PS#030: How to Build Your Leads Funnel
In the last issue, I walked through an overview of a venture capital deal funnel.
Some of the terminology may differ fund to fund, but the general concepts are the same. At the end of the day, the deal funnel is designed to filter out the best possible investments for your fund and its specific mandate.
In order to understand the deal funnel in more detail, we’ll begin at the top – building out your leads funnel. Today, we’re going to discuss some guidelines and frameworks to help you build out the leads portion of the funnel for your fund or investment thesis.
Start with the numbers.
Venture capitalists tend to invest in less than 1% of the deals in their deal funnel.
It’s a crazy statistic, but it serves as a great guideline for building out our funnel targets. If we know that we want to invest in 10 companies (which will come out of our portfolio construction), we can work backwards and say that we want to look at roughly 1,000+ companies over the life of the fund’s investing period.
To be fair, I would call this the bare minimum.
In reality, we’re going to invest in much less than 1% of our deal flow, probably more like 0.6-0.3%. This will give us a good goal in terms of the number of leads (putting it more in the 2,000-3,000 range).
But, what does this number mean?
Well, if you shoot for this number, you’ll be pretty confident that you’re seeing everything that you should be seeing in your space (i.e., not missing any opportunities). This should put you in a good position to understand the innovation in the market and make the most informed investment decisions.
The more you see, the more information you’ll have for your investment process.
Build out & map the value chain.
The numbers give us a target to chase, but that can’t be the only framework we use.
Alongside the numbers, we need to think about the nuances of a particular space.
Depending on the investment area, you might need to adjust the leads target upwards or downwards. Some spaces may be a bit bigger, others may have a lot more companies building and innovating, and some just may not have the same economic value or opportunity.
Each space often comes with its own nuance, so we need to think it through from first principles.
To do this, I recommend the following process…
Map it out. Map out the different components of an industry and/or space (i.e., the value chain). This will give you another perspective when reviewing potential leads. You’ll have a better sense and framework for how it fits within the bigger picture.
Categorize. Start filling in those leads into each piece of the value chain. This will give you a sense of if you’re covering everything from a leads perspective (and it can show you where to build out your network).
Review & iterate. As you fill this in and learn about each space, you’ll be able to leverage deductive reasoning to eliminate pieces of the space/value chain as investment opportunities.
If we use this process (and the others we have/will discuss) effectively, each step of the deal funnel should teach us more about our investment theses. It will teach, challenge, and help us make better investment decisions in the long-term.
Even better, by doing this, we have built the foundation for a market map and tangible value that we can share within our own network/ecosystem.
A couple things to remember.
We are using this leads process to build out a detailed map of our space. We want to understand the market and where the best opportunities are for investment.
With that being said, there are a couple of things to remember…
Don’t forget the incumbents, non-venture backed companies, and companies outside of your stage of investment – these are all really important when thinking through the entirety of the space and the relevant opportunities (although not all will count as leads)
Adjacent markets (and companies) can impact your space – the solution you may be searching for may be a piece of a broader platform in another space, don’t be afraid to look outside your space today for new and innovative solutions tomorrow
Even if it’s not an investment, it may be important to understanding the context of the space or why a future company does make a good investment – not every company needs to move down the funnel, sometimes we mark them as a lead as we build our knowledge base
Use this process (and items listed above) to effectively build out the leads for your fund. It will help you get smarter on the space, improve your theses, and help you find high conviction investments.
