How to beat Venture Capitalists at their own Game Part 3

In the previous post I discussed the issue of investment style and its importance in the relationship between the investor and the entrepreneur.  In this post, I want to move on to discuss the sometimes not well understood concept of Deal Flow and what it means.

 

 

Entrepreneurs need to need to understand when the Venture Capitalist is working to their own agenda and Deal Flow can be part of this.

Why is this Important? In part, this is a numbers game.  You need to understand how the numbers work and make sure that you are not making up the numbers for the VC.

How many deals do they see in a year? 

An average VC firm will see between 500 to 1,000 deals a year.  This number is the number of approaches for funds, business summaries and business plans which cross the desk of all the General Partners and associates in the business.  With this number you need to start thinking about how you make your approach and make your business stand out.  That is probably another subject in its own right.

How many businesses do they meet?

If the VC is running an efficient firm they will only arrange meetings with a fraction of these companies.  I would estimate this number to be between 50 and 100 companies through the year; in other words around 10% of the companies they review.  Getting tough yes?

Why is this Important? In part, this is a numbers game.  You need to understand how the numbers work and make sure that you are not making up the numbers for the VC.

How many deals do they see in a year?

You can do this math for yourself.  Go to the VC website and look at their investment track record for each of the last few years.  I would expect that they close between 5 and 10 deals a year – so the odds are around 1% that you will get investment from this firm.   You need to ensure that you are simultaneously approaching several (suitable) VCs for funding at the same time.  There are several reasons for this, but for the moment just accept that this improves the odds of your getting funded by one of them.

Deal Flow 1

VCs see a number of companies purely to inform themselves about what is going on in the sector and to learn about new developments.  They may have no intention of investing in your company but value the opportunity to understand your product or service, business model, competitive positioning and growth strategy.  It is difficult to screen against this but you must be aware of the possibility.

Deal Flow 2

VCs like to be “in the deal flow”.  They will report back to their investors (Limited Partners) which deals they have seen prior to those companies being fundedand will explain to their investors why they chose not to invest.  The Limited Partners want to know that their General Partners are out there looking for great deals. You do not want to be in this segment of their process.

VC Engagement Key Indicator

In order to get funded you need to ensure you are engaging with a General Partner.  More about this in the next section.  If you find that you are only getting meetings with more junior members of the VC team, this is a good indicator that you are not in the core group of potential investee companies.  You should challenge the VC on this point if you are not getting General Partner engagement.  Better to cut your losses and invest your valuable time with General Partners in other firms who may want to invest in you.

In tomorrows post, I will take up a discussion around the Deal Process.

What Next?

Take a look at my FREE video Tutorial “How to Turn Your Great Idea into a Business” which is all about Starting a Business and Raising Capital.

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