Anyone Can Generate Passive Dealflow
In my last article I broke dealflow down into two main types: Active and Passive. Active dealflow is when investors seek out new investment opportunities, outreaching to founders and startup teams themselves. It is a resource-expensive process that takes away from time and effort that could have been spent analyzing investments.
As a result, it is favorable for investors to have a high mix of passive dealflow. Passive dealflow is when a startup team reaches out to an investor. On the investor’s side, that means no effort or resources are detracted from the rest of the investment process.
Naturally, VCs with famous names, large funds, and a history of successful investments are likely to have the strongest stream of passive dealflow. With that being said, anyone can improve their rate of passive dealflow — Even people like me with no money to invest. Passive dealflow is comprised of two key elements: reputation and network exposure. Every person on earth has both of those things, so generating stronger passive dealflow is just a matter of improving those verticals.
We should all be working towards improving our passive dealflow because it’s prosocial and has zero downside, unless you are retiring or want everyone to leave you alone, which I honestly get.
Ways to improve passive dealflow generation
Say Yes — each new collision is a gift
Saying Yes (enthusiastically too) is a great way to get more people to know about you. Saying Yes works in a variety of contexts: Do you want to come to this niche book talk? Can I bring so and so to your birthday party? Can you help me with a project I am working on or a job interview I am preparing for? What I have found is that friendship begets friendship and a strong network with lots of nodes and reliable branches is basically just that.
Saying Yes seems selfless. Often, when it involves sharing time and resources with someone else, it is. We should always share our time and resources genuinely and honestly, if we choose to — providing careless mentorship or being a jerk to someone you feel “crashed” your event is not nice. But, we cannot neglect the totally selfish benefits of being enthusiastically selfless. You never know who could be at the receiving end of such social transactions. You can’t predetermine someone’s aspirations or network, and there is a zero percent chance your combined networks are not greater than your individual network.
In every memoir I ever have read written by a leader (business, entertainment, etc.), there is a theme surrounding the importance of collisions. In an almost romantic way, these leaders reminisce about how they befriended their collaborative partner in some serendipitous way and reconnected X decades later to build Y empire. Collisions are a cliché of leadership memoirs. So, if you want any content for your future memoir, say Yes.
Open a highly specialized fund
One of the most important mentors in my life, Catharine Dockery, started a VC called Vice Ventures that I got to work at for a year. Coolest professional year of my life by the way(10/30/23)!
The thesis of the fund is to “invest in good companies operating in superficially ‘bad’ industries”. Catharine invests in consumer facing products and technologies in the vice space: alcohol, cannabis/ hemp, lingerie, gambling. She started the fund in 2018, during the golden age of White Claw, when she realized many funds have a vice clause that prohibit investments in such products.
Catharine is operating a one of a kind fund. She found a niche thesis that top VCs are legally prohibited from competing with her on. In my active dealflow article, I explained that it is harder for up-and-coming VCs to rise to the top as a result of competitive dynamics in dealflow. New VCs have to be incredibly active if they want access to the same deals top VCs see passively. Catharine has expertly navigated around this problem by creating a fund that does deals top VCs can not. She invented a new sport by keeping the rules and changing the ball. I do not know what her dealflow mix looks like, but as someone who has Vice Ventures on my LinkedIn from three years ago and still encounters passive dealflow on her behalf, I can tell you she has no shortage of it.
Expand your social media presence
I am ending with social media because it is arguably the most obvious and lowest effort way to expand your reputation and network. There are clear ways to expand your network and be more broadly known, like following a lot of people, posting often, and engaging with content. Further, expanding one’s social media presence can create a false illusion of expertise that might be bad for society but great for passive dealflow. If Jane Doe started a TikTok where she simply interviewed startup founders and over time generated thousands of views, her audience of causal TikTok users may be inclined believe she is an expert at working with startups in spite of the fact that she might not be. On the one hand, she better not abuse the illusion by putting mistruths into the world, or by doing any other malicious thing people do on social media. On the other, this illusion of expertise would certainly generate attention from more founders and even some investors.
After six months of consistent content creation Jane will have probably learned a lot, and will have certainly made plenty of connections with smarter people who will have taught her something. I mean, check me out. I’m writing about dealflow on Medium. Being a fake expert at startups is way lower risk and way higher reward than being a fake expert at geopolitics or epidemics, so I’m willing to see where this one goes.
