Unit 7 of 63
In Progress

Generating VC Deal Flow

Deal flow is a necessary condition of success in Venture Capital. Early access to the best startups is key to generating above-average returns in this asset class.

The primary sources of deal flow are mentioned in this video, such as:

  • Personal networks
  • Branding
  • Startup ecosystem
  • VC ecosystem
  • Fundraising boutiques

How do you generate deal flow for your firm? Do you have any story on meeting a great Founder or founding team in unusual circumstances?

💬 Let us know in the Comments section below.

👀 Sources & Additional Material

  • In a recent and extraordinary account of his adventure in Silicon Valley, a young VC stresses the importance of sourcing deals when you are a junior member of the team. You can read and comment on the article on our VC Forum
  • The calendar you see in the video is from this article
  • Due to the COVID-19 crisis, many popular tech events moved online but are now back offline. You can sign up for them on EventBrite, or directly from their website pages, such as Techcrunch or Web Summit (look for the digital access if it is your preferred way to access these events)
  • I invest mostly as an angel (small
    s’ils 🙂 so I get my deal flow from fellow startup founders who send me their opps. And I do the same.
    Question: it’s the first time I hear about frustration. Great job. Where can I find other sources mentioned in the video and not on the list on this lesson? Thanks. Eager to learn more!

  • Would it make sense to offer those in your referral network some type of incentive, such as:
    * A small renumeration
    * Deal flow back to them
    * Equity in the startup if you do invest in the startup?
    * What other incentives can I provide my referral network?

    There is an organization that considers itself the Y-Combinator for those who seek to raise money from LPs. They have a 10 week program. Do you believe that it is worthwhile to attend such a program or can I learn the information on my own? Thank you kindly!

    • Hi Wayne,
      it’s a good point.

      It depends who you’re talking about. Lawyers (and most consultancies such as auditors) are frequently not allowed to perceive any kind of remuneration in exchange for introductions. The best way to “repay” them is to employ their firm in your deals, as mentioned in the video.

      For other referrers, the cardinal rule is to avoid conflicts of interest. If someone gets something if they convince you to do something, most of the time, they will. Make sure you preserve the independency of thought of those who work with you on deal flow.

      One best practice for operating partners or venture partners who bring you deal flow is to have them put some of their own money in the deal, then sweeten it with options or equity. That way, they will advise you (e.g., during DD) only if they believe in the deal. Free incentives too often lead to biased positions.

      A nice meal can also do it. I systematically invite those who refer deals to me to a 2* or 3* Michelin restaurant or provide them with a voucher to go with their significant other. People appreciate it.

      On your other question, please use the Message function and send me their website info privately, I’ll take a look at it. (see the Messages icon on the left menu once you are in the home page).

  • I had the chance to be in the same class and a good colleague of a successful entrepreneur in my Bachelor’s degree. Oscar created Project Lobster which is a Start Up that creates quality contemporary eyewear in a sustainable way.

  • Thanks for the video – I have two questions. Do you think VC firms are actively recruiting from different universities in order to widen their network? And if yes, do you heard of situations when an application was turned down because the VC already had a few team members from the same university? Thanks a lot in advance!

    • Hi Peter, there’s an article (I think referenced in the online module, otherwise definitely on the How to Get A VC Job live stream) from a couple of years back showing that 40% of US VCs went to either Harvard or Stanford. It tends to be similar across the world. But changing. Slowly.

  • Hi! I wonder whether Internet is going to play a more important role in bridging founders and investors? Something like an online demonstration platform? Some start-ups go to cloud-funding sites like Kickstarter for funds, I imagine similar platforms but targeted at VC funds would be interesting

    • It’s an idea. You also have the likes of AngelList for Angel investors. I guess institutional VCs have so far resisted it because they would not be able to justify their fees to LPs if they couldn’t prove they get superior deal flow.

  • “Anti-Portfolio” is an interesting concept. It is important for us to examine our failures, as much as successes, because they provide us with important lessons.

    One of the most notorious cases is Bain Capital Venture’s miss on Square. Bain Capital Ventures did not invest in Square, because Square’s business model is not new. They are a merchant acquirer, just like others. During that time, there was a lot of buzz in the VC world about having an innovative business model and being the next “disruptor”. However, Square can do their job much better than its competitors and therefore, effectively winning the competition and gaining a lot of market share in a short period of time. Lesson learnt: New isn’t everything.

    • Thanks for the case study Mei-Zhen, I was not aware of it. I encourage everyone to share such stories (and also if possible include the link > and even better, write a short post in the Forums ). Yes you’re totally right, new isn’t everything. In fact, VCs usually don’t like business model innovations. If you think about it, not many successful startups innovate on the monetization side. As for Square, as far as I know (I was raising money in 2012-2013 with a fintech startup in the Silicon Valley and everyone was comparing them with Square), the solution is somewhat innovative. But their success is mostly due to the execution: having such as wide acceptation network, i.e., stores that accept the payment type, is key for such B2C payment providers.

  • How much variation is there across VCs in terms of proportion of deals that make it to close? Would some funds be recognised as being significantly looser in terms of approving a far higher proportion of deal flow (perhaps more nascent funds looking to establish themselves)?

    • Yes, they are usually called Fundraisers or even Investment Banks (although they don’t invest), or Financial Advisors. Their main job is to “package” the startup’s documentation and manage the funding process.

  • I can relate to the frustration part. I believe that frustration is greater in certain decision making models inside a firm: such as consensus decision making, where every partner needs to approve a deal before it is closed. I know that certain firms follow a partner focused decision making model where each partner takes responsibility for his own decision making when selecting the deals. Do you know any other decision making models? Would you have some examples of the specific firms following these models?

    • Hey Agata, you’re in luck, I’ll hold a live webinar tonight on the 7 Untold VC Investment Criteria. I’ll talk about the IC process for Kleiner Perkins & Benchmark Capital. If you can’t attend, just look for the recording at thevcfactory.com/live in a few days.

  • I’ve interned at a PE firm (that also invests in early rounds). We received a lot of teasers from financial advisors, and our partners also had investment opportunities coming from their personal networks. Meanwhile, they also actively made connections in the market segments that might be interesting to look at.

  • I wonder if there is one recurring reason why after having had a first meeting, only 4 companies remain (for example bad fit of the team or the numbers that do not add up) or is it usually a combination of factors?

    • Yes it’s a combination of factors, but usually:
      – drop after the first meeting: better understanding of the team, product, market, etc. shows that it’s not a good fit for the VC firm and/or it’s hard to believe they will execute on their plan
      – drop after partner meeting & several more Founders meetings (pre-term sheet phase): maybe Parties didn’t agree on conditions including valuation and amount, or maybe Founders decided not to push for a term sheet from that firm
      – drop after term sheet, at DD phase: clearly something in due diligence that was not satisfactory or in line with what had been affirmed by Founders before
      – drop after DD: Founders may have chosen another VC firm

  • During my internship in a VC in China, we received many business plans from financial advisors (FA). However, the companies they decided to invest in tend to come from business networks or industry summits (like Jiwei Semiconductor Summit in China).

  • In my previous VC internship, I found that communication between VCs is especially important. Regular deal-flow exchanges will not only generate opportunities for co-investment, but institutions with earlier rounds can also recommend their own portfolios to institutions in the next round to achieve a better exit. These portfolios have been screened by investors, therefore the evaluation will be more efficient than directly screening pitches from public mailboxes.

  • I generate my deal flow thanks to my experience in a successful startup. I was one of the first employees alongside the founders. They are now more than 200 employees, and valued several hundred million euros. The founders support me today and share their own deal flow with me. Colleagues with whom I worked also created their startup in which I was able to invest. Since then, I have maintained this network which generates dealflow.

  • Most of my deal flows come from my personal networks, LinkedIn and other online forums. Over time, a few people I have worked with have also referred people to me. I often attend virtual demo days, but I am yet to invest in any other those. I believe these are other sources of deal flows I could leverage.

    • Thanks Haneen. It’s an effective way to build knowledge about how it’s done, and yes, deal flow: LPs get priority on co-investments in case the VC firm is investing a larger ticket than its sweet spot. It’s important to negotiate it upfront. I recommend that move to Angels and Corporates who want to invest in startups. In the past, large minimum tickets in VC funds made this tactic harder, but more and more solutions now allow investors to put money in VC funds at a fraction of the minimum ticket. See this video on “kickass LP syndicates”: https://thevcfactory.com/category/the-vc-diaries/

  • One interesting point in the video was about VCs inviting other VCs in for a deal. How does the negotiation happen in that case? How does the deal is structured and who has more say in deciding the flow of the deal?

    • The lead firm will generally dictate deal terms and structure. In some cases, especially if the firm making the introduction needs the other one more (because they know the space better or bring as much money), it can be more collaborative.

  • I have never worked in a VC firm or a start-up but I have recognized the importance of personal network. I have witnessed more than once colleagues and friends who have benefited by people referring them and connecting founders with VCs.

  • I do not have experience in VC or generating deal flow, but my friend who does work in the industry has met founders through their professional or personal network.

  • It seems like networking is the most important tool for a successful VC. I am suprised by that because I thought it was much more about quantitative analysis of potential targets

    • There’s a debate on networking vs. desk search at entry-level, but the more you progress in the career path, the more networking takes precedence. VC is a people business first and foremost, especially in early-stage financing.

  • For each investment decision, VC firms need to invest resources to pick up their targets. Instead of putting resource to do the research into the start-ups from nowhere, approaching to the start-ups through networking may be more efficient.

  • I once applied for a social impact business accelerator and met a number of interesting founders at the investor pitch evening. The founders all had very interesting backgrounds that aligned with their vision for their business, it was very inspiring.

  • >