How do top venture capital (VC) firms stand out from the rest? The strength and edge of their deal sourcing.
Deal sourcing is about scouting for the next unicorn before anyone else. That’s how you create generational wealth and keep your firm on top of future entrepreneurs’ minds.
From unconventional sourcing like barging into the founder’s office to more data-driven methods using database platforms, here are 7 proven VC deal sourcing strategies used by top VCs like Sequoia, Benchmark Capital, and O’Reilly Alphatec Ventures.
Traditional deal sourcing
Network-based deal sourcing
eBay and Benchmark Capital
According to a study from the National Bureau Of Economic Research, network-based sourcing is the most common way of deal sourcing. Over 30% of VC deals are generated through professional networks. Another 28% comes from referrals from other investors and portfolio companies.
But why?
- The best opportunities are rarely shared with the masses to protect competitive and unfair advantage.
- More trustworthy
Consider Pierre Omidyar, founder of eBay. During the first round of funding, Omidyar had a 2.5 times higher valuation offer, but he still went with the lower valuation offered by Benchmark Capital.
This is because Bruce Dunlieve, Benchmark’s general partner, had invested in Omidyar’s prior company. So, Omidyar saw value in their partnership more than just money.
Thanks to the strong connection, Benchmark turned its modest $5 million investment in eBay into a staggering $2.5 billion return.
So, how do you create a better relationship with entrepreneurs? Easy, just treat them with respect. As Jack Ahrens, Venture Capitalist and Owner of TGap Ventures, once said:
My best opportunity ever in my 30 years of investing experience came from an entrepreneur I had turned down. He referred another entrepreneur to our fund, and we made an investment that turned out to be our best performer ever. I guess when we said no, we must have done it in a thoughtful way.
Proactive deal sourcing
Facebook and Accel Partners
Proactive sourcing means you hunt for opportunities in a slightly unconventional way. Instead of waiting for them to come to you, you pounce first. At times, it can yield serious gold.
Even when Facebook was only a year old, Kevin Efrusy of Accel Partners realized its massive potential. He set his sights on this prize and won’t give up until he traps this elusive beast.
He called and emailed Facebook relentlessly but was turned down repeatedly. Frustrated by this, he took a bold change of approach.
He decided to walk into Facebook’s office and invited Zuckerberg for a meeting the following Monday. He promised that by the end of the day, he’d give Zuckerberg a term sheet or Zuckerberg would never hear from him again. Zuckerberg agreed.
On the day, Zuckerberg showed up wearing flip-flops, shorts, and a T-shirt. He also didn’t prepare any slides.
Nevertheless, Efrusy sealed the deal. Accel invested $12.7 million and secured an 11 percent stake in Facebook. This move cemented Accel as the second earliest Facebook investor, behind Peter Thiel.
Come the IPO 7 years later, Accel’s investment was worth $6.3 billion.
But what if you find a good company and the round is closed? How can you creatively get in? Going to the office like Efrusy did might not work anymore.
Square and Kevin Rose
When Kevin Rose found out that Square was raising money, he was already missing the boat. The round was already full and Square didn't need any additional investors.
Gutted by this but not ready to back down, Kevin tried finding a back door entry. He then noticed that Square didn’t have a product demo video.
He quickly created one and showed it to the co-founder, Jack Dorsey. Jack was so impressed that he immediately opened the supposedly full Series A round for Kevin.
Commercializing research
Ikaria and ARCH Venture Partners
When Bob Nelsen of ARCH Venture Partners met biologist Mark Roth at the Fred Hutchinson Cancer Research Center, Mark was working on suspended animation – a technique to induce a hibernation-like state by cutting off the oxygen supply.
Realizing the commercial potential, Bob patiently worked with Mark for five years. This led to the creation of Ikaria in 2005, a healthcare company that develops treatments for critically ill patients.
Steven Lazarus, the founder of ARCH, explained: “This was not seed capital. In our case, we were identifying science literally at the site of inception, assessing whether it had commercial potential, and then erecting a commercial entity around it — it was virtually [starting] from scratch.”
In 2015, Ikaria was acquired by Mallinckrodt for $2.3 billion.
Trade Conferences
Apple and Arthur Rock & Co
Arthur Rock, founder of Arthur Rock & Co, once went to a computer show in San Jose. Most exhibitors only had computer parts to show then.
Not Apple, though. While other booths were empty, people were piling up at the Apple booth. Convinced by that, Rock bought 640,000 shares of Apple worth $57,400.
Two years later, Apple went public and Rock's investments were valued at $14 million, a return of 244x.
Aside from scouting a new company to invest in, trade conferences can also be a place to guide your investment decision. They're a great place to check out the market scene, understand the competitive environment, and judge whether your target company is heading in the right direction.
Organize conferences
TIFF (The Investment Fund for Foundations) and O’Reilly Alphatec Ventures
But while attending conferences can help find investment opportunities, Tim O’Reilly had a massive advantage when he launched his own venture fund, O’Reilly Alphatec Ventures (OATV).
After O’Reilly Media's first Open Source Event went viral across the country, Tim continued hosting more tech conferences.
Tim’s conferences help important tech people make connections. They also help people understand the challenges and opportunities with existing and new tech. And of course, this created a perfect environment for investment opportunities.
Chris Douvos, TIFF’s co-head of private equity investing, called Tim "the Obi-Wan Kenobi of tech" for fostering a thriving ecosystem that attracts entrepreneurs.
When Tim launched OATV, Chris jumped in with both feet and invested without a second thought because of its unique advantage: a first look at many new opportunities even before they become opportunities.
Digital deal sourcing
Traditional methods are great. But relying solely on them will no doubt leave you behind.
A report by Data-Driven VC predicts that by 2025, 75% of all VC deal considerations will use data, analytics, and AI. The investment landscape is shifting. And you must adapt.
You’ve honed your instinct for spotting great opportunities through years of experience. Now, combining that with data will surely help you find more great opportunities quickly. In turn, you’ll make your investors happy!
Angel and startup funding platforms
Both AngelList and EquityZen are among the best places for online deal sourcing.
AngelList
AngelList is an early-stage startup investing platform.
What’s really cool about AngelList is the ability to form syndicates. This means that lead investors can pool money with other investors. So, smaller investors get to ride along with seasoned pros. That can really improve deal flow quality and help build connections with fellow investors.
Another great feature of AngelList is the detailed company profiles like business models, traction, and funding needs. This will give you a clear picture of what you’re getting into.
EquityZen
EquityZen is a marketplace where you can buy and sell pre-IPO shares of privately held companies.
EquityZen also provides detailed company data and insights like cap tables, funding history, and company highlights.
Database platforms
There are several database platforms offering data on people and companies like Crunchbase and LinkedIn Sales Navigator. Now, there’s Sapiengraph too (that’s us).
In some cases, you can get more detailed information than what Crunchbase and LinkedIn Sales Navigator can offer. Plus, Sapiengraph lets you automate bulk data collection and keeps everything organized in one spot.
Sapiengraph has a set of tools that require you only 5 minutes to find the data you want. The tools are:
- Data enrichment within Google Sheets
- Prospector Dashboard
- Job Change Monitor
Sequoia uses Sapiengraph’s data for deal sourcing
Sequoia has used our data to improve its deal sourcing strategies. Here are ways you can adopt a similar deal sourcing strategy.
Data enrichment of founders
VCs often lack complete information about the founders they’re interested in.
This is where Sapiengraph's data enrichment capabilities really shine. Our custom spreadsheet formulas are built right into Google Sheets, so you can easily pull up contact info or employment history to help you make informed decisions.
Our formulas are simple to use. It’s as easy as using the =SUM() functions. Here’s one example of our formulas:
=SG_LOOKUP_COMPANY(COMPANY_NAME_OR_DOMAIN, [LOCATION])
So, a venture capital firm like Sequoia can use Sapiengraph’s Person Lookup and Person Profile Enrichment formulas. The former helps find the founders' LinkedIn profiles, while the latter pulls in extra info associated with those profiles, like the city they might live in and Twitter ID.
Say a venture capitalist is interested in Jesse Beller, Founder of Terrace, and Gaurav Bharaj, Founder of Reality Defender. Here’s how the formulas work.
Data enrichment of companies and employees
VCs also often want to know how many employees a company has. It might seem like a small detail, but it actually can reveal something big.
For example, a large team in a pre-launch startup often signals they've raised too much money too early and might stay in stealth mode too long, which means missing valuable feedback on their product.
On the other hand, a team that’s too small can be a red flag. It could be because of a flawed vision, trouble raising funds, or challenges with hiring and retention.
So, VC firms like Sequoia can use the Company Lookup formula to look up the target company’s LinkedIn profile. They could also use the Employee Count formula to see how many people are on the team, and the Employee Listing formula to get the employees' LinkedIn profiles.
Demo about data enrichment of companies and employees
Other helpful tools to boost your VC deal sourcing efforts
Build a database of employees of a company
As a venture capitalist, you want to invest in companies with the best chance of home run returns.
A company full of exceptional people is half the equation to that. But it’s tough to assess a team’s strength when you’re not actually in the company, right?
No problem. You can build a list of employees of your target company with Sapiengraph’s Prospector. Just search, unlock, and export. That's it.
Using Reality Defender as an example, here's how it works.
Building a list of Reality Defender's employees using Sapiengraph Prospector
Now that you have the list, you can use Person Work History and Person Education History formulas to check their background.
But first, you have to copy and paste the information from Excel to Google Sheets because Sapiengraph only supports Google Sheets for now.
For this demo, I’ll hide irrelevant columns so you can see how the formulas work clearly and how awesome they are.
Finding employment information on Reality Defender's employees
Find phone numbers or email addresses
Let’s say you’re interested in Alex Haro, founder of Hubble Network, and you want to reach him. You can find either his phone number or personal email address in seconds with Prospector.
Here’s how.
Demo about finding phone numbers or email addresses
Find companies meeting your criteria
Let's say you’re looking for US privately held companies in the entertainment providers industry with a maximum of 50 employees.
Here's how.
Demo about finding list of companies that meet criteria
We have 470 million+ profiles worldwide in our database. There are also 40+ filters such as degree name, funding amount, and LinkedIn groups to narrow down your search.
Searching for profiles with our Prospector is free. Your credits are only used to unlock the profiles you want. And each profile unlocks costs 30 credits.
If a profile doesn’t have a phone number or email, you’ll see 'None found,' so you won’t waste credits on profiles that aren’t useful to you.
Keep track of high-potential founders
What if the founder you're interested in just sold their company, and you want to be notified as soon as they start a new one? Or maybe you just want to keep tabs on a promising entrepreneur?
Easy. Use Sapiengraph Job Change Monitor.
When you sign up for a Sapiengraph account and enable the Chrome extension, you’ll see a green “Monitor Job Change” button in every LinkedIn profile.
When you track the founder and there’s a job change update on their LinkedIn, you’ll get a notification email like this.
An invitation
Be in this game long enough and you will have your own share of misses. But it’s the hits that matter, and deal sourcing is a critical component of that hit-miss ratio.
The word on the street is that data-driven deal sourcing is the future. But actually, the future is already here.
Do you think our tools can make you more productive? Let's try them for free! Just sign up for a free trial to get 100 free credits and see if they suit you.
We also have a more comprehensive demo of our Prospector ready for you. Email us at [email protected] and we’ll send it ASAP.
