I’ve been investing with Front Row Ventures, Canada’s first, student run venture fund for the past three years and it has been an incredible journey so far. In the beginning, I really didn’t know what Venture Capital was or how the industry operated. I thought this was going to be like shark tank. We had capital to deploy so surely there would be companies coming to us, right? I thought I was going to sit there, open my email and I would get tens of hundreds of inbound leads from companies that:
Fit our investment thesis in terms of industry and stage
Were on a clear trajectory of becoming a unicorn
Really wanted our money
Turns out, that wasn’t the case and I ended up spending most of my time doing outbound deal sourcing. I learnt quickly that finding deals and being able to tap into high quality sources was one of the most important parts of VC.
This is especially the case as venture funds don’t follow a normal distribution, they follow the power law curve.
A lot of articles and other blogs online have covered this topic before.
This means that numbers matter. The more chances you have “at-bat” (i.e. putting money into high-growth potential startups), the higher the probability of you hitting that “home-run”. And to increase your chances at-bat, you need to a have a high quality, high volume and relevant source of deals to keep your pipeline nice and healthy. In this article, I’m going to attempt to provide some insights on how you, as an intern or analyst, can consistently general strong outbound deal flow by describing the deal sourcing flywheel.
Investing with Esplanade Ventures
This summer, I was lucky enough to spend some time working as an Intern Analyst at Esplanade Ventures, Canada’s leading Digital Health focused venture fund. Esplanade had a very specific investment thesis, we only invested in Seed to Series B digital health start-ups with a patient centric component to their business and were operating in North America, Europe and Israel. With such a specific investment thesis, there were bound to be attractive companies that fell out of scope of the fund. Compared to FRV (sector agnostic but must be a student), this was a bit more narrow. As an Intern, I wanted to provide as much value as possible and one of the ways I tried to do so was by increasing outbound dealflow.
Introducing the Flywheel
Alright, to finally introduce the flywheel I am going to start by breaking it up into 5 key steps.
Baseline deal flow from the network of the Partner’s
Competitive analysis
Finding complementary investors
Assessing their portfolios
Select relevant companies and repeat steps 2-4
1. Deal Flow Baseline
Step 1 is relatively straight forward. Usually VC’s depend on their personal network and referrals for some high quality inbound deals. But as a junior or an intern, you probably won’t have the network yet. Using the flywheel can be a great way to add value through outbound dealsourcing.
The Partner’s will likely forward some deals to you to conduct a quick scan on whether or not the team should pursue for further diligence. This is your deal flow baseline.
We’ll come back to this at the end to see how the flywheel builds up this baseline more and more.
2. Competitive Analysis
From your dealflow baseline, you will already have been able to identify some high quality deals that are relevant to your funds thesis. Once you get their pitch decks, 99% of the time there will be a slide or two dedicated on the competitive landscape.
Something along the lines of this:
Boom - there’s your next batch of deals. It’s not perfect and you won’t always get relevant deals from this. For example, often times startups will list more established competitors that are much later stage, and don’t fall within the thesis. But this is another great source of deals.
I’ve heard a few stories of how some VC’s started off doing diligence on “Company X” that was operating in a hot market they were bullish on, only to see the competitive landscape and find out that “Company Y” (a.k.a one of their competitors), was in a much better position to capture the market. Subsequently they would invest in “Company Y” instead.
3. Relevant Investors
The next step is to identify relevant investors that have a similar investment thesis as the fund you are working at. Once you have a baseline of deals + a few companies scraped from the competitive landscape, Crunchbase will be your best friend.
If you have access to Crunchbase Pro or PitchBook, that’s great, but I find that even the free version of Crunchbase can go a very long way.
Go on Crunchbase and look up each company that you have obtained so far from your baseline and competitive analysis. Crunchbase will be able to show you at least some of the investors who have participated in prior rounds. Specifically, you want to try and narrow down your focus to funds with a similar investment thesis. In my case, I was looking for funds that invested in Early-Stage digital health start-ups.
If you’re really ambitious, you can click the various transactions (e.g. Series A, B, C etc.) and Crunchbase will link you to a page that has some articles which covered the raise.
You can read through those articles and they will usually have a full list of participating investors and even some more competitors (thus adding more fuel to the flywheel).
Make a list of these funds.
4. Scrape Portfolios
Take the list of funds you’ve identified and spend a couple of minutes looking at their portfolio. Don’t worry about making your list of funds too specific. You can add generalist funds as they typically have sub-sectors within their portfolio that fit your tech vertical.
For example:
5. Select Relevant Companies
From looking at the competitive landscape and scraping the portfolio of relevant investors, you should now have a much larger pool of companies that you can select from. All of these companies feed back into your baseline which you can then use to re-enforce the flywheel and find more companies.
Below is my Tim Urban-esque drawing of the flywheel:
The Flywheel in Action
Here’s what the flywheel should look like.
Partner sends me a list of a few companies
I identify all of the competitors of these companies → add to pipeline
I use Crunchbase to find relevant investors from step 1 + 2
I scrape the portfolio from all relevant investors → add to pipeline
I take the portfolio companies from relevant investors and identify their competitors
Repeat steps 3, 4 and 5
The more of these steps that you repeat, the more deals you can source :)
Bells and Whistles
To leave you with one final thought… along the dealsourcing flywheel, there are some “bells and whistles” which you can add to further increase your chances of tapping into high quality deal sources.
Examples of these would be:
Identifying the funds that are thought leaders in the space → do this as you scrape their portfolios in step 3/4
These funds will post reports on general market trends, company spotlights and more. One example of a fund like this in Digital Health is Rock Health. Take a look through the stuff that they post and you’ll know what I’m talking about
Another example is Radical Ventures. This is what I would call a jackpot - when VC’s post market maps of companies in specific market sectors, that’s a lot of momentum you can add to the flywheel.
Identifying Partners and Funds that have a larger social media presence. Twitter is an AWESOME platform for all things VC/tech/startup related. They will often post things discussing market trends and also spotlight specific companies.
For example, some of the best people I’ve been following in the Digital Health space is Deena Shakir from Lux Capital and Christina Farr from OMERS Ventures
Identifying events & conferences where you might see more of these companies
You will commonly find industry events focused on specific technology verticals (digital health, crypto, biotech etc.)
Identify newsletters or articles that typically post about these types of startups
The more research you do into competitors, the more you’ll find articles or newsletters that can expose you to numerous deals
Perhaps one of the most well-known ones in the Digital Health space is CB Insights Digital Health 150. There is literally 150 startups here that you can scrape to the pipeline.
Happy hunting!
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