you do, try to relate and make it personal
What is outbound sourcing?
you as the VC firm are going out and looking for companies
your are doing an inbound strategy but for yourself
Looking for something specific
Trying to find a diamond in the rough
Where can you find late-stage companies when doing outbound?
Pitchbook, Crunchbase
–> Looking for an established business
–> Everyone’s going to find the same list
Where can you find series A company when doing outbound?
Pitchbook and Crunchbase
How can you find Seed or Pre-seed companies when doing outbound?
- Dont have websites
- This is were it can get difficult to find
- All about hustle and creativity
–> Meet with an accelerator, studios, incubators
–> Look at top 20 schools that have gotten grants
–> go to a hack-a-thon
–> Look at people who have founded businesses in the past
–> People who worked at big tech firms
How is the deal sourcing outbound process facing innovation?
Funds are investing in an automated deal sourcing to do this automatically in order to filter through and find the optimal deals that meet specific criteria
Why do partners rarely do outbound?
Too much work and requires you to be running data filters late at night
What is the referral method of deal sourcing?
- Friends
- Fellow VC at another firm
- Founder who is already in your portfolio
What are the pros/cons of a referral from a friend?
PROS:
- Trusted
- Vetted from someone you know
- Someone else has done the due diligence
- Someone else is putting their reputation on the line
CONS:
- All based on the quality of your network
–> On day 1, your network/inner circle will suck
- What are their incentives?
- May not understand industry/ focus or what venture is
- Pressure to take the deal given that this is a friend (might think with a bias lense instead of looking at the value of the business head on)
What are the pros/cons of a referral from another VC firm?
PROS:
- they know the business
- putting their reputation on the line
- the VC community is small and know that it will go with them if they try to play dirty
- completed the due-diligence on the firm prior to sharing
CONS:
- Why are they sharing this deal instead of investing in themselves?
- If they are passing on the deal, why?
- Are they looking for more participation or because of discomfort with the business?
What are the pros/cons of a referral from a founder in your portfolio?
THIS IS THE BEST TYPE OF REFERRAL
PROS:
- They have a pulse on the market and industry
- Founder to founder is more collaborative (no power dynamic or incentive to share)
- The founder who has been successful in your fund strongly believes in the idea and values of this other founder
- Putting their reputation and relationship with the VC firm to introduce someone else
CONS: NONE
What do you need to do to effectively outbound source when looking for companies?
- Pick an investment stage
- Go looking where they might be:
–> Series B: Pitchbook/Crunchbase, on the web
–> Series A: blogs, VC websites, TechCrunch, media articles
–> Seed/Pre-Seed: might be in stealth mode
Which stage is the hardest to find during outbound source?
Early stage founders/ideas
–> Nothing or little public presence, need to figure out how to find them
What is a thesis-driven method
Not randomly looking for people online but very targeted
Look for the companies working on the problem and agree with your view on the world/goal for the future
–> VC firm articulates 1 or 2 sentences about their mission and then find companies that have similar value statement
What are the problem with the thesis-driven method? How do VC firms try to solve this?
so focused on finding companies that fit your thesis that you forget other factors
Some will start with the thesis, think that none of the 10 companies solve the problem that needs to be solved, and start it themselves with co-creation or incubator within the firm
Why should a founder not mention that an Investment Bank is running the round process?
It’s a negative signal about the founder
Founder and CEOs main objective is to attract resources (capital and talent)
If you can’t do the capital piece at the beginning, what are you doing?!?
Seen as an inability to do the job
Looks better if they have an Investment Bank in Series B
What is Linkedin strength in the outbound process?
Finding people
What is GitHub strength in the outbound process?
Finding projects
What is Twitter/Discord strength in the outbound process?
Find early ideas and visionaries
How are LP’s trying to influence GPs outbound deal sourcing process?
Trying to encourage GPs to track diversity
–> using a decision input
–> The LPs forcing it down
Why shouldn’t a founder listen to everything a VC says or let them run the company?
VC’s are good at going into a meeting and tearing the company apart
They don’t know the company, industry and don’t live the business 24/7
What are some filters to put into platforms when doing outbound data-driven methods?
- Keywords
- Booleans (TRUE/FALSE)
- Location of residence
- School of Graduation
- Prior Company
- Tenure at prior company
What is a Scout Program?
Give a bunch of money to really connected people and just let them invest in stuff
At the end of the day you are backing the scout
–> You don’t want to see all their deals, just there best two
–> Rely on these people to filter for them to get high quality deal flow
–> Invest in a bunch and just share the one deal that the GP should care about
Why do firms think deal sourcing is intellectual property?
Don’t want to share how they get their companies with competitors
If everyone is using the same software, what is differentiating that VC from the deal sourcing of their competitors
Why do VCs not invest in medical technology companies, medical breakthroughs or medical devices?
Most VC’s don’t understand the medical background behind it and go away from things that are too complicated to understand.
Need someone who understands the math, the FDA approval process and the science method
How can a VC work with a CEO of a company in the deal sourcing process?
Go to CEO of x company and say “next time you see a good company use this $50k on that company”
–> Whatever they see they can invest in
–> If they burn your 50k and run of to another country no loss, drop in the bucket
Why would an entrepreneur decide to go to a conference?
Put a face to the company and a name. Allows for networking among founders and with VCs
What is a feeder fund?
Feeder fund (“Feeder”) is an investment vehicle, often a limited partnership, that pools capital commitments of investors and invests or “feeds” such capital into an umbrella fund, often called a master fund (“Master”), which directs and oversees all investments held in the Master portfolio.
Investing in smaller/pre-seed funds (get deal flow)
Invest directly in the fund, not in the underlying companies
○ In this case the VC ends up being an LP in a smaller fund
What does having a scout program give you as a VC firm?
Invest directly in the fund, and then they invest in a bunch of companies
Difficult for VC to manage
What are some potential challenges with running this feeder fund program?
Very difficult to manage
The 100 feeder funds may equal
thousands of underlying
companies
How do you track them all?
How do you know which ones
are worth investing in down
the line?
Why might conferences/events be a good or bad way of sourcing deals?
Good: connection can be
personal, be present in the ecosystem
Bad: usually self-selection of
founder types (ie the best
founders are not networking,
they are building)
Why would a VC firm have an EiR
Expands firms network
Early qualified potential deal
Why would a VC create a service offering as it relates to deal sourcing?
Invest so heavily in services that the best founders come to you
Knowing that the primary job of a venture capitalist is to source deals
and having understood the power law, how would you make the
following structural decisions for your firm?
The way you structure your firm?
Structure: optimize for finding opportunities, have lots of scouts,
and strategies for sourcing deals.
Knowing that the primary job of a venture capitalist is to source deals
and having understood the power law, how would you make the
following structural decisions for your firm?
The way you structure compensation?
Compensation: if you tie carried interest to the performance of
the entire fund vs the performance of your individual portfolio
you incentive all members to help each other
○ Could mean you have freeriders
Knowing that the primary job of a venture capitalist is to source deals
and having understood the power law, how would you make the
following structural decisions for your firm?
The way you spend your time?
Make sure to spend more time on deal sourcing effort than on
managing the portfolio and managing the firm
Could come at the cost of not having enough time for
your board commitments
Knowing that the primary job of a venture capitalist is to source deals
and having understood the power law, how would you make the
following structural decisions for your firm?
The way decisions are made at the partnership?
Decision: favour conviction over consensus
–> Could mean a partner doesn’t have all the right feedback or is biased in the deal
You are a venture capitalist doing extensive due diligence on the food
sector and you are passionate about innovation and advances in
plant-based meat substitutes. You find an entrepreneur on Linkedin that is building something exactly in line with your views of how this market will turn out and you decide to message her.
- This is an example of what type of sourcing strategy?
- What are some of the potential downsides of this strategy?
- Craft a message that you think would get her attention.
Outbound
Downsides:
- confirmation bias (looking for something specific and when you find it you do the deal neglecting downsides)
- limit the scope of opportunities you are looking for
- you could be wrong about your thesis or how your mission aligns with the founder
Message:
- short
- simple
- reference something about her
- show that you can relate and that you care and are passionate about the business ambition
You are an early-stage venture capitalist searching the next generation of outlier founders. You particularly like founders that have experience building startups because they deeply understand what it takes to build a company, and the ups and downs associated. You want to craft an outbound sourcing strategy that is going to return you 20-30 qualified leads that you can pursue.
What platforms might you start with?
Linkedin, Discord, Pitchbook, Crunchbase
You are an early-stage venture capitalist searching the next generation of outlier founders. You particularly like founders that have experience building startups because they deeply understand what it takes to build a company, and the ups and downs associated. You want to craft an outbound sourcing strategy that is going to return you 20-30 qualified leads that you can pursue.
Come up with 10 different sourcing filters you might use on those platforms to help narrow the field and ensure you are getting the best quality
- Startings something new
- Exit
- Second-time founder
- Stealth
- University of graduation
- Country of residence
- Amount of capital raised
- Place of previous employment
- Length of previous employment
- Co-founder
You are an early-stage venture capitalist searching the next generation of outlier founders. You particularly like founders that have experience building startups because they deeply understand what it takes to build a company, and the ups and downs associated. You want to craft an outbound sourcing strategy that is going to return you 20-30 qualified leads that you can pursue.
What are some other strategies you might take to connect with these individuals?
- Specifically how would you execute on connecting
with them? Walk through a specific example
Ask for a warm introduction, attend a conference, comment on a piece of their work
You are a venture capitalist and you want to build a referral-based sourcing strategy. You realize that your network as-is is not strong enough or motivated enough to send you deals, so you are looking to quickly expand the amount of deals others are going to share with you.
- A referral from which type of connection would give you the highest signal of quality?
- What are the drawbacks of some referral strategies?
Founder (either in your portfolio or another founder you like)
- Drawbacks are that you are at the mercy of the referrer’s ability
to filter quality and have a strong network - If their network or quality is bad, the referral will be bad
