How Founders Can Leverage the Post-COVID VC Deal-Sourcing Process The deal sourcing process differs from fund to fund since the process functions as a funnel that filters all the companies and only lets in a small percentage of prospective companies that pose as potential investments
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For every venture capital (VC) fund, formulating and maintaining a robust deal flow pipeline is indispensable. Deal sourcing is one of the most differentiating activities that a VC undertakes and perhaps this is why a lot of time and effort is spent on crafting a pipeline that suits the fund's thesis. Nobody wants to miss out on the next Unicorn, and this is where an efficient pipeline helps: to find the hidden gems in the market.
And while the entire ecosystem was pivoting and restructuring themselves to function during the COVID-19 times, we found ourselves too at this end (the VC side) looking for ways to not let the pandemic impact the deal-sourcing process negatively.
The deal sourcing process differs from fund to fund since the process functions as a funnel that filters all the companies and only lets in a small percentage of prospective companies that pose as potential investments. There are many layers to this funnel, answering some important questions such as: What stage would we like to invest in? What sectors are we interested in? What are the kind of traits we're looking for in our founders? Where should they be based out of? What kind of solutions should they be building? Answering such questions, helps sets a funnel in place that helps in formulating an entire deal-sourcing process. There are two things to focus on while designing the process: efficacy of the funnel and the relevance of the deals that pump in.
The deal flow plays a pivotal role in the success of any VC fund. So, if the "funnel' is refined enough, fewer invaluable resources are wasted at the deal origination process, which could ideally threaten the viability of the fund as a whole. Which is why it is always important to circle back to those two factors: How efficient is the funnel? And is it pumping in the kind of quality (of deals) that the fund demand?
Traditionally, deal origination happened via personal networks, referrals, events, and direct outbound research manually or with the help of technology. Just before COVID, we were seeing various tech advancements that helped improve deal origination with its subsequent upgrades which helped in digitizing the entire deal process flows for all kinds of funds.
But since the strike of the pandemic, we started seeing a shift in the process and now it has become more focused. The spotlight is back on the network and a strong referral. Now, founders have to be there at the right place at the right time when a VC is actively looking for lucrative opportunities. Founders (reaching out to us via referrals) showcase their ability to be resourceful. In trying times like these, especially when anything can change in a rapid second, being resourceful (as a founder) is a great positive indicator for any investor.
The events and conferences that used to happen previously, which proved to be a great way to spot such "hidden gems', were all shifted to being online. At the onset, everyone was hesitant about this transition because of varying factors like quality. Physically, it becomes easier to find these gems (read: eccentric and dynamic founders) and find ways to explore different synergies. But with virtual events and meetings, it becomes harder to tap into what is genuine and what is inauthentic. So, for the funds and the founders alike, this transition was filled with experiments to test and gauge the other side. Currently, this space (demo days, pitch days, other such networking events) is crowded and good founders will have to find other avenues to reach out to potential investors. An advice to such founders would be to not wait for different investment cycles, and keep updating your network about your accomplishments regularly to establish a strong word-of-mouth presence.
However, establishing relations with the investors is just the beginning. Investors these days are flushed with deals, in order to make sure you're differentiating yourself from other founders, avoid pitching plain vanilla. Strive for being the cherry on top, something that makes your startup so attractive that the investors reach out to you before anyone else.
Just like a PMF (product-market-fit) is a must while building a product at a startup, identifying and adhering to an IFF (investor-founder-fit) is equally important while fundraising. The way I like to think of the IFF is knowing the fact that many investors and VC firms have certain sweet spots, sectors and stages that they are actively looking to invest in because it fits their investment thesis. As a founder, you'd be saving yourself a lot of time and money, by researching and targeting only those investors who are looking to invest in your space, and at your stage (seed, series A, series B) Besides, knowing what other resources—apart from capital—would be required to scale the startup, and figuring out whether the investor would be able to contribute towards that, is always a bonus point.