Most VCs spend a significant amount of their time generating and evaluating new investment opportunities. When Hunter and I started our Homebrew seed fund last year, one of the common questions from potential LPs was “How will you generate deal flow?” Our hypothesis at the time was that we would generate investment opportunities from four primary sources: our personal networks, other investors, inbound thematic leads and proactive outreach. Now that we’ve closed out 2013 we thought it would be useful to share our data in hopes that entrepreneurs who want to get in front of us or other VCs can learn a few lessons about how VC deal flow works. So here’s a look into our pipeline for 2013 (note: this isn’t 100% accurate as we certainly missed tracking every single opportunity we reviewed and every meeting we took).
First, the high level funnel metrics:
- 885 opportunities evaluated (100%)
- 399 first meetings or calls (45%)
- 71 further diligence, defined as second meeting or greater (8%)
- 11 investment offers made (1.2%)
- 9 investments closed (1.0%)
Let’s breakdown where our opportunities came from:
- 55% from entrepreneurs and executives in our network
- 16% from other investors (includes angels, VCs, accelerators, etc.)
- 4% from service providers (legal, finance, etc.)
- 25% from other sources (inbound, proactive outreach or ideation)
And what about the 71 opportunities where we dove deeper?
- 41 from entrepreneurs and executives in our network
- 25 from other investors
- 5 from other sources
Finally, here are the sources for the companies we wanted to invest in:
- 9 from entrepreneurs and executives in our network
- 1 from another investor
- 1 from another source
When we reviewed this funnel there were a few things that jumped out at us. First, our hypothesis about where opportunities would come from was largely confirmed. Second, we were surprised by the percentage of our opportunities that come from “Other Sources”. However, upon reflection, we realized that the 25% came about by design. At Homebrew, we actually review and respond to nearly every opportunity that comes to us via a credible or thoughtful email. Why do we do this even when the data suggests that those opportunities tend not to become investments? Because we appreciate that Silicon Valley is a tightly networked community and that not everyone has access to that network. While we focus on SF and NY, we understand that innovation and talented entrepreneurs can emerge anywhere. That belief is embedded in our Bottom Up Economy thesis. The other reason for the high percentage is that given our thematic focus, we try to be proactive about reaching out to entrepreneurs thinking about or companies operating in markets that we are excited about. We are thrilled to work with entrepreneurs who are early in their thinking. For us, it’s incredibly rewarding to help formulate, refine or even test ideas. And we anticipate doing even more of that going forward. The final takeaway from the data for us was that we aren’t yet seeing as many high quality opportunities from other investors as we would like. We’ve participated in syndicates with many notable institutional and angel investors but it’s also possible that we haven’t done enough to educate other investors about who we are and how we can be great partners. We have a plan for tackling this in 2014.
Lessons for Entrepreneurs
Warm introductions are critical. Unfortunately, the reality is that most VCs can’t or aren’t willing to spend the time needed to review opportunities that come over the transom given how few ever turn into investments. So it’s not new news, but your best bet as an entrepreneur is to find some way to get a warm introduction to potential investors.
The best cold intro has data or a demo. If you’re going to send an email to Homebrew, we’re most interested when you can share data or a demo. Talking about an idea that you have or seeking general advice about entrepreneurism doesn’t give us enough context to engage.
Expect to hear “no”. As the data suggests, somewhere around 1% of companies we see receive funding from us. And that number (1%-2%) holds true for most venture firms we know. As an entrepreneur raising capital, it can feel like the world is against you and you alone. But the truth is that everyone hears no and everyone hears it often. It’s not personal, so keep fighting for that “yes”.
No second chances for first impressions. We end up speaking to or meeting with less than 50% of the companies we are introduced to. And we spend more time with less than 20% of the companies we meet or speak to once. What message you deliver in that introduction or first interaction matters a great deal (admittedly unfairly so). Seek feedback on your messaging or your pitch before sharing it with potential investors. Prepare for meetings by listing and answering all of the questions you have about your business, because investors are likely to ask the same ones. Research your audience by using their website, social media posts and their existing portfolio to understand more about how they might think about your business. While we’ll share more of our thoughts in the future, Mark Suster has an oldie but goodie on how to prepare for a VC meeting.
Thanks to all of the entrepreneurs who gave us the opportunity to know them in 2013! We’re able to share this data because of your interest in working with Homebrew.