Rebel Venture Fund Reflections — Part 1: Deal Flow Generation
As an undergraduate student at UNLV, I was tasked with leading the university’s venture capital fund, Rebel Venture Fund (“RVF”). In this series, I discuss my experiences as CEO, including the benefits of such a responsibility and the numerous challenges our team faced.
As the new venture fund in town, Rebel Venture Fund faced numerous obstacles related to sourcing quality deal flow. Due to the unique nature of our fund, we had to get creative to source quality deal flow.
Obstacle #1: No track record.
What do Kleiner Perkins, Sequoia Capital, and Foundry Group all have in common? Startups typically chase them, not the other way around. All three VCs have a proven track record of creating value for founders and eventually leading them to successful exits. As a new fund, RVF had nothing more than bright people and the support of UNLV.
So how does a new and extremely small fund attract quality investment opportunities? By creating a unique value proposition.
As a university venture fund, we had the support and the resources of a large public university. As a result, if you received an investment (i.e., endorsement) from us, our newly formed partnership could provide benefits that other VCs and angel investors couldn’t match in Las Vegas.
For example, imagine that your startup sold educational software and targeted universities. It’s very difficult to persuade universities into making large purchases that would change long-established processes. However, with our help, we could give you direct access to two deans at the university, both of whom learned intimately about your startup throughout the entire due diligence process.
As another example, what if you are a biotech startup who could benefit from a university partnership to use university equipment and facilities to conduct additional research? Accepting a small $25,000 investment would increase your odds of succeeding with this goal.
Lastly, we began to position ourselves as “the stamp of approval” in the community. Why would others investors conduct loads of useless preliminary due diligence when we could do it for them? It’s not like our $25,000 would drastically dilute anyone. If we decided to invest, the $25,000 would sit in an escrow account until they entire round was filled. If a fund wanted to co-invest, our stamp of approval was already given and we would be more than happy to share our due diligence materials. It’s a win-win.
UNLV is an incredibly large university, and it was our job to continue building relationships internally to provide value to current and potential portfolio companies.
Obstacle #2: The “Student-Run” Stigma
Though our operations were overseen by over a dozen venture capitalists, angel investors, and educators, the student-run nature of the fund scared the hell out of some potential portfolio companies.
One entrepreneur who was pitching to us refused to share his margins (!) with us because he worried that college students would go around town sharing his “proprietary” information. Yet he still wanted an investment!
Though that is an extreme case of quite the paranoid entrepreneur we encountered, others voiced their concerns about the fund. Some worried about potentially having a student on the Board of Directors (which would never happen — more on that below) and others did not know if an RVF investment would affect follow-on funding opportunities.
To remedy this problem, we first had to ensure entrepreneurs that we would never require a board seat. Our policy was only to ask for a board observer seat, which allowed us to stay involved and keep learning from portfolio companies. However, we would never have any control.
Secondly, we had to show startups that sophisticated investors —institutional and individuals — supported us and were willing to share deal flow with us. Though students are conducting due diligence, we reminded founders that they ultimately receiving an investment from a university, not a group of students. The endorsement of a university should present more opportunities in the future, not hinder them.
Obstacle #3: Presence
Even if a startup was okay with a student-run fund without a track record, we still had one fundamental problem — finding these startups!
We focused on developing presence through word of mouth / referrals and online.
Firstly, we sent representatives to the startup events that exist in most cities — pitch nights, coworking space events, etc. Secondly, we also hosted a few of our own events, including our Startup Community Mixer in 2015, which was graciously hosted by Work in Progress. We quickly established relationships with entrepreneurs and established a decent amount of deal flow, though the quality still was not top notch.
To manage our deal flow and begin to develop an online presence, we used Gust (very East Coast of us, I know) as our platform to conduct preliminary due diligence. It kept us organized and allowed us to discuss deals remotely, which was critical for a group of people who all operated on vastly different schedules.
On the co-investor side of things, we began by having our board members refer their own deal flow that fit our investment criteria. As expected, this was our best source to meet quality startups and we slowly grew this network by meeting with as many co-investors as possible.
Leading a new venture fund, especially one as unique as ours, is not much different than running a startup. We faced many of the same challenges as our potential investees, and I loved every minute of it.
“Rebel Venture Fund Reflections” Series:
