Inside VC, Decoding Investments — Dealflow

Dealflow is the raw material for any venture capital investment, driving the pursuit of promising opportunities that have the potential to yield desired returns.

As the saying goes, “Garbage in, garbage out” — the quality of deal flow directly influences the quality of investments.

What defines dealflow from a venture capitalist’s perspective, and what should entrepreneurs know when approaching VCs for funding?

Curating a robust deal flow is the crucial first step in the investment cycle. Lets deep dive into the intricacies and understand what builds a dealflow.

At Auxano, we receive over 250 deals a quarter, where do we receive our majority investments from?

1. Direct Channels: Majority of the investors set out a defined path to connect with them, usually through a dedicated section on their website (ours).
   View: While this process seems time-consuming because founders have to provide extensive details without knowing if they’ll get a response, if investors are interested, it speeds up the process since they already have all the necessary information asked as responses.
2. Cold, cold reachout: Founders frequently initiate contact with potential investors through cold outreach, using email, LinkedIn, and WhatsApp in that order. This usually involves sending a brief message along with a business deck.
   Cold outreach requires 3–4 months of dedicated time from the founders to find investors.
   View: A direct reachout is important for the founders to understand the dynamics of the market and generate initial feedback. However, the approach might miss on extensive reachout due to founders’ limited knowledge of the actively deploying investors.
3. Investment Bankers, Middlemen: Investment bankers connect founders with relevant investors, charging around 2–3% of the investment amount upon successful fundraising.
   View: Opting for investment bankers is a trade-off of money against time, this not only spares the founders from the initial challenges of locating, researching, and reaching out to investors, but also grants them access to the insights of an experienced Investment Banker. These insights, gathered over years of fundraising, enhance the efficiency and effectiveness of the process. It is recommended to select Investment Bankers with a proven track record.
4. Platforms: Early-stage founders often prefer using platforms to avoid the costs of hiring an investment banker while still accessing a broad network of investors. Examples include Private Circle Markets.
   View: Platforms are an alternative that certainly would have lower conversions with the benefit of incurring lower costs but can bring the initial traction required to kickstart the fund raise activity.
5. Events/ Demo Days: Several enablers including investors host events and demo days, providing opportunities for entrepreneurs to make warm introductions.
   These events can range from government-led initiatives like Startup Mahakumb to paid events costing between Rs. 2–3K to Rs. 20–25K to attend.
   View: Participating in events and demo days demands two key qualities: extroversion and the ability to deliver a clear message in under three minutes, which is typically the maximum time allotted. To fully capitalize on these opportunities, it is essential to proactively seek out and engage with investors.
6. Recommendations: The approach that is highly curated and incurs almost no cost. Several smaller funds operate with a thesis to invest alongside several other funds.
   Recommendations from other funds, advisors, or close-knit circles are highly curated and cost-effective but challenging to obtain from scratch.
   View: Recommendations are more effective than other methods because they are based on the understood needs of both parties and include the referrer’s reputation. Strong connections are essential for obtaining recommendations. Events, existing partnerships, and other opportunities can be leveraged to build these valuable connections.

Takeaway:

1. Strategize Wisely: When reaching out to investors, avoid treating it as a trial-and-error process. Many investors may reject proposals at first glance due to missing information. Seek feedback from experienced professionals to craft a fund-raising strategy.
2. Prepare a Comprehensive Data Room: Investors typically require business data such as MISs, Business Plans, Customer Cohort Analysis, and Cap tables. Have these ready before starting the fund-raising process to cater to investor interests promptly.
3. Avoid Shotgun Approaches: Sending generic proposals to everyone rarely yields positive results. This approach dilutes the essence of the deal and diminishes the credibility with potential investors.
4. Track Your Outreach: Create a tracker to monitor your outreach efforts. Lack of response from investors doesn’t always indicate rejection. Tracking progress and feedback allows you to make necessary adjustments.
5. Diversify Your Approaches: Don’t rely solely on one strategy. Utilize multiple approaches simultaneously to expand your reach and improve the chances.

One good investor conversion is often enough for the investment, as the investor might fulfill the entire commitment or bring validation to seamlessly close the remaining portion of the round.

With that note, all the best if you’re actively raising or are planning to raise…

Author:
Kanuj Jadwani