How venture capitalists can improve qualified inbound deal flow from startups

How venture capitalists can improve qualified inbound deal flow from startups

Tl;dr: If you’re sick of getting unqualified deal flow from founders you need to change what you’re doing. Founders don’t know what you invest in, so you need to tell them. We’re going to go through why so you understand and then I’m going to spell out some ways to change your website to communicate to founders.

As an investor, you have one job and that is to invest in startups (in order to generate LP returns). 

To invest in startups you need to find them, or they need to find you.

We’re dealing with the latter today. Specifically, how to get better qualified inbound deal-flow.

Putting deal flow and an investors’ job into perspective

“You’re born, you take shit. You get out in the world, you take more shit. You climb a little higher, you take less shit. Till one day you’re up in the rarefied atmosphere and you’ve forgotten what shit even looks like.” – Layer Cake

Some investors feel they have arrived at an exalted status as a “VC” and they can now act with impunity. Ironically, it’s almost as if they have forgotten how hard it is to raise a fund and that they themselves know who to raise from (many still don’t!). 

I get it. 

At the top of the layer cake, it feels rational to get frustrated by all these annoying startups who are now asking for money now that the fund is closed. 

Looking at deals is tedious. After the 300th pitch deck of the year, you’re thinking why the heck do you want to do anything to explain what you invest in?

Nah, that might only invite more deals to look at! 

Those peasants either know what we do, or they’re idiots and not fundable.

Seriously.  Stop.

You are in a service industry whether or not you like to believe it. You just have a Patagonia logo on your uniform instead of a Chucky Cheese one.

You are only successful and get to write tweets that get retweeted by “VCs congratulating themselves” (Meaning hoping you get the ‘blocked’ badge of honor), and your Medium post when you stand on the shoulders of giants that you are “honored to have been the first check-in”.

You and I both know that no one really knows who is going to be successful to make your fund, but also on the other side that there simply are just so many rubbish startups and those destined for failure. However, the more deals you see, the more you might find the ‘fund maker’.

The downside of the job is triaging deal-flow. 

“The only thing worse than being talked about is not being talked about.” — Oscar Wilde.

The only thing worse than having too much deal flow is having none at all.

The quarterbacks of VC get 2-3k decks a year, whereas the curling captains get maybe 1000 a year (Likely an exaggerated number, but it’s what everyone claims).

VCs report to LPs the deals they see and always say they saw a deal (especially post hoc when one is viewed as hot), even if they couldn’t get in or have no idea what the LP is going on about. 

There are three ways to categorize deal flow, which are not mutually exclusive:

  • Qualified: Startup reaches out to the right investor regarding stage, sector, ticket, etc
  • Quality: The team, traction warrant the attention of the investor 
  • Form: How the founders got in touch with investors is appropriate

Top tier investors might lose their entitled shite if a quality and qualified startup reach out with an inappropriate form. “Holy Moley, doesn’t she know I expect a warm intro!”

Startups might have an appropriate form and be qualified and Tier-2 VCs would be generally fine with it. They might just not be quite happy with the quality aspect (and might not communicate with the introducer on quality grounds in the future).

Qualification is just something everyone gets pissed off by. “Dude, we’re series-B healthtech and you’re raising an Angel round in adtech?

I argue 50%+ of unqualified deal flow is your fault!

The rest is going to be founders either spamming or just not checking.

Let’s get into improving that.

Newer funds need inbound

Benchmark Capital has a one-page site with nothing on it. They only accept intros for inbound as they can.

No joke, this is literally their site:

benchmark capital vc inbound deal flow

99% of funds aren’t Sequoia etc. The brand isn’t there yet.

Networks vary dramatically between GPs so inbound is going to be important to most funds for the first few funds. 

As a new fund, all activities at events, speaking, blogging, quora, twitter etc is going to result in a founder going to your site first before reaching out to you. And let’s face it, CrunchBase is pushing paid (which no founder will pay for), founders don’t pay for CBInsights etc, so you can’t rely on third-party sites to provide education for you.

All activities will drive founders to your site to learn about you. How good is your site?

Also, I should have explained this more, but introducers in your network will only think of you if they themselves are clear what you invest in! I know I do.

Founders don’t know how to raise (it’s not their job!)

I seriously have never understood how much investors expect founders to know about fundraising. I reckon about 30% of my readers are investors, startup advisors, lawyers etc. I know for a fact that investors know nowhere near as much as founders think they would, especially on technical aspects. 

What do you need from a founder? Idea, execution, team building etc, right? 

Who do you want to invest in: an awesome raiser, or an awesome product/executor etc?

Ok, ok. Yes I know, raising is really important as it can make a difference when rounds start with ‘series’. Let’s skip that.

A16z looks for technical founders and has 120 operating partners/support team folk as they believe tech matters and the rest can be helped with/taught/hired for.

Founders do not know how to raise. I do calls to teach investors/founders all the time, so I know. 

They don’t know:

  • How to run a process
  • How to build a list of investors and qualify them properly (Read: Fundraising process manager tool)
  • And they certainly don’t understand valuation, term sheets, deal structures, ESOP and all the other crazy complicated shizzle

Founders only need to know how to raise so they can execute.

VCs do not help founders enough and appreciate they simply don’t know.

It can be hard for me to know what a VC invests in and does not. If I don’t know, well, I run a big blog that teaches this stuff, so fill in the blanks.

If your paradigm shifts from ‘layer cake’ to ‘we need to help founders get the raise done’ everything you’ll do will be different.

Founders don’t know what you invest in (it’s your job to tell them)

Read this a few times: Founders only know what you invest in if you tell them. They only know as much as you tell them. They’re not going to spend hours figuring it out.

I’ve raised a few times so I can tell you I won’t spend more than 20 minutes qualifying an investor, and that number is only for someone I am sure has a lot of money.

For most, given almost all VCs suck at explaining what they invest in, here is what I do once I have a list: 

  • Check portfolio on the site (I actually know a lot of companies so it’s quick for me, but otherwise one would likely have to click through to each website) for sector and geography
  • Read what’s on CB. I can sometimes get an idea of check sizes from it to know what stage and ticket investors are doing
  • Flick on your website (quickly). It always has some BS about investing in visionary founders which tells me nothing useful
  • I then make a quick call if it is obviously dumb or not and add/delete from my list or not

I can do that fairly quickly, but it’s still a lot of work, especially as I want a list of like 100 investors. You can imagine you’ll get bored at some time and stop really making an effort.

Think what it would be like for a n00b? They don’t even know they should be looking for:

  • Sector
  • Geography
  • Stage/ticket
  • And then all the ‘value add’… let alone the ideal partner

To put things in perspective I know Sequoia through blogs or being told by a partner that “we actually do invest in seed!” Why the hell do they need to say that. It should be obvious?

It’s literally your job to tell founders what you invest in. If you don’t explain it, how the heck can you actually expect anyone to know?

It sounds so dumb, but that’s because it is. It’s honestly insane VCs don’t make this simple.

Do not complain you get unqualified inbound if you do not make this super obvious to founders who are frankly more busy than you.

Let’s get into how you can be respectful to founders, starting with knowing what you invest in, first.

Investors need to know what startups they invest in

There is a huge tendency to have the broadest mandate possible so that you don’t miss out on any hot new trend/deal. I get it- you want optionailty, but it’s really myopic.

When I started out as a VC in Asia around 2013, there literally were not enough fundable startups to focus on any sectors. Of course no one can know everything about all sectors, so the way we dealt with it was by having venture partners. They reviewed all adtech deals, for example.

That’s changed a bit in 2020, but not enough. There are various fintech funds, but fintech is so fricking hard you have to specialise here (And specialise within subsectors). I know there are reasons to be broad in focus, but for developed markets, there’s just too much competition to not.

If you don’t stand for something you will fall for anything and in this epoch, you need to have focus unless you are a mega-fund with a team of partners.

Why do you need to have focus?

  • Founders know who to reach out to and talk to one another
  • You become more memorable
  • Introducers in your network remember you easier (If you say SaaS, I immediately think Point9, Notion, Emergence (Enterprise SaaS), SaaSTR, Matrix and Bessemer)
  • Founders have options and want the ‘SaaS guy’
  • You can’t add value to a sector you are clueless about
  • You need to build your brand and having focus is the easiest way
  • Content marketing can have an impact (e.g. Jason Lemkin) and focusing on an area is far easier (Trust me on this)
  • LPs need to manage their portfolio so sector exposure makes this easier (Pro tip from a friend of mine at the largest FoF in Canada)

Define what you invest in

Most investors will have some idea about what they are focused on. Be honest, how clear are you about what you don’t invest in? Why, really? Other than old funds, I bet most GPs are winging it.

This is going to sound insane, but get all the partners and your minions (depending on your culture) in a room with a whiteboard and brainstorm your investment thesis.

I’ve done this with a fund 2 years into investing, so I know you need to, I also do calls with new funds and I teach them they need to do this. 

Start brainstorming and prune to get really clear on what you:

  • Do invest in
  • What you do not invest in
  • What you are focused on
  • Who is focused on what and will lead deals (Even how you pass on deals)
  • Your initial tickets and reserves (as you made that shite up for LPs and didn’t think about it properly)

You need to realise that focus is positive. You can still retain the optionality for that random deal, but you will garner a defined purpose for everyone. People need focus to be more effective.

Knowing what you don’t invest in makes saying no efficient

When I was a n00b investor I spent too much time looking at too many deals because I just didn’t know better. If I had just defined what I wanted and didn’t I could have saved so much time. 

For example:

  • Adtech: Don’t understand. Pass. Or… I just forward email to the adtech OP and not spend a moment on it (As I eventually started doing once that was my rule. Sounds so obvious but it’s not)
  • Hardware: Team and market look interesting. I don’t understand how it works, but why not learn? No. F that. I just pass. I don’t do hardware. Time saved
  • Angel: I don’t do. I respond immediately to the founder I don’t and that I only do seed with $500k+ check. If looks OK, I might mention some angels that might be interested (Watch out, they always then ask for intros, so be prepared) to be nice as I want to help, and know that’s how I get founders talking about me
  • UAE: I don’t invest there, sorry. Check out this list of investors I came across in this link that might be helpful in your search

All this makes triage easier. I then made template emails to respond politely but give the impression I care and not just “come back when you have more traction”. I made a few for different scenarios and used a text expander to populate the emails.

I also made template word docs to the same shite I kept teaching to save time. It’s why I started this blog so I could send links instead. Anyway.

Create founder avatars to know who you are looking for in the what

Once you define the big picture, get more anal. Define who you want to invest in. In Simon Sinek terms, the ‘Why’ is the ’Who’ with investing. Team is like 70% of the decision.

Watch this if you don’t know what I’m talking about: The Golden Circle

I want you to actually create 1-4 avatars of founders you ideally want to invest in. How many depends on how many verticals you invest in etc.

The process is the same as in Customer Development Methodology. Stick a photo there, work experience, industry knowledge etc. Goal is to help you triage deals by helping you know the quality of team you are looking for.

What factors might you think about:

  • Age: Some business models need experience
  • Experience: You might need experience to understand the problem
  • Education: For sectors like biotech you probably need a PhD
  • Sex: Relevant if you’re selling tampons or handbags
  • Race: Only if it’s selling weaves or something
  • Nationality/time in country: Some countries need a local who knows how things work

In fintech, you might prefer grey hair, in social you might just want Stanford CS grads or whatever. If you’re investing in sectors you should have an idea who is the ideal, but leave space open in case the exception comes along.

The goal is to help you triage deals going forward. It’s not something you write on your website (People are so sensitive and find ways to release rage on Twitter…), it’s something everyone (analysts) use to triage deals faster by knowing clearly what you are typically looking for.

This section could be a few blogs. So figure it out. You’re a VC right…?

Tangible ways to improve your deal flow from startups

I’m going to give you some ideas I brainstormed to help founders qualify themselves before they reach out to you. It’s all about your website and it’s all totally reasonable.

The first thing you are going to want to do is to think about the structure of your website, so you know the content you are going to create.

Website structure

You want to have a menu header along the lines of “Raise from us”. Make it prominent along with your usual headers such as portfolio and team. Frankly, make it the first on the left in my opinion, as it’s the first thing you really want busy founders to check.

Tech point: That header won’t have a link unless you want to make a page for it, so have your dev set that as a “#” so there is no link.

Then I would have 4 submenu items to link to under it. These are, in order:

  1. Our investment thesis
  2. What we invest in
  3. What we don’t invest in
  4. How to raise from us

Let’s go into each of these briefly so you know what content is going to go into it.

Our investment thesis

Your investment thesis is your macro view. It’s basically you academically jerking off. If you haven’t done one already for your LPs you really should. I believe very few VCs do this properly (as they don’t know how to).

I’ve collated all the VC investment thesis’ I can find here so you can check them out (Not many, It’s sad): VC investment thesis collection

From a founder perspective, they can get a broad view about what you are excited about and how your team thinks. You’re ideally looking to get specific so when the ideal founder reads it they think “awesome, this is the VC I’m looking for” and they reach out excited.

This is not required, I just think you’re not putting your academic best foot forward if you don’t have one. 

What we invest in

This is clearly the core objective of your homework and what 99% of founders are actually looking to read. So, what do you invest in?

Spell it out. The absolute basics are how you expect a founder to qualify themselves to you, so think critically what a good qualified deal is? Here are the basics:

  • Sector: If you aren’t specific then founders will find a grey area and an excuse to spam. State the common sector name and then drill into the sub-sectors you are particularly looking for
  • Geography: If you invest in the USA, fine, but then you aren’t investing in Europe. Many US investors might only invest on their coast or in their state 
  • Stage/ticket: Stage can be tricky these days, especially for the seed phase. Some VCs now state they invest a Dollar value instead. If you are series-B then maybe clarify what that means in terms of ticket size and perhaps typical traction (E.g. ARR)

There are many other things you could include. It’s your mandate, so figure it out and write it.

If you want to get fancy, what you could do is to have a section with examples of deals you did invest in (3 is ideal). Just a nice photo and teaser text. Then have links to pages with case studies of companies you invested in. You want to get the founders to give you some nice quotes. Explain why you invested, how you found them, how the process worked etc. 

Remember who the audience is and the goal. Cut the corporate speak. You want to educate founders to encourage the best ones to reach out to you and have a positive impression.

This is potentially a tonne of work. A smart associate could do a solid first run (if they worked in banking/consulting before, as we had to do random crap like this before all the time).

Your goal on this page is:

  • Get founders who are a bad fit off your site and to another asap
  • Give a positive impression to positive fit founders that they want you even more (pre-sale)

What we do not invest in (and why)

Opposite of before. Spell out anything you won’t touch. This page is likely a lot less effort and has a lot less content.

State sectors you hate and explain why. People crave why. 

Most VCs hate hardware and most hardware founders are indignant and have no idea why. Explain capital intensity and higher failure rates etc.

Whilst you don’t want to invest in these founders (let alone hear from them), if founders feel you are academic and reasonable, they will still recommend you to other founders. Fairness is a huge concept to understand.

Again, if you have the bandwidth, you could also have a section with case studies on why you passed on deals. I’m not sure what this looks like in my head, but I think it is possible.

How to reach out

All roads lead to reaching out (Rome). Every outbound to an investor is perceived marginal optionality to a founder. 

If you made the effort to explain what you do and do not invest in, you’ve hopefully got rid of anyone that doesn’t make sense. Hopefully.

The people who reach out will be in 3 categories now:

  1. Solid: They believe they are a fit
  2. Not sure: Still not sure about fit as you prob weren’t clear enough, or they are in ‘bridge round’ type land and if you aren’t super specific, you haven’t actually answered
  3. Numpties: There are just founders that don’t care and will spam you anyway 

You should be fine in receiving 1 and 2, and 3 are just a fact of life.

Most people currently deal with 3 by just making the contact page ghetto with a physical address and some cavern called [email protected]. Anyone dumb enough to use the email is a moron.

This is incredibly myopic on your part as some poor analyst has to check these emails occasionally. ‘How to reach out to us’ is an opportunity that no one takes.

Go back to the section about the fact founders don’t know how to raise. They don’t know how you want them to reach out to you! Tell them!

Honestly, I teach VCs how to reach out to LPs, so don’t give me BS that founders are the only morons who don’t know how it works ;).

Founders do not know how it works. There is a reason I wrote these: How to get warm introductions to VCs and How to spam investors.

Explain to founders how to reach out to you and why you want things done in a certain way! If you don’t, it’s your own fault if you don’t get approached how you want to, not theirs, as you spelled it out (for the first time ever!).

If you only do warm intros from super famous people, say it… not that it will go down well.

You can provide options, for example:

  • Preferences: Linkedin, email, social media
  • Intros: You prefer via email from x y z

Let’s talk email

In reality, most people only want to add people they know on LinkedIn, and not many people are going to pay for InMails.

If you tell founders to reach out on Twitter, most people won’t as they feel it’s not concrete. More desperate ones will just hit you up everywhere in addition.

I know everyone hates how many emails they get, but it’s how business gets done. So deal with it.

In my opinion, I would just share each partner’s email. Most VCs these days have partners who cover a sector or geography so use that workflow. There are so many emailing hunting services that founders can get your email anyway. Ther are also technical ways of not having your email scraped, so that shouldn’t be a concern.

Providing your email makes you appear approachable.

If you are a large firm that insists in pushing top of funnel through associates, make that the workflow for founders and explain that. Many want to reach out to a ‘decision-maker’, but if you explain why you do things in a particular way, they should get it. You can also clarify partners take direct intros from people you know. This is a question of your culture.

If we agree that email makes sense, then why not go a step further and explain what the ideal email looks like? Epiphany! You complain you don’t get short and structured emails, so say that!

Why not set out what the idea email introduction looks like, what the idea cold email looks like?

Doesn’t this help everyone? Forget the founders, it makes your triage a hella lot more efficient.

I’ve provided examples in two blogs above… You can even tell founders to read my blogs and follow my advice, ha.

I could write examples for all this, but then this would be a book.

This is your opportunity to define your decorum and not be a dick and expect founders to know your old boy’s club secrets.

I anticipate these ideas should get you thinking “this is so obvious, why aren’t we doing it already?” Whether you do it is another story, ha!

Advanced tips to improve your inbound

If you do the basics I taught you, you are solid. Here are some bonus tips.

Replicate your content everywhere founders search

Founders will go to your site, however there are loads of places that founders may discover or read about you. 

Some are the usual AL and CB, others might be user created lists in google sheets. 

For the ones you control, you want to c/p your copy and keep your story straight. This will also make it easier whenever a community investor list is made as they will c/p your info for founders to read in their sheet.

Write in simple English and for your audience

In my experience, quality investors and founders are educated and know words good (that’s a joke).  Problem is that educated people can’t explain things simply. Academics are the worst… seriously why do they have to have math proofs for everything?

People have no attention, so no $2 words. Be simple. Focus on what matters and don’t let it get lost in corporate speak. If your core take-aways are lost in a sea of text you lost.

I briefly mentioned developing avatars when defining your startup audience. Marketing BS can be just that, but knowing your audience and how to talk to them matters.

Look at my blog. I have no filter. I’ve decided my audience are smart people that are sick of hearing lies, being told fluffy BS, want to be taught complicated details as well as, personality-wise, love I am honest, make crap jokes to make content less boring and keep it real. That’s who I am. I don’t have to lie.

People who don’t like how I write won’t contact me. I like people reaching out who get me, so I self select my tribe. Yes, I have haters, but I have a lot of fans too. The later are who I care about.

You want people reaching out who get you. You want to turn off the founders you don’t want (in a sense. I can get away with more than most funds, especially if they have institutional investors).

The most common thing I get from clients is “I could tell you’re the only person that would rip me to shreds and that’s why I come to you”.

My attitude defined my audience. In investor terms, it defines my inbound deal flow.

I’m not famous, so look at Gary V. He is not for everyone, but hustle porn lovers love Gary. He speaks to his tribe

You want your own tribe. That comes with being authentic to you.

Don’t forget that you are investing for up to ten years. Love the babies you are helping make.

This leads to being personable.

Personalise your site with videos

No one does videos enough. Do you know one VC site with actual videos from the partners?

No.

Many make a few youtube videos to build a following, but that’s as far as one will go.

Every site I make has videos with me on every page explaining stuff. I don’t start perfect, I just ship the videos. I make better over time.

Founders are taking money from a partner and the firm. A video is the best way to communicate your personality. The thing is everyone is scared of making videos.

As a founder, what better way to get to know you and your firm than a video? I can triage from your content what you do and don’t invest in, your thesis and the like, but when I want to escalate my interest, you are who I want to know about.

I recommend this. Make company and partner videos:

  • Video explaining what you invest in: Do 1-5 general videos to get founders to understand you and the firm, how you work etc. Show off your Jackson Square office, ha
  • Video with each partner: Explain what each partner invests in specifically so founders know who to reach out to specifically. Stick it on their profile page
  • Videos with support teams: If you are spending a tonne of management fees on OP teams, then have them make videos too so they can make that value add feel like it’s actually real!

As a founder, once I know that BlueCollar Ventures invests in s-a SaaS on the East coast I need to figure out what partner, and why they could fit on my board?

Spell it out. Think about founders. Make it easy for them. They don’t know if you don’t tell them.

No one is doing this yet, so you have the op to be the first to set yourself apart in a sea where every investor just looks like a check-book.

Conclusion

The definition of insanity is doing the same and expecting a different result. If you want more qualified inbound, then take matters into your own hands and just tell founders what you want in simple language.

Any questions? Sound out in the comments and I’ll answer.

 

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