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What I've Learned About VC Investing So Far
In VC, deal flow is priority #1, syndicates are different, and everything is a signal.
I’ve been investing with Deep Ventures for a few months now and learning a ton!
While I haven’t made an investment yet, I’ve been working hard to set ourselves up to execute one very soon (stay tuned!). I’ve had dozens of meetings and hundreds of conversations with founders and other investors to discuss possible investments, and we have some interesting startups in the deal pipeline.
Here’s an overview of what I’ve been working on and what I’ve learned so far.
Creating deal flow is priority #1
A really important part of being a venture capitalist (especially a new one, like me) is deal flow - sourcing interesting startups that you can possibly invest in.
There are many aspects to VC investing, but deal flow is the lifeblood - if you don’t have a pipeline of strong startups to possibly invest in, you won’t be able to make good investments.
There are three primary ways I’ve generated deal flow.
Sharing deal flow with other investors
I share deal flow with other VCs in my network. These VCs share interesting startups with me based on Deep Ventures’ (DV) investment theses, and I do the same for them.
These conversations usually start on Telegram. Then we may jump on a phone call to learn about what our investment approaches are, such as at what stage we typically invest and what specific sectors we’re most interested in (which include Web3, AI, and other deep tech for DV).
I love having these conversations because not only do we talk about innovative startups, but we wind up discussing many other topics, such as our backgrounds, careers, and blockchain in general. After these conversations, we’ll continue to engage on Telegram or other messaging apps to trade information on these potential investments.
In a similar vein, I know many Business Development leaders at Layer-1 blockchain projects. They help teams who are building on their blockchain to raise funds, and they pass these deals to me to assess for possible investment. These BD leads truly understand their ecosystems and where the opportunities lie, which is helpful in analyzing these startups’ potential to win their market.
Strong relationships with other VCs and BD leads who you trust are great sources of deal flow.
Working with Techstars
I’m a mentor for Techstars Washington DC and Techstars Crypto Boston and have access to the companies they accelerate. Techstars is one of the most influential and successful startup accelerators in the world, having deployed nearly $24B in funding to over 3,300 startups including hugely impactful companies such as SendGrid, ClassPass, PillPack, and many more.
Working with Techstars helps deal flow in a number of ways:
I have the opportunity to engage with the entrepreneurs in each cohort and deeply learn about their businesses and how they work.
I build relationships with the Techstars investment teams so I can continue with #1 for the future.
These startups are already blessed by Techstars, so they’ve passed an initial test of credibility and legitimacy that helps with my assessment of whether to invest.
The relationship that I have with Techstars has already been fruitful in increasing deal flow and will certainly continue to do so into the future.
Cold outreach by founders
Many startup founders whom I don’t know reach out to me via Telegram, LinkedIn, email, and other channels about fundraising for their ventures.
They find me a number of ways:
I’m a member of many Telegram groups, including groups about investing, marketing, and crypto. Founders may see my profile in these groups and DM me about their startups.
Many founders can easily find, connect with, and message me on LinkedIn.
My personal email address is everywhere on the internet (a blessing and a curse).
Many VCs don’t accept cold outreach from entrepreneurs. These VCs say that founders should find a way to get a warm introduction from someone in their network.
Part of me understands where these VCs are coming from. Most of them are uber-successful investors, former entrepreneurs, or both, and they have plenty of deal flow due to their past success. Thus they are probably swamped with investment opportunities and don’t want cold outreach emails clogging their inboxes.
I think this makes startup funding too insular and exclusive.
In my opinion, it’s VCs’ responsibility to scope out any investment opportunity that comes their way. There are many founders who don’t have networks that overlap with VCs but may be building the next big thing. This is especially true in crypto, where the industry is so global and decentralized. Having a more open, inclusive investment philosophy will level the playing field for entrepreneurs all over the world, and can help VCs realize outsize returns from sources they may not expect.
Investment syndicates are a different beast
Another huge learning is that investment syndicates, which Deep Ventures is, operate differently.
VCs who run a traditional fund raise a bunch of money from limited partners (LPs) and then make decisions on which startups to invest in and how much.
On the other hand, a syndicate is a group of independent LPs who pool their money together to invest into startups that we (the DV team) research and coordinate on a deal-by-deal basis.
For example, I would find a startup who is fundraising, look at their pitch deck, talk with the team, and do any other due diligence. If I think the startup is a good investment, I will write up a deal memo outlining why, and pitch this to our syndicate of LPs. Then it’s up to these LPs to decide if they want to invest in the deal.
If they would like to invest, great! We complete all the tasks necessary to execute the deal. If not, we move on to scouting the next startup for possible investment.
Thus, we need to be aligned with our LPs and understand their interest in each deal before pitching to them.
This structure is great for both our LPs and founders.
LPs can invest into startups without doing a lot of the leg work, such as searching for deal flow, taking meetings with founders, and filling out boring paperwork. They trust us to take care of all of that.
Founders get a broader network of investors and advisors. Many of these LPs are former founders and operators from high-growth companies who can lend their expertise to help these startups launch and grow.
Sure, there are some cons to syndicates, but overall it’s a win-win for investors and founders.
Everything is a signal
I’ve reviewed hundreds of pitch decks since I started investing a few months ago and I’ve discovered that everything is a signal.
How a founder writes their outreach messages. How professional their pitch deck materials are. How thoughtfully they answer questions about their startup. All signals, for better or worse.
As a past founder who has been on the fundraising side of the table, I know how important it is to have my story, pitch materials, and answers about my company airtight, with no mistakes.
Because every little thing counts.
It’s been a tough macroeconomic environment lately, with lots of economic and regulatory uncertainty, especially for the crypto industry. As such, many venture investors are conservative with deploying their capital. Thus DV hasn’t made a recent investment.
But we are actively working on a few very interesting deals and hopefully we’ll announce some investments soon! Stay tuned.
As I continue to learn more about venture investing, I’ll document my journey here. Sign up for my email list below to receive future posts.
Thanks for reading!