Sourcing is a hot topic in Venture Capital. It is considered as one of the most time-consuming parts of VC investing and is a real competitive issue for funds, both because the first to arrive has the highest chance of landing the deal; also, because quantity counts, a high frequency of deal flow is needed to increase the probability of finding quality investment opportunities. Thus, sourcing is a true foundation of successful funds. In this context, it was crucial for G.Ventures, a super early-stage fund run by students for students, to have deep insights into the best practices and processes of deal sourcing.
We hosted a rich panel of Venture Capital Analysts to highlight these issues, including Abel Samot (Red River West), Alice Bardon (Newfund), William Labussiere (Breega), and Aïda Mansour (50 Partners).
Sourcing channels: outbound and inbound
As a reminder, sourcing refers to the process by which investors identify and pursue investment opportunities. The rate of incoming investment opportunity is called: deal flow.
The Deal flow sources can be classified into two channels:
Outbound: It is the most deterministic and refers to the process by which funds receive investment opportunities after a proactive approach. This method of sourcing is assimilated to “hunting”. The ultimate goal is always to position ourselves first. For us at G.Ventures, the idea is to contact startups at the beginning of their development stage, i.e. when they have not even thought of raising funds or just starting. Therefore, startups will be more likely to contact us when ready to raise funds, mainly because we have shown interest early.
Inbound: This is the process by which investment opportunities are received by the fund without significant effort, usually via the fund’s website. The downside with this sourcing channel is that most of the startups received are unqualified, i.e. do not fit the fund’s investment thesis. There is some pruning to be done.
Besides, although this is a different source of deal flows from the first one, we can outline a certain link between the two. The effectiveness of the outbound strategy will have an impact on the fund’s reputation through the resulting investments and on the quality and quantity of the inbound. Therefore, it is essential to know the tools and processes for effective sourcing.
Tools and resources of Sourcing
Database platforms (Crunchbase, Dealroom, Pitchbook, CB Insights): these are helpful websites to access in-depth information on startups using customized filters. Filtering criteria can be maturity, size, country, industry, start-up date. Those database platforms are also used to search competitors as part of market analysis.
New startup or new product census sites (Pepitech, Product hunt): recommended for analyzing new startups and new disrupted products launched. It is an excellent way to track innovations and investment opportunities.
Media and newsletters (ExecSum, Avolta Partners, a16z): these tools enable us to identify hot trends to forge convictions quickly.
Scraping tools (Phantombuster, Snov.io, Hunter): these applications are ideal for recovering hidden e-mail addresses, and they are handy to get in contact with the founders.
Specific tool — Sales Navigator: This is a powerful tool developed by LinkedIn that allows users to set up alerts via filters by country, by sector, with a purpose to identify people who change their profile title and become for example Founder, Co-Founder, CEO, CTO. These signals are highly relevant for detecting potential contacts. Again, with the idea of arriving first, Sales Navigator can capture signals from startups operating in stealth mode. This is a fledgling startup working to bring a new product or service to market under a temporary state of secrecy.
School incubators, events, startup weekends, student entrepreneurship organization: in addition to being interesting sources of deal flow. Being part of these ecosystems enables the fund to be known and to ensure constant inbound.
Reach out Startups
Now that we know the different sourcing channels and the tools often used, what should we say to founders to get their attention and start a discussion?
According to Alice Bardon, Analyst at Newfund, emails seem to be much friendlier and work better than LinkedIn messages which are often considered intrusive. As entrepreneurs’ time is precious, the message must be short. Regarding the content, what works is to capture the attention of entrepreneurs by finding a common point or anchor. For instance, mention if you went to the same school if you have tested his product/service, and even better if you have discovered a bug. If it is a tech or product-oriented guy, you will certainly get an answer quickly.
In short, follow the AIDA method:
Attention — Get the person’s attention (you need a killer subject line to get them to open your email).
Interest — The first few lines of your email should pique their interest (try to provide value to the person if you can).
Desire — Make them want to take the next step with you, focus on the 1 or 2 value propositions you have that best fit the person.
Action — Always include a call to action! — e.g. Are you available for a quick call next Thursday at 2 pm?
After meeting the entrepreneur, it is time to make a decision. It may be positive. In this case, the investment process continues with extensive due diligence. However, sometimes you have to say “no”, therefore declining the project. We will now focus on the second case.
How to say “No”?
Unfortunately, in Venture Capital, we often say “no”. We usually say: there are many candidates but very few winners. The “No” can be easily justified when the project does not correspond to the investment scope of the fund. However, it becomes less obvious when it is a matter of fit, the ability of the team, time to market.
Regarding this issue, Abel Samot from Red River West says, “We once had to help an entrepreneur improve his deck. He was aware that we were not going to invest in his project. However, he liked the approach so much that he introduced us to one of his entrepreneur friends raising money. We had a good fit with his friend, and today, it’s a successful company and part of our portfolio.”
It may seem surprising, but the VC world is small. People know and talk to each other. So, you have to be careful about how you respond to entrepreneurs. Otherwise, you might tarnish your reputation. You have to seek a friendly approach, for example, via a call. You must always be in a mindset of bringing value. For instance, you can reorient the entrepreneur to another fund that might be interested in the project. Also, you can refer the entrepreneur to another one who is developing or has previously developed a similar product/service. Be empathetic.
Besides, it is worth finding the right balance as you certainly do not want to spend more time saying “no” than focusing on the deals you want to invest in, as this will impact your productivity.
Last but not least, we should also be careful how we say “no”, simply because we are not infallible. We can say “no” to a future unicorn or an entrepreneur who will be a great advisor.