Turns out, the new school double-O is down with the old school double-O…so I thought I’d give both some props to the extent that I’m a big fan of both. You can read more about the matter by visiting The Night Feed. In the interim, enjoy the clip below. Gotta slide, slide, slippety-slide to a board meeting so I’ll catch y’all later.
A fellow VC just informed me that the OC Metro has an article on me/OC VC in their latest edition. You can read the article here. Not sure what it all means, but I find the media attention interesting. Enjoy!
I’m sitting here on my laptop wishing the novocaine would wear off my gums/cheek so I can safely eat lunch… or, better yet, that I could somehow magically transfer the sensation to my separated shoulder. Yeah, that would be nice. Anyway, I recently returned from a ski trip to Park City and accumulated a fair amount of material for my blog but have been a bit hindered in my “input abilities” — having suffered a level 3 AC separation on my right shoulder (I’m right-handed) — but have finally figured out something that works and thought I’d share some observations.
The guys I went skiing with are, by and large, not in the technology industry in any fashion and so it is always interesting to me to run things by them and get their thoughts as “lay people”. Once such conversation revolved around social networks and which of us had Facebook profiles. While I was amazed that most of the guys had never heard of Facebook, I had to remind myself that my profession puts in at the tip of the innovation sword and that there is ALWAYS a lag effect as to when the general population embraces some new technological wonder (if at all). At one point, one of the guys simply asked a question that will stick with me for quite awhile: “I don’t get all this social network stuff…what happened to picking up a phone and simply calling your friends to get together in person?”. An excellent question if you stop to think about it. Here’s why. My immediate reaction was to tell him that social networks are about “discovery” and meeting new friends…but then I started thinking about it. Here I was in Utah with a bunch of guys I only get to see about once a year due to mutual time-constraints talking about meeting new friends. What the hell??? I barely have time for the friends I already have let alone making new ones… I’m beginning to wonder what the point of social networks really are other than yet another online diversion to occupy increasingly precious time. Anyone feel the same these days?
At the risk of being tarred and feathered by a few of my VC peers, I’m going to go out on a limb here and explain (at least at a high level) some of the life blood of venture capital funds: DEAL FLOW. So why, you might be asking yourself, would VCs not want me to post this? Simple. Funds live and die by the quality and quantity of their deal flow and if everyone understood how deal flow works the quantity thereof may decrease — perhaps a stretch but it gives me something to post ;-) While the unwritten (yet, often whispered) rule is: “Thou shall come by way of referral”…most people don’t truly appreciate why. Let me explain.
VCs find potential investments (a.k.a. deals) through a variety of sources and a certain “natural hierarchy” has evolved to help VCs manage such deal flow. Sure, you’ll here VCs complain that there is too much money chasing too few deals but the reality here is that there are an enormous amount of deals to be done…they’re just viewed relative to how few VCs there are to do them, the finite number of hours in any given day, and the amount of time it takes to do them. Essentially, managing deal flow becomes a “return on time” exercise (hence, the nature hierarchy of deal flow). So what is the hierarchy? Glad you asked. I’ll start at the widest point in the funnel and work my way up.
Off-The-Street: Off-the-street or “OTS” deals are just that. These are deals that are unsolicited and simply come to VCs either through snail mail, email, or by phone. They are generally brought to the VCs by the company founders, but are also occasionally presented to the VCs through a finder. VCs receive thousands of these types of deals any given year and most, if pressed, will admit that they have never invested in an OTS deal. Given the sheer magnitude of OTS deals, how few VCs there actually are, and the gating factor of time, most OTS deals wither and die in deal flow purgatory or are ultimately cursorily turned down without any explanation whatsoever. Okay, so why risk reducing my fund’s quantity of deal flow by explaining how low the probability of an OTS deal getting funding is? Well, my partner and I are a bit different. Our last (announced) investment was in a company that came in “off the street”, Helixis. Sharon saw the potential, helped shape the vision (and company), and we ended up syndicating the deal with a couple of larger funds… and the company is doing VERY well…
Mutual Contact: This category is also self-explanatory. These deals come to a VC through some mutual contact. Such contact may be professional (e.g., an attorney, accountant, another VC, etc.) and/or personal (e.g., family friend, relative, fraternity brother, etc.). Before you think “great, I’ll just figure out who I know that knows said VC and have him or her make an intro”, let me quickly clarify here. Like most things in life, the strength of any such contact relationship is relative — i.e. not all contact sources are given the same weight by VCs. For example, I’m much more apt to pay attention to a deal that is referred to me by a VC I know and trust than by mother (no offense, Mom). Simply put, some sources truly understand when a deal is good and some do not. Again, there is a magnitude issue here as well. Most VCs have huge rolodexes and receive large numbers of referrals from their networks any given year…so the underlying nature of the mutual contact relationship matter… A LOT. The strength of the entrepreneur/mutual contact matters too. I may look at a deal from a very trusted source, but it doesn’t help me much if he or she doesn’t really know the entrepreneur and/or the underlying company all that well. There is a reason why some of the more venerable funds continue to back folks that they have had success with before over “newer” entrepreneurs.
Personal / Incubated: This applies more to early-stage, but seems to be a growing trend. Personal deals are where a VC has an idea for a company, creates the company, funds the company, gets the company to a certain developmental level, and then brings in a management team to run it. There are a number of funds that have done very well incubating companies and controlling them from inception on (e.g., Domain Associates).
I don’t have any statistics in front of me, but if I had to guess, I’d venture to say that ~ 90% of the deals that get funded come from mutual contact, ~ 9% are incubated, and < 1% are off the proverbial street. If any of you have any real empirical data here, please do share with everyone… Until next time, happy venturing.
