Looking for a startup to invest in is like scouting for a football team. The more players you observe, the bigger the chance you will sign a future star.
But—true for both industries—you also need to know where and how to look.
Building deal flow
The search starts with a database of candidates. In the VC industry, it's called "deal flow".
A quality deal flow isn't a random list of companies. It only lists those startups that fit the investor's criteria: geography, industry and funding round. Flyer One Ventures, for example, focuses on CEE startups at Seed and Series A stages.
Each fund looks at their own deal flow to evaluate the quality of the startups and decide whether or not they are suitable for its portfolio.
To increase the chances for a successful investment, the deal flow must be as extensive as possible. With a small list of candidates, it's more probable that you'll invest in a "so-so" startup. It’s like walking around with a metal detector: 95% of the findings is trash, 5% is treasure. But still, you need to cover a lot of ground.
Deal flow should be written down somewhere where you can update the information about the companies and be as handy in use as possible. It can be kept in a Google Doc, Notion, Affity, Pipedrive or any other app.
The document must be detailed and updated regularly: if you refuse a startup, write down why—other members of your fund will be updated on the process, which will help them make decisions in the future.
Accessible and transparent deal flow helps avoid confusion, too. Some startup founders may secretly speak to different investment managers of the same fund, and the updated deal flow will show this.
Deal flow is the end result of the process called “startup sourcing”, or scouting. But how exactly should an investor scout startups? There are two approaches: outbound and inbound.
Reaching out, asking, talking: Outbound startup sourcing
Outbound startup sourcing is a proactive search for startups and other potential partners. Tools used to achieve it.
Cold emails, calls.
Introductions from other industry players.
Screening media publications, rankings and databases.
Networking at conferences or pitch competitions.
A VC fund may engage in outbound sourcing during its first years when it hasn’t yet formed a solid base of established contacts with other funds, investors and startups.
Flyer One Ventures’s investment as a result of outbound startup sourcing: HackerNoon (contacted its founder on LinkedIn); Awesomic (asked a friend for an intro); Muncher (found through screening Garage Syndicate investment activities).
It’s about PR: Inbound startup sourcing
Inbound sourcing is a passive search for partners—when, in fact, partners search for you. It requires building awareness about your investment activity and will bring results in a long-term.
If a fund is well-known, there are higher chances that startups themselves will want to meet and ask to participate in their next investment round. Inbound sourcing tools:
PR and SMM, including on Twitter, Facebook, LinkedIn and other social media.
Friendship with other VCs and angels.
Participation in conferences and other initiatives like workshops.
Word of mouth.
The ideal result is when everybody in the industry knows your name and how you invest.
Flyer One Ventures’s investment as a result of inbound startup sourcing: Sheep Inc (friendly fund TA Ventures recommended it); Refocus (met in Riga at TechChill); Prodly (introduced by a portfolio company).
For this approach to work, building a PR team is the key. It’s responsible for coverage in the press (TechCrunch, Sifted, VentureBeat, Forbes), representing the fund at conferences (WebSummit, Slush, TechChill), and building strong online presence.
Overall, PR teams aim to build the communication with 1) clear messages, 2) transparency and “googleability” of the fund and its portfolio startups, 3) showcasing its expertise, and 4) awareness.
This article is a summary of Flyer One Ventures webinar on June 11. If you don't want to miss our following webinars, lectures, and events, we recommend that you subscribe to us: Medium, Facebook, and LinkedIn.