What is awesome angel deal flow

I was recently reading the post Awesome VC deal flow. What is it exactly? by Gil Dibner and it got me thinking about the differences in VC deal flow from angel deal flow. There are some incredible differences between the two that are interesting to think about.

Gil talks about Intrinsic quality, Inbound, proprietary, and validated deal flow as being the four pillars of great VC deal flow. Some of these translate to angel investing for example intrinsic is great and inbound is great as well. I do agree with Gil here that inbound deal flow that is also intrinsically investable much more difficult to come by and if it is a normal part of deal flow than it is an incredible thing. This usually comes through a strong network of referrals vs. cold calls due to the simple fact that there are a lot of deals that get sent around to anyone with an email address and the word investor associated with their name. Too often entrepreneurs use the spray and pray fund raising approach and don’t look at the investments their target angels have made in the past or the industries they are most interested in before sending an deal along.

The other aspect of inbound deal flow for angels is that they are not professional investors, this is why many join angel groups. Getting inbound deal flow as an investor who is not a professional angel is incredibly difficult. Joining an angel group where deal flow is presented every month is a much easier concept to grasp. This is changing a lot with online investing, following lead investors on AngelList, having a curated list of startups to choose from on SeedInvest, or leveraging the angel group due diligence that happens for companies presented on DreamFunded is a game changer for angel deal flow and removes this requirement a bit. It also fits nicely with the other attributes that make up great angel deal flow.

That is where Gil’s great VC deal flow stops being aligned with great angel deal flow. Proprietary angel deal flow can be a bad thing, often deals at this stage are so early, being the only investor is a negative. What is more important is Gil’s last measure, validated. Deals that have other good investors putting capital in helps to make a good deal. Often there are teams searching for investors high and low with investors passing on the deal, these are less validated and similarly less proprietary. On the other end of the spectrum are teams asking a curated list of investors for capital and those investors are putting the capital into the deal, these are closer to proprietary but they still have an aspect of validation that others can see the benefit. As the project gains traction, the investor validation is less important and customer validation of the vision becomes more important. That is the point where “proprietary” deal flow is important and is usually after the angel round.

An important aspect of great angel deal flow that is more unique to angels is timing. Many angels have more limited funds than VCs have and this makes timing much more critical for an angel than it does for a VC. Often angels have a number of deals they can do in a year to maintain their overall allocation to early stage investments and getting too many great deals at once or in a single year can really make managing deal flow a difficult problem. At the same time too many angels invest all of their early stage allocation right away and then sit on their hands for seven years waiting to get some of it back. Because of this problem it makes it even harder if too many great deals come to fruition at the same time because angels should be worried about investing all their early stage allocation at the same time. So great deal flow for angels would include great timing where great deals come at a cadence that matches the investors’ timing.

On reflection, I think there are four measures of quality deal flow:

Intrinsic quality. This is the most basic measure of all. What extent are you seeing companies you want to invest in? Companies with strong teams, huge markets, great products, market validation, growth strategies, etc. Every other blog post on VC is about this topic, so I won’t go into any more detail on “what makes a good deal.” I will say that one rough way to measure this is the “conversion” rate from qualified leads, to first meetings, to second meetings, and all the way through the funnel. The high the quality of startups, the harder it is to say no. (Just to confuse things, I’ll add another statement: the higher the quality of the VC, the easier it is to say no.)

Inbound deal flow. The more inbound a VC is seeing, the better “deal flow” he or she has. Outbound is important as well – and VCs can often source their best deals by chasing down particular companies or specific investment theses. But outbound is, ultimately, a measure of how hard the VC is working. Inbound, by contrast, is a measure of how much entrepreneurs value a VC as an investor. The complication, of course, is that inbound leads on new investments can often be of low intrinsic quality. So the real measure is the combination of the two: What proportion of the quality leads are inbound? And what proportion of the inbound leads are quality? High quality inbound deal flow is the best measure of a VC’s “brand” – and one of the ways that brand matters in the venture world.

Proprietary deal flow. In some ways, proprietary deal flow is the Holy Grail of venture capital. And, like the Holy Grail, it rarely if ever exists. A “proprietary deal” is a deal that you as a VC have unique or exclusive access to.

  • This is rarely if ever binary. VC investment opportunities are rarely 100% proprietary or 100% public. They are often in a grey zone, and some are more proprietary that others. Most smart entrepreneurs will speak with a few VCs, not just one – whether because they want to hedge their risk, ensure a fair price, or build a syndicate. But from the VCs perspective, it is better to be on the short list who had access than on the long list that read about the investment on Crunchbase. VCs that have access to an accelerator’s class before it hits the press have more proprietary access. VCs that attend demo day, less so.
  • Proprietary can be either inbound or outbound. Sometimes, VCs can hunt down a company, create a relationship, and generate an investment opportunity that doesn’t exist for other VCs. Sometimes, an entrepreneur seeks out a specific VC that he has worked with or heard about to talk about a business idea, consider investment, or just explore financing options. That sort of inbound vote of confidence means a lot – and can result in truly proprietary deal flow.

Validated deal flow. While VCs should be comfortable making their own investment decisions, there is no doubt that outside validation of the quality of a company is a great help – and a great measure of the quality of deal flow. Validation can come in many forms – too many to list – but the key ones would include:

  • Co-investors, advisors, or key-employees who have joined the company
  • Key customers or partners
  • The referrer – if someone referred the startup to a VC, that person has tied their reputation to that of the startup, and that’s a very important indicator in some cases.

– See more at: http://yankeesabralimey.tumblr.com/post/96467972240/awesome-vc-deal-flow-what-is-it-exactly#sthash.8544b4Xo.dpuf

On reflection, I think there are four measures of quality deal flow:

Intrinsic quality. This is the most basic measure of all. What extent are you seeing companies you want to invest in? Companies with strong teams, huge markets, great products, market validation, growth strategies, etc. Every other blog post on VC is about this topic, so I won’t go into any more detail on “what makes a good deal.” I will say that one rough way to measure this is the “conversion” rate from qualified leads, to first meetings, to second meetings, and all the way through the funnel. The high the quality of startups, the harder it is to say no. (Just to confuse things, I’ll add another statement: the higher the quality of the VC, the easier it is to say no.)

Inbound deal flow. The more inbound a VC is seeing, the better “deal flow” he or she has. Outbound is important as well – and VCs can often source their best deals by chasing down particular companies or specific investment theses. But outbound is, ultimately, a measure of how hard the VC is working. Inbound, by contrast, is a measure of how much entrepreneurs value a VC as an investor. The complication, of course, is that inbound leads on new investments can often be of low intrinsic quality. So the real measure is the combination of the two: What proportion of the quality leads are inbound? And what proportion of the inbound leads are quality? High quality inbound deal flow is the best measure of a VC’s “brand” – and one of the ways that brand matters in the venture world.

Proprietary deal flow. In some ways, proprietary deal flow is the Holy Grail of venture capital. And, like the Holy Grail, it rarely if ever exists. A “proprietary deal” is a deal that you as a VC have unique or exclusive access to.

  • This is rarely if ever binary. VC investment opportunities are rarely 100% proprietary or 100% public. They are often in a grey zone, and some are more proprietary that others. Most smart entrepreneurs will speak with a few VCs, not just one – whether because they want to hedge their risk, ensure a fair price, or build a syndicate. But from the VCs perspective, it is better to be on the short list who had access than on the long list that read about the investment on Crunchbase. VCs that have access to an accelerator’s class before it hits the press have more proprietary access. VCs that attend demo day, less so.
  • Proprietary can be either inbound or outbound. Sometimes, VCs can hunt down a company, create a relationship, and generate an investment opportunity that doesn’t exist for other VCs. Sometimes, an entrepreneur seeks out a specific VC that he has worked with or heard about to talk about a business idea, consider investment, or just explore financing options. That sort of inbound vote of confidence means a lot – and can result in truly proprietary deal flow.

Validated deal flow. While VCs should be comfortable making their own investment decisions, there is no doubt that outside validation of the quality of a company is a great help – and a great measure of the quality of deal flow. Validation can come in many forms – too many to list – but the key ones would include:

  • Co-investors, advisors, or key-employees who have joined the company
  • Key customers or partners
  • The referrer – if someone referred the startup to a VC, that person has tied their reputation to that of the startup, and that’s a very important indicator in some cases.

– See more at: http://yankeesabralimey.tumblr.com/post/96467972240/awesome-vc-deal-flow-what-is-it-exactly#sthash.8544b4Xo.dpuf

Gil Dibner

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