Incubators, Accelerators and Venture capitals all know this issue all too well – how do you ensure good deal flow (rate of new business and startups coming in) while still maintaining a high level of screening to make sure you bet on the right horse.
After all, investment is a bet and it can pay off or not. So how do you do this? Most organizations that handle investments have deal flow committees or analysts. These people or committees are tasked with the burden of analyzing each application that comes through, make new connections, attend conferences, expos and events to find new promising entrepreneurs and in general make sure the engines keep running.
However, there are certain limitations to this structure.
Most VC, incubators, accelerators or investment organizations have some degree of focus on certain verticals or stage of the venture. Sometimes it’s both, making it even stricter and harder for new startups to apply. However, in our constantly changing world and the thriving ecosystems of innovation and specifically in a world of the “Internet of Everything”, it is not uncommon to meet startups or entrepreneurs with big visions whose idea can apply to multiple verticals. If the analysts or the deal flow committee members are focused on very specific niches, they might miss out on great ideas.
No one knows it all
Continuing with our last point about the ever changing ecosystem, it is crucial to have your analysts or deal flow committee members really adept and knowledgeable in as many fields as possible. They have to understand technology and specifically types, areas and nuances of technology, they have to be familiar with numerous business models including emerging ones, they have to be familiar with ventures and startups all over the world to understand the competitive landscape, they have to be adept at marketing to understand where an idea could get to. But no one is perfect and no one is a master or specialist in everything. So how can these fine and smart people judge ventures when they may not see the whole picture? Or when they do not understand basic things like the technology?
Real time actions
Raising funds for a startup is the make or break and it is a task, every entrepreneur knows, that takes time and requires patience. However, most entrepreneurs apply to several VC’s or funding channels at the same time. They will go to the first one who replies and funds them. Chances are, if your competitor thinks a venture is good so will you. But if you only get to the entrepreneurs’ application form or email a week after they sent it because you’re swamped, or if your deal flow committee only convenes at specific dates and intervals – how many great ventures are you missing out on?
Now take everything written above and think what it means if you are not an accelerator or an incubator. What if you have no analysts and deal flow committees? What if you’re an Angel investor?
The more you think about it, the more you find that it’s an almost impossible task for a single person (analyst or Angel investor) or a committee restricted by time and expertise.
So what’s the solution to ensure high quality Deal Flow?
The answer to this question is actually quite simple and most investment organs already do it even without realizing. The answer is: rely on connections and expand your networks. In other words: build a community of strategic partners who can provide constant deal flow.
These connections can be service providers, startup mentors, other investors, founders of portfolio companies, relatives and basically anyone at any touchpoint. There is a catch though. We’re all human and we’re often biased. People will try to pull you towards ventures they believe in personally, ventures of their friends and family, ventures that look cool but in effect are not investment worthy etc.
You could use crowd wisdom here and crowd source opinions. This will probably work but it will still bring in a lot of “noise” that you have to filter.
The simpler way is to find one good source (think “thought leader”) in the startup ecosystem who is well connected and who meets a lot of ventures and entrepreneurs. For example: a recruitment expert or agency specializing in startups or an online marketing agency whose founders are known public speakers and mentors. These types of organizations usually meet with a lot of founders, counsel them and they have the knowledge, skills and time to screen and filter (because if they don’t they will fail in their own job and damage their own business).
Basically, what we’re saying is quite straight forward: if a venture is good enough for us to take on as a client, it probably means it’s also worth checking as a potential investment. Why? Because a) with our combined experience and expertise and that of our own team and partners we can quickly and efficiently identify “hot air balloons” and b) we only choose to work with clients that have added value and professional merit. We can judge the technology, the idea, the growth potential (after all this is what we do and what we will have to deliver should we take them on as a client) and decide if it’s worth anything or not.
Over the years we’ve referred many entrepreneurs to investor and various acceleration programs and we’ve been right in our assessments almost every time.