The vast majority of an investor's time is devoted to sourcing deals. An effective deal sourcing strategy is a prerequisite for success. According to Chris Dixon, Partner at A16Z, “Success in VC is probably 10% about picking, and 90% about sourcing the right deals and having entrepreneurs choose your firm as a partner”.
In today's competitive environment, investors can no longer afford to wait for opportunities to come knocking on their doors—they must proactively source deals.
1. Diversify your pipeline geographically
One of the most effective means of increasing your investment performance is to diversify your investment pipeline geographically. According to a paper published by Harvard Business Review, although the best performing venture capital funds are based in three major venture centers--Silicon Valley, Boston, and New York--their outperformance is the result of outsized performance outside of the venture capital firms' office locations
Unfortunately, investors have a tendency to source deals and invest in companies based in their backyards. According to data from Crunchbase, the tendency to invest “close to home” is apparent among investors specializing in all deal stages, though it is especially pronounced among earlier-stage investors.
You can use Affinity to evaluate how geographically diverse your pipeline is. Use location-based filters to determine how much of your pipeline is based within close proximity to you. If your pipeline is lacking in terms of geographic diversification, use Affinity to discover promising opportunities in new locations outside of your backyard.
2. Leverage social media
Investors are increasingly turning to social media platforms such as Facebook, LinkedIn, and Twitter to source deals. Investors are quickly developing strong presences on social media platforms so as to communicate their investment strategy, promote their brand, and connect with other investors and potential portfolio companies. Platforms such as LinkedIn, Facebook, and Twitter are especially common. Venture Hacks founder Babak Nivi explains, "[investors are] all over Twitter and blogs...They use social media to source deals and to create a latent relationship with entrepreneurs so they can close the deals they want to."
Developing a strong social media presence can enable investors to become magnets for deal flow opportunities. Lowercase Capital's Chris Sacca is one of many investors who finds investment opportunities on Twitter. One of Sacca’s most promising investments, Fanbridge (a fan audience CRM platform), appeared on his radar after tweeting to his Twitter followers. He recounts, “Fanbridge came to me after I wrote a tweet asking if there were any bootstrapped, profitable startups with founders working late on a Friday night…They replied that they totally fit that bill. It is now one of my favorite portfolio companies."
As a venture capitalist, you can’t afford to ignore the potential of social media as a goldmine for discovering untapped investment opportunities. Once you've identified opportunities on social media, use Affinity to determine who in your network can facilitate an introduction or a warm referral.
3. Build Alliances
The most effective investors readily share deal flow with other investors in order to gain exposure to a greater pool of potential investment opportunities. They realize that they must collaborate with their industry peers in order to improve deal flow. According to research spearheaded by Teten Advisors, investors “more than make up for whatever competitive edge they lose by giving outsiders a peek at what they’re up to.”
Time and time again, investors tell us that understanding who your peers actually know is incredibly difficult. Tools like LinkedIn fall short of understanding the strength of relationships. Affinity's Alliances allow investors that want to share dealflow to have a holistic view of their potential partner's connections, highlighting path's to introductions.
Deal sourcing is arguably the most important aspect of an investor’s work. It is a key source of sustainable competitive advantage. Affinity empowers your firm to improve deal sourcing and identify promising opportunities in advance of the competition.