Humor me with a thought experiment. You are the best entrepreneur in the world. An investor’s dream. You are privy to a niche yet venture-scale problem, you alone know how to solve it, and you know how to get to market.
Who’s your “first call” for seed money?
- If you’re venture savvy and well networked, it might be a top-10 silicon valley fund by returns or reputation.
- If you’ve built a company before, it might be an investor who treated you well there, win or lose.
- If you’re more technical and this is your first rodeo, it might be your PhD thesis advisor or the editor of your industry journal.
Back to reality, now. Unless you work at A16Z, have put cash into a broad array of grateful founders, or happen to be a top-tier expert in your particular sub-industry of focus, you can see the problem here. You’re not getting the “first call,” and neither am I most of the time.
As the set of entrepreneurs raising money around the world at any given time work their way down the mainstream hierarchy of desirable investors, they break into cohorts defined by average quality. That average quality decreases as each tier fills their portfolio, meaning that the ratio of signal to noise is lower for those of us who need it the most. That is, top-tier investors in the best position to analyze deals end up with the pipelines that require the least diligence, and the less well established venture hopefuls that have limited analysis resources are served a stream of dealflow desperately in need of a Brita filter.
That doesn’t mean that the top firms and super-angels take all the good deals! If that were the case, there would be no successful emerging managers or retail investors. It just means that there’s a good reason to prioritize the ability to tap into the dealflow from those higher on the food chain. Disproportionately good dealflow reduces the primacy of due diligence in the investment process, and proffers the opportunity to play in spaces that interest you but aren’t in your area of direct expertise.
5 Sources of Differentiated Dealflow
If you’re not the “first call” now, how do you get there? Here are 5 ways to move up the dealflow food chain:
- Be the Grand Poobah in a Community or Geography. Where have you been building your expertise throughout your career? Lean in on your strengths. Start writing, speaking, and promoting within your domain. Mentor promising young people selflessly, constrained either by geography, technical community, or narrow business focus. As they mature, you’ll be their first call.
- Be the most Frictionless Follow-On in the World. Are you lucky enough to have existing relationships with investors who have outstanding absolute returns or industry understanding? Earn an allocation in their deals which meet your criteria by being known to be a frictionless follower. This doesn’t mean being a blind passenger. It means having your priorities set up front so that a simple exchange answers the question- are you in? Re-doing diligence without a differentiated set of expertise, badgering founders on items of narrow concern, and otherwise taking up the anchor’s time and attention are the way to lose that call.
- Have George get it for you. Let the autopilot put dealflow in your pipeline. Set up google alerts, salesforce tags, and LinkedIn macros to keep you apprised of movement in the sectors that interest you. There are professional firms which are so good at this dark art that they’re often able to surprise entrepreneurs, contacting them before they’ve publicly launched. If you’re first, you’re taking an interest, and you’re curious, half the battle is already won.
- Outwork Everyone. Run manual search queries on CrunchBase, AngelList, and LinkedIn every day. Show up to every industry event. Let your opinions and insights be known publicly, often, and with good SEO. Meet with founders for [virtual] coffee, offer your expertise. Ensure they go back to their friends at the [virtual] accelerator and tell everyone what enormous value you provided without asking anything in return. Build something that matters in the space you care about to prove that you’re more than a tourist.
- Prove your value-add to a Bigger Fish. Make your specific expertise clear to an investor at a higher level of the food chain. Let them know your only motivation in seeing deals from your sector is investment, NOT consulting income. Be responsive when asked for feedback on decks. Keep your commentary and value-add specific to the sector where you want to place your money. Make it unthinkable for them to invest in that sector without getting your opinion. Make them want to see you put your money in so they feel more comfortable with the deal. Look what you did. Now you’re moving up the food chain.