Where Do Venture Capitalists Find Their Companies?

I’ve received a few emails recently asking me where VCs find their investment companies.  I can’t speak for all firms, but if I look over the past 10 years of my career and add in results from other VCs that I’m close to, I will conclude the following:

VCs get their deal flow from the following sources (in no particular order):

1. Personal Networks;

2. Repeat Entrepreneurs;

3. Other VCs;

4. Email / Blog / Cold Calls;

5. Professional Service Providers; and

6. Venture Shows / Trade Shows.

It’s hard to put a particular percentage on each category.  In general, I think that good VCs with healthy deal flow invest in 1% or less in the aggregate of their deal flow.  I know that sounds like a small number, but the great majority of companies presented to us to invest in are easy rejects.

As for division between sources, I think a healthy VC might see the following division:

1. Personal Networks; 30-50%

2. Repeat Entrepreneurs; 30-50%

3. Other VCs; 10-20%

4. Email / Blog / Cold Calls; 5-10%

5. Professional Service Providers; 5-10% and

6. Venture Shows / Trade Shows. 0%

So what does this mean?  The low hanging fruit is VC / Trade shows.  If you are presenting at a show, you’ve already struck out the normal routes of VC investment and you are pitching to "everyone."  I think that most VCs who have healthy and proprietary deal flow don’t go / care about these types of events.

Clearly personal networks / repeat entrepreneurs (what I call "proprietary deal flow") are the major sources of companies.  This is why investors should chose one VC over another. 

As for the cold call / email / blog category – yes it does happen.  In our newest fund, we have one deal already in this category and we are working on another that fits this bill. A VC with a strong web presence can attract good deals.

The professional service providers can also be a source of deals.  While I’ve spent plenty of time making fun of lawyers and accountants, occasionally they have good clients to fund. 

So bottom line – you have a much greater chance of getting a deal done if you are already in a VC’s network or if you get a warm intro from someone in our network.  Your other avenues are much less likely, but not impossible. 

  • for clarification, deal source from other VCs 10-20% happen as a joint investment, referral from a field they don't invest in, mixture of both? thanks for the breakdown!

  • Usually as a joint investment.  Good question.  Very rare that VC in totally different area has good deal flow in an area they don’t invest in.  In other words, if I send you a medical deal to look at, be wary. 

  • Jason, you seem to suggest that the VCs who attend the Venture Shows/Trade Shows are as bad as the companies presenting. I've seen Venture Shows that list both quality investors and companies. Venture Capital in the Rockies comes to mind. Many times it is more cost effective for a company to talk to as many VCs as possible in one place, particularly for first time entrepreneurs without a network trying to get their feet wet.

    • This isn’t what I’m saying, actually.  There are plenty of good companies at VCIR, but we’ve seen them before they get there.  So if we invest in one, I don’t count that as a trade show, rather our network.  One of the Foundry Group partners has been on the selection committee every year that I’ve gone, so we get previews.  Not all VCs get these previews and not all have the same “we want to see it first / be first money in” attitude that we have.  Certainly for folks raising Series B or later rounds, these trade shows can be helpful.  It’s just not what we do and thus the way I presented it in the blog.  Great question / comment. 

  • Thanks for this. Would be interesting to know if and how these division % have changed during your 10 years and can you see any pattern of some source/sources growing and others decreasing. Also would be very interested to hear, into what division you would put our service http://www.growvc.com

    • I think it’s natural over time for deal flow to be more heavily weighted toward network and other VCs as a person has been in the industry for a wild and has built a strong ecosystem.  I don’t think any external factors have played into our deal flow dynamics in the past 10 years, rather we’ve all been around longer and are more well known.

      As for the site, not really sure where that falls in, as I haven’t used sites like this for deal flow.  Looks to be more angel than VC.

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  • Weighting deal flow towards personal networking/repeat entrepreneurs can also save money in the deal formation and execution stage. It's simple really…if you know who you're dealing with (and know them well) then you can better gauge their motives and activities, and can avoid some of not much due diligence review.

    Not to say the due diligence exam won't be important, but maybe it's a "check-up" and not a "root canal."

  • Good post on where people should focus there efforts, Jason. My own experience as a VC is pretty similar but some slight variations. I find that I get a lot of early stage deal flow from lawyers. They know about the companies before most people because one of the first things you do as a company is register the company and set up a shareholders' agreement or similar amongst founding team.

    Also, I think that some venture shows can work well (think TC50, DEMO, Twiistup). My rationale is that you have the opportunity in a one-many format to effectively convey the key points of your business. If you're a polished presenter I think this creates interest and the commensurate press creates inbound leads. Inbound leads have a higher high-rate than outbound. At least that was my experience when I was raising money. I must have hod 10 VC's call after Demo '06.

    But your general point is spot on: focus on other entrepreneurs or people who know VCs. I did a blog post on the topic here: http://bit.ly/17ktOy

  • Adam

    My favorite: Craigslist. I sourced a deal searching it one time.

  • Awesome!

    Jason Mendelson

    Sent from my iPhone
    – please forgive iTypos.

  • keiko

    Follow up question to your post: How do VCs research the companies they find? In particular, do they get any value from reading trade or business press? Does a strong media presence help a company trying to gain traction with the VC community? And if so, where is the most useful place to be seen? What kind of media provides the most valuable "validation?"

    • I don’t really care what the media says in evaluating companies.  Most of them find us through our blogs or other outreach activities. 

      Formal reports are helpful to weed out “noise” but it’s not what drives me.  It’s being immersed all day / every day in the themes that I’m interested in investing in and having my own thoughts as to what might be a good investment.

  • teamlram

    Is Email / Blog / Cold Calling outbound sourcing? Or is that when an entrepreneur cold calls the VC? Where does outbound sourcing fit into these division?

    • I consider that cold-  no intro – just email / blog / cold call.

  • Frank

    As a VC, would you consider a company with a driven team even and great idea even though their resumes don't show a track record for starting companies? If say their idea was in the right niche market at a crucial time when other companies in the same market where looking to find themselves.

    • Sure.  if the team is excellent and they are doing things in areas that I’m interested in, no issues.

  • Gina

    Once a VC is looking for companies there are endless options to consider. Obviously their first choice would be their personal network but this practice is old and no longer attractive since the communication networks expanded dramatically for the past years. I must say that I speak from experience; more and more VC's ask to be included in certain lists or databases of investors (http://www.vcgate.com), especially those databases that entrepreneurs pay for. It is easier for them from several reasons, people actually bother in order to get to their attention, they are already classified after their industry stages, capital, geographical location and other preferences. This way they only get interesting and more realistic proposals.
    Soon the VC's will probably pay larger fees than the entrepreneurs in order to be part of a top list.

  • Networking is the most imortant part thats why most of these guys sit on each others boards. Bit of a closed shop.

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