PS#077: A Tactical Approach to Sourcing
Alright, this week, we are back to some tactical strategies.
Arguably, the most important skill for a venture capitalist is the ability to sourcing high quality deal flow. Everyone wants to learn how to do diligence, build models, negotiate term sheets, etc., but without this foundational skill, none of that matters.
So, how do you build this skill? Great question.
As with most things I discuss, I believe that sourcing can be broken down into a process.
Over the next few posts, we’re going to discuss that process.
Let’s dive in.
Six sourcing strategies.
There are all sorts of ways to source deal flow.
For simplicity’s sake, I tend to bucket sourcing into six categories…
Databases
Conferences
Other investors
Internet searches
Ecosystem & network relationships
Universities, incubators, & accelerators
Let’s give each of these a bit more context…
Databases: This includes paid databases, such as Pitchbook, Grata, Crunchbase Harmonic, etc.. I might also include aggregator newsletters into this bucket (although they could also be included in internet searches).
Conferences: This ranges from broad VC-focused conferences to niche industry or technology conferences.
Other investors: This refers to sharing deals with other venture or PE investors, especially those whose deal flow may match your fund’s strategy or investment criteria.
Internet searches: I think of this as moving deeper and deeper down the rabbit hole. Cruising the internet for new ideas, startups, founders, etc.
Ecosystem & network relationships: This is deal flow that comes from the relationships that you’ve built in the space, which could include content creators, thought leaders, customers, vendors, incumbents, members of the value chain, etc.
Universities, incubators, & accelerators: These are organizations focused on helping foster new ideas and founders in the early stages of building a business.
It’s important to have a strategy and dedicate the appropriate amount of time for each of these.
We’ll discuss specific approaches and strategies in the next few issues. However, before we do, let’s talk about proprietary vs. nonproprietary deal flow.
Proprietary vs. nonproprietary.
Proprietary deal flow.
It’s the promise of every investor across the capital stack. While investors will also highlight their ability to pick winners, showing an ability to identify and gain access to proprietary deal flow is a HUGE part of raising funds and building an investment firm.
So what is proprietary deal flow?
Proprietary deal flow is when an investor has the opportunity to invest in a company before other investors.
If we think about the six strategies listed above, we can segment the strategies by their level of proprietary vs. nonproprietary deal flow…
Nonproprietary Deal Flow
Databases
Conferences
Internet searches
Universities, incubators, & accelerators
Proprietary Deal Flow
Ecosystem & network relationships
Conferences (we’ll explain how this can be both)
Other investors (ironically, yes, it can lead to proprietary deal flow)
In today’s day and age, it’s not quite black and white. Depending on how you approach some of these strategies (e.g., conferences), it could actually lead to some proprietary deal flow.
We’re going to discuss this in more detail in the next few issues.
Daily deposits.
For a venture capitalist, sourcing is an everyday activity.
It requires daily deposits for an investor to be successful, dedicated time and effort for each strategy (repeatedly). Over the next few issues, we’re going to discuss how to approach each strategy in terms of thought process and time management.
As I’ve mentioned before, a venture capitalist’s most important skill is time management. It’s easy to get distracted by the flashy conversations and events. But, if you’re not dedicating real, intentional time to sourcing, you’ll have a hard time staying in this game long term.
