PS#079: Strategies for Proprietary Deal Flow
Last week, we discussed strategies for nonproprietary sourcing.
Today, we are going to dive into the proprietary strategies highlighted, including…
Conferences
Other investors
Ecosystem & network relationships
Proprietary sourcing strategies are a key part of any successful investment firm. It allows investors to have unique access to startups in advance (or instead) of other investors.
Before we dive into the strategies, I’d like to offer my view of proprietary deal flow in today’s day and age.
Proprietary deal flow in today’s day and age.
With the institutionalization (and industrialization) of venture capital, it’s become a bit harder to maintain proprietary deal flow.
Historically, investors may have truly had exclusive opportunities to invest in startups before other investors. And, while this does still happen, it’s become less frequent. Due to the abundance of capital available (i.e., so many venture firms), this has become a bit more difficult.
With that being said, just because it’s difficult doesn’t mean it’s not possible. There are two versions of proprietary deal flow today…
Being the first with an opportunity to invest
Having unique access to invest
If you’re the first investor to have an opportunity to invest in a startup, that is one version of proprietary deal flow. And, it may happen due to the strategies we discuss below. Most people think about this version as “finding” the opportunity before others.
However, It’s important to recognize that finding an opportunity first is not the only way to have proprietary deal flow. There is another option that is becoming even more common. This is about having unique access to invest in a startup instead of other investors.
In some cases, this means that allocation is reserved or held for your firm. This may happen because of a firm’s strong brand in the market, the skill set or experience of a specific investor, or some sort of strategic value that can be provided through an investment.
More and more, this form of differentiation (or provided value) is becoming the best strategy to maintain proprietary deal flow.
Alright, now that we’ve set the stage for the current environment, let’s run through the thought process and time management for each of the strategies we listed above.
Conferences.
In the last issue, I discussed the nonproprietary version of conferences.
Today, let’s discuss the proprietary version.
Early in my career, I thought a lot about competition. I didn’t have a pedigree as a top-tier investor and my firm was just starting to build a brand in the market. I needed to find creative ways to generate proprietary deal flow.
Industry-specific conferences, not investor-oriented conferences, was one of the best ways for me to generate this deal flow. Alongside very specific and niche investment theses, I attended industry-specific conferences that were designed for vendors and customers. These weren’t conferences designed for investors and startups, but often contained several startups trying to break into the industry.
In my early years, this led to a lot of great investments. In most cases, I was the only investor there and I was able to build great relationships with these companies (very early on). It allowed me to build my brand as an investor in these niche spaces, provide value, and track these companies as they grew in the industry.
This strategy depends on the industry, technology, and the availability of said conferences, but they can be a great tool to build that proprietary deal flow, whether by being first or by building a strong, trusted reputation in the market.
My recommendation is similar to the nonproprietary conference strategy. Spend some time researching these conferences at the beginning of the year and check in quarterly to see if new ones have been added or changed. The more specific and niche that you can be, the better.
The more you know about these conferences, events, etc., the easier it will be to relate and build relationships with these founders.
Other investors.
On the surface, this might look like it flies right in the face of our definition for proprietary deal flow. However, when you look a bit closer, you find that this isn’t always the case.
Yes, generally, if you’re getting a deal from another investor, they’ve (by definition) looked at before you have reviewed it. But, this deal might not be relevant for their firm or investment mandate. That means they aren’t actually able to invest in the company.
There’s the proprietary opportunity.
If you’ve built strong relationships with investors outside or adjacent to your mandate, they’ll think of you when they find something in your focus areas. For them, alongside passing on the opportunity, they will be able to help the founder find an investor who could provide capital, boosting their reputation in the market. For you, you might be gaining access to a startup ahead of other investors due to your relationship and expertise.
I mentioned earlier that it’s not always about being first. Sometimes, a firm finds a deal and wants to bring in a certain brand, skill set, or strategic value. If an investor or firm offers this value, the lead investor or founder may reserve allocation for that type of investor. This will provide access to the deal that is unavailable to most investors.
As you think about the firm and type of investor you’d like to be, this is a really important thing to keep in mind. In a world where capital is a commodity, what makes you or your firm different?
In terms of approach, it’s all about staying top of mind. My recommendation is to meet with investors regularly, share your theses, investment criteria, and ways in which you or your firm differentiates in the market (concrete examples go a long way).
Especially early in your career, meet as many different investors and firms as possible. Give yourself a wide aperture from which to decide where to build your long-term, trusted relationships.
Ecosystem & network relationships.
If done correctly, this can be a great source of proprietary deal flow.
As I’ve discussed previously, it’s important to build relationships within the ecosystem of your investment theses. This gives you great insight into how these areas work and provide critical resources when performing diligence on a startup.
For those same reasons, they also provide a great channel for sourcing.
Oftentimes, these individuals have unique vantage points and access to new, innovative companies. In some cases, they intimately know the problem being solved and are able to identify genuine solutions in advance of others.
My recommendation is to treat these relationships just like you would investors. Meet with them regularly, provide value, and try to build trusted relationships.
When they find something of interest (based on what you’ve shared with them about your mandate), they’ll share it with you first. Giving you a leg up on the competition.
