This is a great way to think about how to categorize the nuggets among the rocks of startups. One question is do you create a sluice box effect or do you use the suction dredging technique?
The first requires you to dig up a bunch of dirt and pound it out with a lot of water and hope for the best. The second requires you to go deep in the water where nobody is looking and pull up the muck.
Bringing this analogy back around to startups, the question really comes down to deal flow. How do you go about getting good deal flow to categorize lots of deals?
Sluice Box Deal Flow Method
When the deals come to you, they are also being shown to everyone else. They are being run down the line to anyone who might look at them. The only thing you can do to snag a few nuggets is to speed up your categorization, selection, and offer process to get them done quicker. Think adding more water to the line for analogy purposes.
Suction Dredge Deal Flow Method
When you go to the physical location of the deals where nobody else has seen them yet, you can secure a first-look advantage and assure that you get the right deals without a large amount of competition along the way to a term sheet.
The first methodology focuses on the misses because it is an assembly line and I end up hearing VC’s gripe about which deals they missed because they saw it too late.
The second focuses on wins because it is the added element of location-specialization that offers significant advantage.
Which one do you use at Floodgate, and which one do you think is best?
I notice that you have partnerships in Austin through other companies, but this creates a sluice box effect for you. If there was a small Floodgate remote office in Austin, could it be possible to use it as a jumping off point for regional deals where you are dredging given the limited number of competitors out here?
I would hope the small cost of a body and an office may lend itself to find the companies with 3 to 4 layers of your value stack.
I hope I didn’t get too ethereal with my analogy, but there’s gold in them thar [silicon] hills. The question is are you close enough to find it?
Thanks for reading Mike.