Deal flow seems to be this nebulous thing to some people, especially outside of venture capital. I’m frequently asked where does it come from? What is the quality? How do I know it’s enough?
I recently had the opportunity to evaluate my deal flow. So I figured I would answer the question as it stands today. Now the key thing to put up front is this is that my deal flow is just a small subset of RTP Ventures (my employer). I contribute my deal flow to RTP, when it makes sense, but sometimes it doesn’t because of sector or stage, or other reasons and I simply don’t want to waste their time. This is my slice from outside sources in the enterprise seed and early stage space. So take this analysis with a grain of salt and don’t expect too many follow on answers.
In the past full year, I looked at slightly over 300 deals. That’s a key number for an early stage investor because of the following:
A committed investor should be thinking about doing 2% of the deals that get looked at or less. So 300 deals means 5 or 6 deals a year. In order to get the asset class return I think it makes sense to do 18 or 20 deals, so the investment horizon is about 3 years plus. My thinking on this is my own, and only loosely based on Harry Markowitz, modern portfolio theory. Additionally, if an investor kept to these numbers, I think it would mimic what might be a typical seed stage fund (at perhaps a smaller scale).
Some high level stats as it relates to my deal flow – I received about 75, unsolicited inbound deals this past year (about 1 every 5 days). Most people know that I’m an enterprise investor so about 75% of the deals I was shown were enterprise b2b, but there were still pretty many outside my focus area. I think that is improving over time as sources get more acquainted with what I like to see. 70-plus deals per year come from proactive searching – meaning reaching out and talking to companies in the spaces I’m interested. The other deals come from the following sources:
- Accelerators / Incubators / Co-working spaces
- Venture Capitalists
- Corporate lawyers
- Startup CEOs / Corp Dev. Execs
- Investment bankers / analysts
- Angel Networks
- Cloud Providers
This list is actually in order of percent contribution. So the second least deals come from Angel Networks and the least come from Cloud Providers. The other interesting thing is there is not ‘customer concentration’, meaning no single source is more than low teens in terms of percentage.
Quality is likely a function of source. In general, the better networked the source is, the higher the quality typically is. Each has source their different quirks. Deals from founders are usually very high quality. Deals from universities are usually great tech, but missing other key components that make for a great company. When I look at deals, I try to keep track of who actually ends up doing the deal, what their track record is and how well the company goes on to do.