There’s no such thing as “Dealflow” for a VC

As soon as I started working as a VC, I’ve been overwhelmed by technical lingo, which in most cases is useful to have a tailored approach for each problem (think SaaS metrics for instance). But one word sounded different to me, and it starts with a “D-” and ends with “-ealflow”. Although it is one of the most often used word in the VC industry, I’m not too comfortable with the concept of “Dealflow” as it is generally used, because as it’s often a catchall jargon with unclear meaning.

The concept of “Dealflow” is a shortcut encompassing diverse realities

For many VCs “Dealflow” = “Startup founder who contacted us and sent us our deck for an ongoing fundraising”.

I think that one possible reason why this is so confusing is that we all use a tool (although this too seems to be a major issue with which VCs are rarely fully satisfied) to track what we call our “dealflow”. By experience, finding / developing the right tool is a pain in the ass, and more importantly it flattens out the hierarchy of investment opportunities in our minds.

The word “Dealflow” seems completely irrelevant to me

• First, they are not all “deals”. Many people refer to “dealflow” when it’s really about just knowing a startup exists and what it does. Maybe because you saw them pitch, you’ve read about them, someone told you about them because they are customers / suppliers / competitors / partners of a startups you have a relationship with. But it doesn’t mean they enter your investment focus, or that you’re interested in digging into them, or have a direct access to them, or that they would be willing to take any money now, without even talking about taking yours.
  All of the above is true for me for Docker for instance, but the first thing that prevents me from investing in it is that I don’t have a qualified, personal access to Solomon Hykes, for example. So there’s no potential “deal”…
• Then, it’s not a “flow” (Thanks Marie for helping me clearing my mind on that). I love getting back to basic definitions to deconstruct the hype around buzzwords. First, a ‘flow’ is something smooth and continuous. I can assure you that there is no continuous flow of interesting companies, and if you’re not a Tier-1 VC you don’t have at every point in time a flow of cash to invest. Second, the flow is something that has a direction, is unilateral. It gives the impression that we VCs are judges and just put thumbs up or thumbs down on pitch decks… that’s not my vision. A true, trustful, two-sided desire to work together from part of the entrepreneur(s) and the VC is the preexisting condition for a good VC deal.

So, just as we wouldn’t call it ‘football’ if it wasn’t played by kicking a ‘ball’ with a ‘foot’, we shouldn’t call a dealflow ‘dealflow’ :).

My funnel vision of a pool of potential “DEALS”

Since I’m not comfortable with this vision of ‘Dealflow’, here’s the way I am looking at startups around me. It’s obviously a simplified version so each further step of the funnel is not necessarily a subset of the previous one.

In the case of inbound dealflow (ie when you get directly pinged by a startup founder or an intermediary or a referral), you generally get #1, #3 and #5 simultaneously (and #2 if the referrer has done his job well), but it rarely meets #4. Oftentimes you already have #1 and # 2 if you are doing your “intelligence” job correctly, maybe even #3 if you are a good networker too. But then you can fail at some stage down the funnel, oftentime #6 if the deal is competitive and you’re not a top closer, either because of your brand name or your interpersonal skills or whichever other reason.

The three stages of generating qualified investment opportunities

Apart from the tool, the other reason why ‘Dealflow’ is such a misused concept might be the different ways VCs source deals. The first difference here may be between inbound sourcing (ie when the VC gets pinged by the entrepreneur / an intermediary / a qualified referrer) and outbound sourcing (ie when the VC proactively goes out and hunts interesting founders).

Here’s a graphical way I look at it, but it’s highly subjective.

In my opinion, the best way to source deals is to build a network strong enough for you to get informed and introduced to the best entrepreneurs, and that in turn the entrepreneur hears enough about the good reputation you have to consider receiving funding from you seriously. It requires time, hard work, and most of all: integrity and respect for the entrepreneurs.