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.