#73 Dealflow & What Really Matters in VC

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Dealflow & What Really Matters in VC

We’ve been talking to a lot of LP investors and VC GPs lately about what really matters in VC. When you simplify what drives success (outsized returns) in venture capital, it boils down to a few simple concepts:

  1. Dealflow: do you see the “best” deals that can generate outsized returns?

  2. Picking/Winning: how good are you at picking the best deals and then winning the right allocation in the deal for your fund strategy?

  3. Platform/Support: how do you work w/ your companies to increase the likelihood of their successful outcomes?

  4. Liquidity/Distributions: when/how do you exit positions and return capital to your investors? See Taking Money “Off The Table” by Fred Wilson 

In the coming weeks, we’re going to spend more time unpacking each of these concepts. We’re starting today with dealflow, or the lifeblood of VC.

Dealflow Demystified

Dealflow is a VC’s pipeline of investment opportunities. Here are some of the most common deal flow drivers we see:

  1. Strong Networks: VCs actively engage with entrepreneurs, industry experts, and other investors to expand their connections. Attending conferences, industry events, and meetups helps VCs meet promising founders and gain insights into emerging trends. Establishing a reputation as reliable and supportive can attract more deal flow through referrals and recommendations from trusted sources.

  2. Targeted Outbound: the best VCs proactively seek out promising startups. They leverage various channels, such as online platforms, social media, and industry-specific communities to identify early-stage companies with potential. Through targeted outreach, they connect with founders, understand their vision, and evaluate whether the startup aligns with their investment thesis. This approach allows VC funds to tap into lesser-known opportunities and gain a competitive edge in the market.

  3. Co-Investing and Syndication: VC funds often form partnerships and syndicate deals with other VC investors. By pooling resources and expertise, they access a wider range of investment opportunities. Co-investing with reputable investors not only increases the deal flow but also mitigates risks and enhances diligence. Additionally, syndication provides access to shared networks and expertise.

  4. Industry Specialization: Many funds focus on specific industries or sectors where they have deep domain knowledge. This specialization allows them to understand the nuances and dynamics of the market, identify emerging trends, and recognize potential winners. By actively monitoring industry developments and attending sector-specific conferences, VC funds position themselves as experts in their chosen domains. Entrepreneurs seeking funding in those industries are more likely to approach specialized funds, increasing the deal flow for these investors.

  5. Strategic Partnerships: incubators, accelerators, universities, and corporate innovation programs provide another way for VC funds to access a steady stream of deal flow. These partnerships provide early visibility into promising startups and give VC funds the opportunity to mentor and nurture them from the early stages. Additionally, they can collaborate with these organizations to create tailored investment programs that align with their investment goals.

Securing deal flow is a critical aspect of venture capital investing. By continuously expanding their reach and leveraging their expertise, VC funds increase their chances of finding the next big winner and returning their fund.

Additional Dealflow Resources

The VC’s Customer (& The VC Deal Flow Process). -Fred Wilson, November 2005

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