Deal Sourcing

The ability for a VC firm to become successful in generating returns depends on a multitude of factors, which tend to be measured by all sorts of metrics and aggressively tracked against. However, the one aspect that rises above all of them is the ability to generate a strong deal flow, which is the rate at which VCs receive potential investment opportunities from founders of startups.

Deal flow is where the Associates make their name (and money) in early-stage VC firms. But how can one find a pocket of startups to meet with, perform due diligence, and eventually go back to the firm with a potential company to invest in? There is only thing that matters in accomplishing this: building a network. Your ability to find talented companies to invest in a directly proportional to how big your network is and what you can do for them. The more well-connected you are and the more you are willing to help your connections, the easier it is to get referrals and establish a pipeline.

For early-stage funds, in order to grow your network and create a pipeline of companies looking for capital, there are several things you can do:

Find Your Nearest Startup Accelerator / Incubator

Chances are that if you live in a metropolitan hub, there’s bound to be a startup accelerator or incubator you can check out. These places are thriving with founders who have at least an idea of what they want to create and may even have an MVP of some type worth checking out. Every so often, there will be a sponsored event at these places where founders come out and mingle with other founders or investors.

Use Market Research Tools

Some that come to mind are CB Insights, Pitchbook, and Crunchbase. You can spot trends in certain industries, identify startups with respect to the amount of funding they’ve received, and locate startups in your area. Market research is powerful in itself if you’re looking to specialize in a certain sector.

Scour Platform Media

LinkedIn, Meetup, and AngelList are some of the more popular places to find and filter startups or founders looking for capital. You can filter by different regions, sectors, and series in which they are raising capital. The conversion rate here might not be as high but it still is another outlet to find and source deals.

Provide Value to Founders You Know

This is based on your current network. You can always go to the founders you’ve met and continue to see where you can help them out, even if they weren’t the ones you ended up sourcing. This helps the most when the founders are still early enough to not need funding. This is because they’ll keep you in mind when the time does come and can act as another referral tunnel for you since founders tend to know other founders pretty well. Always be providing value where you can.

Attend Pitch Competitions / Demo Days

Product Hunt usually has places throughout the country where they have pitch competitions. Essentially, founders come up, explain their product or startup, and answer questions from judges in an attempt to win some sort of financial prize. This also helps act as a filter since only the best in the competition win out and are seen as having more potential. Some accelerators and incubators also host Demo Days (see YC) where startups who have been undergoing a program of scaling their company show off all the work they’ve done.

The most important thing to do when looking for sourcing deals is to not think of yourself. Think about what you can provide for the founders you meet. Always try to sell yourself as someone who can be of real value to those looking to raise capital. Even though startups do look for ways to raise money, they also look for resources they can’t find anywhere else – general guidance, help on financial models or market analysis, and more. By tailoring your focus around this and finding places where startups might be, sourcing deals can be a win-win for both parties in more than one way.