Investment Strategy Series: Deal Awareness & Sourcing
Venture capital moves at a breakneck pace. A single firm will meet with thousands of entrepreneurs every year, all seeking capital to help build their businesses. According to Crunchbase, 2018 was the most active deal-making year on record, with global VC deal volume jumping by 32% to just over 34,000 done for the year and $320B+ invested.
So how does AVG decide which ventures to fund? What is our process?
At AVG, we think of the journey a venture investment takes from awareness to close as our “deal pipeline.” Many potential investments start at the top of this pipeline and must beat out other ventures to move down the funnel. And in order to evaluate or invest in a deal, we first must be engaged with the company.
Finding a Source
Establishing and maintaining a strong flow of deals begins with awareness, and that awareness is built on the organized collection of information. “It is a constant search and vetting process,” acknowledges Wayne Moore, Principal at Purple Arch Ventures, AVG’s fund for Northwestern alumni. “Traditionally, VCs use two types of deal sourcing tactics: active and passive.”
Active deal sourcing requires involvement from a fund’s general or managing partners. This can include:
- Networking – Most deals are sourced through networking by fund managers and creating person-to-person relationships. However, building a quality network takes time, and there’s only so much ground a single person can cover.
- Targeted deal searches – This is a more analytical approach to finding deals that involves gathering data on companies that have raised previous rounds of capital. An investor might perform market research within a specific industry or around a trend or technology, and then seek connections to gain access to a deal. Just one example of how AVG conducts such searches is our Deep Dives, explorations of a burgeoning venture sector or region that is conducted by and shared among our team members.
Passive deal sources include:
- Organic inbound deal flow – These are the deals that come in from “cold” sources that have not been pre-vetted, like an investor’s website, public deal portal, and even social media. Typically, this source of deals improves over time, as a venture firm builds their brand and becomes more well known.
- Referrals from network partners – These are individuals or firms within the venture community that refer deals to us. They have a vested interest in the deal doing well and are usually already connected with the fund in some way—whether that’s through an email newsletter or consistent social media engagement.
Community Is Our Secret Sauce
All VC firms use a network, but one of AVG’s unique advantages when it comes to our deal flow is our ability to organize and leverage our huge network. In fact, it’s our secret sauce. We’ve built a global community of over 400K alumni of the nation’s top universities and an even broader population who want to learn more about venture capital and entrepreneurship.
Each of our funds has its own community of alumni from that school and is led by a Managing Partners who’s also an alum. The Managing Partner knows their community and is actively involved in that entrepreneurial ecosystem. In addition, programs like our Venture Fellows Program allow us to connect with and nurture talent outside of the traditional VC world. This alumni-centric approach creates warm community introductions and a nexus of powerful connections. In Q1 2019 alone, AVG reviewed over 30% of all VC deals, more than 60% of which included top decile VC co-investors.
On top of these resources, our value proposition to the entrepreneurs in our community is highly appealing. They like our responsiveness and low-friction approach. As a stage and industry agnostic co-investor, we don’t renegotiate terms or request board seats. We also have the best Rolodex in the venture industry, connecting entrepreneurs to advisers, clients, partners, and potential employees.
AVG is a full-stack venture firm, investing in innovation and entrepreneurship at every stage and sector. As Moore notes, “We’re generalists. That means we go broader than most VC shops, and we lean on the lead for a lot of the vertical expertise.”
AVG’s scale and centralized model allow us to have a unique vantage point on the national entrepreneurship ecosystem. Our investment velocity allows us to see more deals than other venture firms. This, combined with our rigorous data and process-based diligence, continues to serve our investors well. It is “the network effect” at its best.
This is the first installment of our Investment Strategy series, which pulls back the curtain on our investment strategy and process. Stay tuned as we continue to examine how AVG evaluates and nurtures entrepreneurs from initial pitch to portfolio company.