Pre-VC career tips part 2 — Which startups to talk about in an interview?
I often get asked by people on how they can improve their chances of getting into VC.
Below I have started to summarise my advice on how to best prepare yourself “before making the move to Venture Capital”, based more or less on my own experiences and journey from Consultancy to Startup to Investment-fund over the last few years.
The first part of this series of posts can be found here.
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Part 2 - Hunt down some companies you would invest in
Finding out about job openings is of course only the first step in getting hired into a Venture Capital investment team. During the interview process you are likely going to be asked about companies you have come across that you would invest in if given some money. The following section includes some tips on how to approach this ahead of an interview.
Whoever is interviewing you is likely interested in finding out the following:
- How do you approach the task of generating dealflow?
- Are the deals you find broadly in line with the companies he/she has recently been looking at?
- Can you tell a convincing story about why you like a certain company?
Let’s first understand the main sources of dealflow for early stage tech investors; it is typically a combination of the following in decreasing order of relevance:
A) Pre-qualified inbound
Examples: intros to founders from friends, portfolio founders or other trusted investors, founders who get back in touch after the investor has passed on a previous round after looking at the company in detail
Most investors get the vast majority of deals they do via trusted recommendations; especially for later stage investors introductions from “upstream” i.e. earlier stage investors are often the main source for dealflow.
Examples: web research, pitch competitions at conferences, accelerator demo days, specialised tools (proprietary solutions or packages such as Crunchbase, Angellist, Mattermark, CB Insights, Tracxn); blogging about your investment thesis or interest in specific areas (e.g. AI, food-tech, drones) could also be considered as outbound dealflow generation
Rough diamonds can sometimes be found through these techniques but this applies mostly to companies who have not raised any significant external financing yet as companies with announced funding rounds don’t stay under the radar for too long.
C) Unsolicited inbound
Examples: cold emails from founders, applications submitted on fund website, being approached at events
It’s usually difficult to identify interesting startups due to the large amount of noise and therefore this source often becomes more of an afterthought for investors.
How to get dealflow without being a VC?
A) How to simulate pre-qualified inbound deal flow
In short, try and reach out to people in your network who might be in a position to refer interesting companies and check where “upstream” (earlier stage) investors have most recently invested.
Now is the time to pro-actively leverage your network to see if you can identify any interesting companies not yet on the radar of your potential future employer; one way of increasing the results space of such connections is to search your LinkedIn for keywords such as “CEO”, “Founder”, “Co-Founder” and if you filter only for 1st degree connections you might find out that an old university acquaintance has in the meantime set up an interested ad-tech platform. If you filter to see only 2nd degree connections you might recognise some of the company names of the startups to whose founders you are connected via a mutual connection. If any of them look promising it might be worth getting in touch with the “mutual connection”.
Another interesting way to get a list of companies that a given fund you are interviewing with might be looking at is to check which earlier stage investors they typically invest together with. Check Crunchbase for the last few deals that the VC fund has done, and then look which Business Angel or Angel/Seed-fund invested into the same company in a previous round. If there is a pattern across more than 1 deal, I would check which other deals the “upstream” investor has done more recently, as your potential future employer is likely to be looking at those very deals.
B) Develop hypotheses on underlying trends before doing outbound research
When trawling free databases such as Crunchbase or Angellist for potentially interesting startups, the main issue is typically the vast number of companies in these databases combined with often inaccurate (because of user submitted) information about what each company actually does.
My recommendation for dealing with the large number of companies is to develop one or more of your own hypotheses for underlying trends (e.g. “radically more students will learn and study mostly on their mobile device in 5 years”). Ideally you are deeply convinced about these trends and/or have some data to back up your thinking, but at the same time not everyone on the street (or your grandmother) should immediately agree.
With 2–3 trends mapped out in your mind, you can then perform very narrow searches on the free databases to identify companies that could benefit from these trends (e.g. keywords “mobile iOS learning” with location set to “London” and amount raised set to “>100k”). Especially startups that have raised more than a few hundred thousand dollars from well known Angel and Seed-stage investors are likely to be already on the radar for other VC investors.
C) Generic inbound dealflow is unlikely going to be helpful
Without a VC fund name on your LinkedIn profile or business card, it will be difficult to generate inbound interest from top entrepreneurs (if any). Even when attending tech ecosystem and networking events you would need to be incredibly lucky to meet world class founders telling you about their latest company, hence I would focus only on the other 2 sources.
How to package your it all into a story?
The above tips should yield at least a handful of companies for your investment short list. The final step is then to group them again into buckets along your theses on underlying trends or by the themes of problems these startups are trying to solve.
When asked about which companies you find interesting you can then present your thinking as a process of
- initially getting interested in a specific trend that not everyone would agree on
- then learning more about it and identifying which problems need to be solved if that trends persists
- subsequently finding a handful of companies trying to tackle the problem with an innovative solution
- finally filtering the list down to 1–2 companies based on your view of whether their specific product, team and traction look promising
Pre-VC career tips part 1 — Which VC funds might be hiring?
In future sections of this blog post I plan to include tips on how to:
Collect skills useful for junior investors (reporting, networking, coding, recruiting)
Build a social media profile & opinions on technology trends
Join a startup as an employee if you plan to become a VC later on
Additions and thoughts are welcome!
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