As the new year starts, I am starting to reengage with co-investors, as well as reaching out to accelerators and other investors with whom I have not had a relationship with in the past. Those two efforts have highlighted to me how difficult it is for investors to find appropriate deal flow, and how good some people are at matching founders and investors.
Hearing about companies looking for financing is not difficult for investors – there are numerous websites and accelerators these days, and those funding companies are interconnected in ways far greater than ever before. What’s difficult is learning about companies that fit one’s investor profile.
A handful of accelerator company directors, micro VC fund partners, and angels that I know are very good at matching companies to investors. Here are four things that I have noticed that they do differently from other people who send me deals.
What Improves Deal Flow Quality?
Understand My Investment Criteria
All investors have preferences for the types of start-ups they like to fund. Usually those preferences are some combination of industry, stage of business development, business model and founder background. The referrers who are most helpful are the ones who pay attention to my criteria and only send me deals that fall within or close to my criteria. This allows me to avoid wasting time telling founders “no” because their venture doesn’t fit what I am looking for.
Provide Me with Information
Before I talk to a founder, I want to see his or her pitch deck, and know about his or her background, be aware of the valuation at which the company is raising money, understand the customer problem being solved, and get a sense of the traction to date. The best referrers send me that information upfront in the email suggesting that I look at the company. That saves time in asking for it, or seeking to gather it from the founder.
Offer Me Insight
One of the most difficult things to gather about a start-up is information that isn’t easily codified. Things like a founder’s sales ability or how he or she responds to stress or potential contracts in the pipeline are tough to see from a Linked In profile or a pitch deck. The referrers I value most provide me with the uncodified information about founders and start-ups. They go beyond the information I can read myself.
Small Business Deals
Tell Me the Good and the Bad Upfront
No founder or start-up is perfect – at least none that I ever have referred to me. The best referrers tell me the positives and the negatives when they first show me companies. They tell me things like “the founder is really smart, but he doesn’t listen well” or “the team closes a lot of customers, but their churn is higher than average.” They might even say “I can’t find much wrong with this one, which is why the valuation is higher than you would expect for their stage of development.” Knowing the good and the bad allows me to think in terms of trade-offs and know what weaknesses I will accept and which ones are deal breakers.
Not everyone does this very well, and I don’t want even the referrers who do it less well to stop. I would rather do more work figuring out if something is gem or a lump of coal than not know that a gem exists. But there are still people whose referrals are so good that if I get an email or text from them, I stop everything to see what they are suggesting.
Deal Photo via Shutterstock