This is the first post in the BREAKTHROUGH
series. The THEME of the series is … How to identify
promising breakthrough companies
It is an adjunct to the STARTUP series [ https://desulf.blogspot.com/2020/05/starting-down-startup-path-recap.html ]. While there is some overlap, the focus of the BREAKTHROUGH series is on how to identify companies that may be worth the risk of investing them.
I use the term “investment” in a broad sense. Venture capitalists invest money directly in a chosen company, hoping for a big win.
However, there is another kind of investment … taking a chance on a company with breakthrough but unproven technology to solve a problem your company is trying to address. That is a risk that is similar to, but different than, the risk taken by venture capitalists.
Caveat … I am not an expert on risk assessment. However, I am an expert in online research. The purpose of this series is to help you make more efficient use of online resources to achieve your objectives.
So, how do you identify companies with breakthrough technology? Well, if you are not a venture capitalist, whose job it is to identify such companies, it might be useful to see how venture capitalists go about this critical task.
How do you find such information? Try this …
TIP: Google® how do venture capital firms find companies
Here is one useful result …
///////
Feb 3, 2014
Where Are The Deals? How VCs Identify The Next Generation Of Startups
[ EXCERPTS ]
David Teten
Entrepreneurs
You’ve probably read dozens of articles about how to raise capital from venture capitalists. However, as a venture capital fund, we have the opposite problem: how do we find companies in which to invest?
It might appear that origination is becoming much easier because of new tools like AngelList and the SEC moving toward adoption of rules that will allow equity based crowdfunding. Just do a search online and the VC’s job is done! But in practice, these phenomena create a tremendous volume of startups, which investors then have to filter. The easier it is to source, the more you have to work to screen.
Most investors rely on their network of colleagues and service providers to source investments. Unfortunately, our research finds this traditional approach is not powerful enough to uncover all of the most promising investment opportunities.
Prior to joining ff Venture Capital, I published the first-ever study of how private equity and venture capital funds originate new investments, with my coauthor Chris Farmer, CEO of SignalFire and an experienced VC. We drew on our work with leading institutional investors and in-depth interviews with over 150 funds. We published the full report in the Journal of Private Equity; it's now the #2-most viewed article in the Journal’s history. Now that I’ve been an institutional VC for a few years, I thought it would be helpful to revisit our findings from the investor side of the table.
Deal origination is a slow, labor-intensive, frustrating process. The median VC reviews 87 opportunities before making 1 investment. I've shown below some specific data from a range of VCsAnnual Deal Pipeline for Selected VCs and Angel Investor Groups
[ Visit the full text source to see this table ]
Based on our study, we have five recommendations to dramatically improve the volume and quality of dealflow for venture capital investors.
1. Build a specialized outbound origination program.
Investors with dedicated, large-scale sourcing teams are almost all top-quartile performers across stage, vintage, and sector. The largest practitioners of these programs – including Battery Ventures, Great Hill Partners, Insight Venture Partners, Platinum Equity,Summit Partners, TA Associates, and TCV--- typically have between 0.75 and 1.25 dedicated deal sourcers for every generalist investment professional.
Similarly, Professors Henry Chen, Paul Gompers, Anna Kovner, and Josh Lerner found in a research paper, “Buy Local? The Geography of Successful and Unsuccessful Venture Capital Expansion” that the best performing VC funds are based in the major venture centers (Silicon Valley, Boston, and the New York area), but their best investments are outside of those geographies.
2. Create opportunities, instead of waiting for opportunities to appear.
A number of the funds we studied use an origination approach that allows them to proactively co-create companies or opportunities. ffVC, Benchmark Capital, and General Catalyst Partners work with Entrepreneurs-In-Residence (EIRs) to develop their ideas, giving such VCs an advantaged position to lead an investment in any resulting company. Private equity funds such as Castle Harlan and Blackstone Group frequently partner with leading corporations when bidding on investments, allowing them to bring unique value and resources vs. other possible investors. Private equity fund Frontenac Company uses a "CEO1ST" strategy, partnering with "deal executives" to source investments in these executives' focus industries.
At ffVC, we do have strong opinions on the direction in which technology is evolving. However, we believe in looking at companies first and evaluating them against the thesis the founders articulate, vs. going in with a thesis and looking for companies that fit the thesis.
3. Look for targets with revealing "tells".
One of the great challenges of investing in private companies is that most private companies do not want an outside investor. In order to filter the universe of companies, some investors specifically reach out to companies bearing “tells” that the firm would welcome an outside investor. Some VCs monitor Internet traffic reports or job boards to see which companies are growing. Firms like Bright*Sun, CDling, DataFox, Indicate, Inkwire, Mattermark, and OnlyInsight help to automate this for VCs.
At ffVC, we do not use any of these automated services currently (although we’re evaluating some). We have such a deluge of inbound deal flow via our network that we are not investing a lot of energy seeking out additional companies to filter. However, of the companies that approach us, we are very sensitive to the "tells" that indicate a given company has high prospects of success.
4. Become open and transparent.
Historically, institutional investors kept their investing strategy very discreet. However, that model has now flipped. About 10-15% of the 1,000 active venture capitalists blog, according to Jeff Bussgang, General Partner, Flybridge Capital Partners. Some firms, such as ffVC, Formation 8, and Khosla Ventures, post analyses of their target investment sectors on their websites. These investors have found that openly discussing their investment theses increases their perceived expertise and trustworthiness, and thus generates dealflow. ffVC has an active blog and I keep a personal one at teten.com.
While relatively few private equity firms are so open today, Norwest Equity Partners regularly publishes thought pieces. HealthPoint Capital has made their website a destination for M&A/investing information in their target industries, the musculoskeletal sector — specifically orthopedics and dental. MCM Capital (case study) is a rare example of a lower middle-market private equity fund with a proactive social media strategy.
5. Take advantage of social media and emerging platforms such as Angel List.
Many investors report that they used LinkedIn, Twitter, Facebook, and like tools to keep in touch with their professional and personal networks. However, those tools do not address all the unique needs of a VC. Specialty tools like Angel List, Gust, SeedInvest, and OurCrowd are emerging as potentially significant tools for sourcing early-stage investments.
That said, our experience so far is that these online markets are most useful to identify opportunities to join a syndicate, not to source and lead a new investment. To date, ffVC has sourced only one investment on Angel List, in 500px, where we led the seed round after being seduced by 500px’s beautiful site.
The online markets are therefore likely to attract many companies that are not very attractive to investors (at the time of finding a lead), both because of their openness to all comers, and because of the selection bias.
Free full text source: https://www.forbes.com/sites/davidteten/2014/02/03/where-are-the-deals-how-vcs-identify-the-next-generation-of-startups/#680ed0e62b85
///////
Google® Better!
Jean Steinhardt served as Librarian, Aramco Services, Engineering Division, for 13 years. He now heads Jean Steinhardt Consulting LLC, producing the same high quality research that he performed for Aramco.
Follow Jean’s blog at: http://desulf.blogspot.com/ for continuing tips on effective online research
Email Jean at research@jeansteinhardtconsulting.com with questions on research, training, or anything else
Visit Jean’s Web site at http://www.jeansteinhardtconsulting.com/ to see examples of the services we can provide
It is an adjunct to the STARTUP series [ https://desulf.blogspot.com/2020/05/starting-down-startup-path-recap.html ]. While there is some overlap, the focus of the BREAKTHROUGH series is on how to identify companies that may be worth the risk of investing them.
I use the term “investment” in a broad sense. Venture capitalists invest money directly in a chosen company, hoping for a big win.
However, there is another kind of investment … taking a chance on a company with breakthrough but unproven technology to solve a problem your company is trying to address. That is a risk that is similar to, but different than, the risk taken by venture capitalists.
Caveat … I am not an expert on risk assessment. However, I am an expert in online research. The purpose of this series is to help you make more efficient use of online resources to achieve your objectives.
So, how do you identify companies with breakthrough technology? Well, if you are not a venture capitalist, whose job it is to identify such companies, it might be useful to see how venture capitalists go about this critical task.
How do you find such information? Try this …
TIP: Google® how do venture capital firms find companies
Here is one useful result …
///////
Feb 3, 2014
Where Are The Deals? How VCs Identify The Next Generation Of Startups
[ EXCERPTS ]
David Teten
Entrepreneurs
You’ve probably read dozens of articles about how to raise capital from venture capitalists. However, as a venture capital fund, we have the opposite problem: how do we find companies in which to invest?
It might appear that origination is becoming much easier because of new tools like AngelList and the SEC moving toward adoption of rules that will allow equity based crowdfunding. Just do a search online and the VC’s job is done! But in practice, these phenomena create a tremendous volume of startups, which investors then have to filter. The easier it is to source, the more you have to work to screen.
Most investors rely on their network of colleagues and service providers to source investments. Unfortunately, our research finds this traditional approach is not powerful enough to uncover all of the most promising investment opportunities.
Prior to joining ff Venture Capital, I published the first-ever study of how private equity and venture capital funds originate new investments, with my coauthor Chris Farmer, CEO of SignalFire and an experienced VC. We drew on our work with leading institutional investors and in-depth interviews with over 150 funds. We published the full report in the Journal of Private Equity; it's now the #2-most viewed article in the Journal’s history. Now that I’ve been an institutional VC for a few years, I thought it would be helpful to revisit our findings from the investor side of the table.
Deal origination is a slow, labor-intensive, frustrating process. The median VC reviews 87 opportunities before making 1 investment. I've shown below some specific data from a range of VCsAnnual Deal Pipeline for Selected VCs and Angel Investor Groups
[ Visit the full text source to see this table ]
Based on our study, we have five recommendations to dramatically improve the volume and quality of dealflow for venture capital investors.
1. Build a specialized outbound origination program.
Investors with dedicated, large-scale sourcing teams are almost all top-quartile performers across stage, vintage, and sector. The largest practitioners of these programs – including Battery Ventures, Great Hill Partners, Insight Venture Partners, Platinum Equity,Summit Partners, TA Associates, and TCV--- typically have between 0.75 and 1.25 dedicated deal sourcers for every generalist investment professional.
Similarly, Professors Henry Chen, Paul Gompers, Anna Kovner, and Josh Lerner found in a research paper, “Buy Local? The Geography of Successful and Unsuccessful Venture Capital Expansion” that the best performing VC funds are based in the major venture centers (Silicon Valley, Boston, and the New York area), but their best investments are outside of those geographies.
2. Create opportunities, instead of waiting for opportunities to appear.
A number of the funds we studied use an origination approach that allows them to proactively co-create companies or opportunities. ffVC, Benchmark Capital, and General Catalyst Partners work with Entrepreneurs-In-Residence (EIRs) to develop their ideas, giving such VCs an advantaged position to lead an investment in any resulting company. Private equity funds such as Castle Harlan and Blackstone Group frequently partner with leading corporations when bidding on investments, allowing them to bring unique value and resources vs. other possible investors. Private equity fund Frontenac Company uses a "CEO1ST" strategy, partnering with "deal executives" to source investments in these executives' focus industries.
At ffVC, we do have strong opinions on the direction in which technology is evolving. However, we believe in looking at companies first and evaluating them against the thesis the founders articulate, vs. going in with a thesis and looking for companies that fit the thesis.
3. Look for targets with revealing "tells".
One of the great challenges of investing in private companies is that most private companies do not want an outside investor. In order to filter the universe of companies, some investors specifically reach out to companies bearing “tells” that the firm would welcome an outside investor. Some VCs monitor Internet traffic reports or job boards to see which companies are growing. Firms like Bright*Sun, CDling, DataFox, Indicate, Inkwire, Mattermark, and OnlyInsight help to automate this for VCs.
At ffVC, we do not use any of these automated services currently (although we’re evaluating some). We have such a deluge of inbound deal flow via our network that we are not investing a lot of energy seeking out additional companies to filter. However, of the companies that approach us, we are very sensitive to the "tells" that indicate a given company has high prospects of success.
4. Become open and transparent.
Historically, institutional investors kept their investing strategy very discreet. However, that model has now flipped. About 10-15% of the 1,000 active venture capitalists blog, according to Jeff Bussgang, General Partner, Flybridge Capital Partners. Some firms, such as ffVC, Formation 8, and Khosla Ventures, post analyses of their target investment sectors on their websites. These investors have found that openly discussing their investment theses increases their perceived expertise and trustworthiness, and thus generates dealflow. ffVC has an active blog and I keep a personal one at teten.com.
While relatively few private equity firms are so open today, Norwest Equity Partners regularly publishes thought pieces. HealthPoint Capital has made their website a destination for M&A/investing information in their target industries, the musculoskeletal sector — specifically orthopedics and dental. MCM Capital (case study) is a rare example of a lower middle-market private equity fund with a proactive social media strategy.
5. Take advantage of social media and emerging platforms such as Angel List.
Many investors report that they used LinkedIn, Twitter, Facebook, and like tools to keep in touch with their professional and personal networks. However, those tools do not address all the unique needs of a VC. Specialty tools like Angel List, Gust, SeedInvest, and OurCrowd are emerging as potentially significant tools for sourcing early-stage investments.
That said, our experience so far is that these online markets are most useful to identify opportunities to join a syndicate, not to source and lead a new investment. To date, ffVC has sourced only one investment on Angel List, in 500px, where we led the seed round after being seduced by 500px’s beautiful site.
The online markets are therefore likely to attract many companies that are not very attractive to investors (at the time of finding a lead), both because of their openness to all comers, and because of the selection bias.
Free full text source: https://www.forbes.com/sites/davidteten/2014/02/03/where-are-the-deals-how-vcs-identify-the-next-generation-of-startups/#680ed0e62b85
///////
Google® Better!
Jean Steinhardt served as Librarian, Aramco Services, Engineering Division, for 13 years. He now heads Jean Steinhardt Consulting LLC, producing the same high quality research that he performed for Aramco.
Follow Jean’s blog at: http://desulf.blogspot.com/ for continuing tips on effective online research
Email Jean at research@jeansteinhardtconsulting.com with questions on research, training, or anything else
Visit Jean’s Web site at http://www.jeansteinhardtconsulting.com/ to see examples of the services we can provide
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