6. Dealflow (Charlie O’Donnell)

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Charlie O’Donnell joins Nick on The Full Ratchet to discuss dealflow, including:

  • What does the term “dealflow” mean?ceo_headshot
  • How do you find great startups?  Where are your main sources for dealflow and what is the percentage from each?
  • Where do you tend to find the most startups in which you eventually make an investment?
  • If we think of dealflow like a sales funnel… what are the major steps in your process to arrive at a yes/no?
  • How do you accelerate this evaluation process in order to optimize your time and spend it on the right startups?
  • When it comes to focus…  do you believe startup investors should restrict the dealflow that they evaluate based on their domain expertise, vertical/market, geography, etc.?
  • From a strategic standpoint, why is dealflow volume so important?
  • In general, do you subscribe to the philosophy that an investor must see a certain number of companies for every one that they invest in?

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Key Takeaways:

 
1- Dis-qualifiers
It’s often about dis-qualifiers often moreso than it’s about qualifiers.  Much of the time there is clear criteria that isn’t met which makes it inappropriate for Charlie, as a venture investment.  This doesn’t mean the startup is not going to be a successful business but maybe it doesn’t make sense as a venture investment.  Maybe the market isn’t big enough.  Maybe the skill set required is a very difficult thing to do or the founders don’t have the appropriate skill set.  Maybe the target buyer does not have a role with which to make rational decisions based on the value that the startup is selling.  Maybe the type of product has particular friction with the type of buyer… like in his example of selling tech to a local pizza joint.  And finally, is the plan appropriate for the resources available.  Here’s where he brought up the example of building an elevator to the moon.  Clearly the talent, partnerships, regulatory and money required may be far greater than what an existing team has or can achieve with a fundraise.  Remember that the under-ask (ie. asking for too little money to reach the proposed milestone) is very common in the early stage startup world.     
 
 
2- Filter early!  
Determine a clear set of hurdles or criteria that’s pretty basic and easy to get from the startup upfront.  This way, you can quickly filter out dealflow early, and not waste your time taking meetings with startups you will never fund.  If you have a website or e-mail address where many startups connect with you, create a simple form with your key inputs.  For example let’s say you only invest in companies that are Business to Business, software, enterprise sale, in the financial technology sector…  w/ revenue generation and founders that previously worked in this space.  It would be very easy to setup a list of these factors and ask any startup that contacts you to fill it out and send it back.  Upon quick review, you could easily eliminate a great number of startups and tell them exactly why.  You can also potentially get some intangible feedback based on their response format and response time.  Did they fill out the form correctly?  Did they send the form back to you in a timely manner or did it take them a week?  Any of this data is great to get upfront b/c it can accelerate your NOs and help you focus your time on the strong candidates.
 
 
3- Early Intros
 
Charlie mentioned how if he were a time traveler, what day would he have had to be present for to get that deal.  And he estimated 18-24 months, when we spoke.  After our interview, Charlie went back and looked at all his dealflow data and published an article about it on his blog, which I will include in the show notes and strongly urge you to give it a read.

 

 

It turns out, it took an average of 821 days from first connect, or about 26 months, and 162 days from pitch, or about 5 months.  His initial estimates were pretty close to the actuals.

 
Interestingly, Charlie says that his avg turnaround time these days on saying yes is probably within a week.  But often it takes longer due to:
 
  • the process of gathering other investors for a round.  
  • meeting the entrepreneur before they’ve really decided what they want to raise, or before they have a deck
 
For this exercise, Charlie went back across the 21 investments he’e made both at First Round and at Brooklyn Bridge Ventures, which dates back to January 28, 2010, when he closed on Backupify.  He looked at when he first met the company, when it closed, and what connection he made to be in a position to get the deal in the first place.  For example, while he closed on the seed investment in Tinybop on November 19, 2012, he met Raul two years earlier at the first Brooklyn Beta in 2010, even before he was working on the company. 
 

Upon tracing the specific sources of dealflow, his results were interesting.

In order of greatest source to least, here were the results:
  1. Events accounted for 33.3%
  2. Non-VC intros accounted for 33.3%
  3. Inbound connections were 14.3%
  4. Outbound were 9.5%
  5. and Intros from other VCs were just 9.5%
 
While every investor’s dealflow source info is going to be different, it’s great that Charlie is so transparent and can give the rest of us insight into where these startup intros often come from.
 

Tip of the Week:  Purchasers vs. Users… invest in startups that know the difference

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