The business of investing begins and ends with sourcing. You can’t invest in the startups you don’t see or have never met. And in an industry where outcomes are governed by a power-law distribution, missing a great deal is the difference between an incredible fund and a mediocre one.
Sourcing startups takes a combination of a strong relationship network and a proactive approach. While most of the best opportunities come through mining your network, there are also several new ecosystems and tools that enable an entrepreneurial investor to source deal flow in other ways.
There are opportunities almost everywhere you look, so we’ve compiled a few of our top ways to find your next startup investment:
Build Relationships With Other Investors
One of the reasons why keeping an active, engaged network is important is that some of the best startup investment opportunities are brought to your attention by other investors.
One direct way to accomplish this is through building relationships with investors who invest earlier in a company’s lifecycle than you. Part of an investor’s business model is helping their portfolio companies secure follow-on funding, and so they are as incentivized to spend time with you as the other way around!
For instance, if you’re an early-stage (e.g., Series A) investor, getting to know the active angel investors in your network is a good way of surfacing companies they’ve invested in that are performing well. Similarly, if you’re a growth equity investor, getting to know investors at Series A and B venture capital firms helps better define the pool of relevant opportunities.
Counterintuitively, later-stage investors can also be great sources of early-stage opportunities. Growth-stage investors (e.g., Series C, private equity investors) often see startups they think are compelling but are ‘too early’ for their business model. As a result, a strong relationship with those investors can result in high-quality referrals – and likely in businesses that have a bit less risk of securing follow-on capital (given the growth investor’s interest).
One of the best ways to keep engagement “warm” with other investors is to have a good system for reminding you to keep in touch. A CRM like 4Degrees will remind you when it’s time to reach out.
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Go Where Startups Congregate
One great way to find new investment opportunities is simply to go where new startups congregate. Certain conferences are huge for startups – SXSW, SaaStr and The Next Web Conference are good examples of long-standing and popular conferences that attract new startups.
This concept expands beyond physical space – there are also many digital communities and social media platforms where startup founders often engage. Twitter is the most obvious, but so are more industry-specific ones (e.g., inbound.org or Growth Hackers for marketing technology companies or marketers at startups).
A key tip is to have a good system for gathering and filing information about the people and startups that you meet. This way you can remember what it is that they’re doing, which gives you a good start if you’re going to reach out to them later!
For example, you might enter contacts into your CRM and tag them so that you’re able to sort and find them later.
Mentor at Startup Accelerators and Incubators
Some of the most well-known companies in the world went through startup accelerator programs long before they became household names (AirBnB is one of them!). Startup accelerators can be invaluable for ensuring new businesses have the startup funding, business plans, and mentorship to create success. It’s also quite common for startups to be fundraising as they enter and exit these programs, and the accelerator program itself does some vetting on your behalf – helping you be more efficient with your due diligence.
You can often find the next unicorn among contenders in a startup accelerator so it’s always a good idea to keep an eye on them and what they have going on. In North America, some of the biggest startup accelerators include Y Combinator, Techstars, 500 Startups, Women’s Startup Lab, and StartUp Health. Note that many accelerators specialize in certain niches, so you may want to look into which will be a good match with your chosen investment niche.
In addition, startup accelerators also attract other talented operators and startup founders as mentors and advisors. As a result, they become central to many of the entrepreneurship ecosystems they are based in. Historically, those ecosystems have been centered around a geography (e.g., YC for Silicon Valley, ERA for New York), but now is increasingly less restricted by location.
Find Them on Internet Platforms
You’ll find a lot of startups featured on various internet platforms, especially as they look to grow and attract investors. Some of these platforms include:
Moreover, more early stage startups are taking advantage of crowdfunding as a means of getting their initial capital. This approach has multiple advantages – crowdfunding can validate business ideas, enable startups to raise at more founder-friendly valuations, and avoid the many rejections that come with pitching to venture funds. As an investor, these campaigns give you valuable information about how receptive potential customers might be to the product, and also about the company’s metrics and progress – which can be challenging to get from private companies.
One way to make these platforms work more efficiently for you and avoid hours of scrolling is to use an AI solution to hunt out those opportunities and bring them to your attention.
Work on Your Inbound Strategies
Inbound strategies are those that attract startups or potential new clients to you first. How can you harness inbound? By showcasing your depth of knowledge and expertise.
Content marketing is a great tool for drawing more people into your network and finding new startups. For example, you might write articles or publish reports on your website on topics that interest the people you are targeting.
Social platforms also have a role to play. In a professional sense, Twitter, YouTube and LinkedIn have all been great publishing platforms to share your views or valuable information. The key is to carefully define your target audience first so that you keep your content focused and well-curated. You want to encourage comments and engagement from those people.
There’s another, newer player among the social platforms too, which has more recently been taken up by a large number of tech workers and venture capitalists. If you aren’t on Clubhouse yet, it has so far been promising as a setting for connecting professionals and promoting discussions on key topics. The app allows people to gather in topic-focused audio chatrooms, either as speakers or listeners. It’s different from other platforms in that discussions are overseen by moderators who can let people chime in, or can boot anyone out who is not following the guidelines. Currently, you have to be invited by an existing member to join, and it’s only available for iPhone users, but it is proving a valuable way to build networks.
Watch Where Talented People are Going
The success of any company is always largely down to the people who make it run. One strategy is to take a people-first approach. Your strategy for working your network successfully is to keep an eye on what highly talented people are doing.
For example, if you notice a pattern of people leaving their current company to join a particular company, or if known talent is leaving to start something new, those can be good signals for opportunities with those companies.
Another approach is to identify former founders or high-level operators with recent exits (e.g., IPO, acquisition), and build a relationship with them as their ‘lockup’ period ends. People who have worked together successfully in the past may team up as co-founders for a future company. These experienced founding teams are in high demand from VC firms, and you’ll want to be there before they start to raise money for a seed round!
One of the best ways to monitor is to use software that tracks and reports on trends. This is an important feature to have in any venture capital CRM.
Take a Problem-first Approach
Another approach to finding great startups is problem-first. This means you look to identify gaps and seek out areas where you see opportunities for new companies to emerge. With this approach, you’d then look for the companies that are stepping up to tackle those gaps and trends. Who do you know that is connected? How might you make a connection? These areas on your radar might be worth cold outreach, such as through email, to build your network.
For instance – if you thought the rise of SaaS and other businesses that generate recurring revenue, plus the increasing amount of monetary stimulus in the economy was going to lead to a new way of providing cash flow to those businesses, you’d actively scout for companies in that domain. You’d reach out to founders who had worked on related companies in the past, speak to domain experts, and build a map of that landscape. Well executed, that thesis might have lead you to Pipe and CapChase, alongside many other great companies.
As you’ve probably guessed already, this is another area that the right software can help you to monitor efficiently. If you identify the trends and gaps that you’d like to monitor, you can set up alerts to filter the news or information that gets highlighted for you.
Host Events
Hosting events can provide you with several opportunities for networking and to source startups. You can effectively showcase your expertise to help build your network, as well as stay “warm” with members of your current network.
Events also allow you to determine the interests of your relationship network. It’s another way you can tag and filter them – you might be able to send them related content or invite them to similar events, for example.
To really make the most of hosting events, you need a good CRM to ensure that all attendees are added to your system. This way, you can easily and efficiently stay in touch.
Final Thoughts
There are several different strategies a firm can take to find high-growth investment opportunities. Depending on your own areas of interest and skills, any combination of these or others could lead to your next great deal.
One underpinning truth across many of these strategies is the importance of a strong, engaged relationship network. Our technology at 4Degrees is tailored toward the relationship management and intelligence that takes work out of the sourcing process, enabling you to source great startups.
