The Art of Developing Deal Flow

Famous venture capital firms have a lot of what I like to call “passive deal flow.”
Every single day reputable VCs will get their inbox blown up with pitch decks from entrepreneurs. Often times, a good bit of their job — or the analysts’ job — when it comes to deal sourcing is to merely filter this massive influx of pitches.

But what about us new kids on the block? When you’re just starting out at a new fund with a limited industry network, a much more substantial portion of your deal sourcing comes from “active deal flow.” This can mean a whole laundry list of things, which is at times overwhelming for new associates. In this blog post, I’m hoping to shed some light on the situation.

Simply put, the only goal of working on one’s deal flow is to find the winners — the ones that are going to return that 10x, 20x, or even 100x for your fund. Above all else, you don’t want to miss the big one — the Uber, Snap, Facebook, etc. You can’t make the best deals in the industry if you never see them, right? However, in an ideal situation, you are spending less time sifting through deals that aren’t interesting to you so you can spend more time evaluating the great ones. So, there are two sought-after elements here that you must optimize for: quality and volume.

Some bad examples of hijacking your deal flow for high volume while ignoring quality would be to manually scrub all startups on crowdfunding sites or blast out an ad campaign for your fund. Quantity does not necessarily equate to quality. While you may be able to find that winner you’re looking for through a sheer volume play, wouldn’t you rather save the time?

The unfortunate truth here is that most high-quality deal flow is relationship based and takes a while to develop; however, in the meantime, here are some actionable items to improve the quality of your deal flow.

Network, Network, Network: Attend each and every networking event that you can, so long as it is relevant to your investment thesis. A networking event can mean a tech conference, an accelerator’s demo day, or anything really. As long as there are investors and startups there, it’s worth your time. When your at these things it’s important to actually meet some folks, otherwise you might as well have stayed home and worked on your computer. Here, you can do a multitude of things to up your game. You may befriend another investor who could share deals with you. You can learn a considerable amount from industry experts speaking on panels. You can even speak on panels — which gets you a lot of attention.

Develop an Investment Thesis: Not only is it smart to think hard about what particular types of startups you find attractive but if you become super passionate and opinionated about a specific topic in venture a couple things can happen. First off, you’ll have a much easier time connecting with VCs who may share deals with you. Convincing another investor of a compelling investment thesis will not only get her interest but will also cause her to want to see your thesis in action. If your thesis works and it leads you to a massive exit, you guys are buddies now. Additionally, becoming vocal about this thesis could get you featured on certain online media like blogs, vlogs, podcasts, press releases, etc. In a perfect world, VCs or entrepreneurs who share your vision will reach out to you.

Leverage Your Own Personal Network: Whether you think you have one or not, everyone has a valuable personal network. Your peers are slowly becoming professionals in their various industries. If you went to college, your alma mater has a multitude of resources including, teachers, current students, and possibly entrepreneurial programs — all of which can prove to be a fountain of information and valuable deals. Being active and open on social media about your investor status, also, will let enable online connections to refer you as an investor as any and all of them meet entrepreneurs or see ideas by happenstance.

Follow Other VCs: Examining other VCs portfolios and their investment theses allows you to check the pulse of the startup community, so to speak. For example, you may notice that one VCs most recent fund invested a ton in robotic food prep. Follow up with someone at that firm. Ask why they thought that was so attractive, and how the companies are doing now. There may be an allocation for you and your fund in some of the companies, and your VC contact will have tons of research documents prepared on these investments.

These are the things I’m currently doing to work on my deal flow, but I’m always trying to find more creative and effective ways to source deals. The VC that is more efficient with their time spent on finding deals has a larger opportunity to self-educate, conduct due diligence, and be a better investor in general.

Alright, that’s it, guys. What are you looking at me for? Get out there and find that unicorn.