Where Do Venture Capitalists Find Their Companies?

I’ve received a few emails recently asking me where VCs find their investment companies.  I can’t speak for all firms, but if I look over the past 10 years of my career and add in results from other VCs that I’m close to, I will conclude the following:

VCs get their deal flow from the following sources (in no particular order):

1. Personal Networks;

2. Repeat Entrepreneurs;

3. Other VCs;

4. Email / Blog / Cold Calls;

5. Professional Service Providers; and

6. Venture Shows / Trade Shows.

It’s hard to put a particular percentage on each category.  In general, I think that good VCs with healthy deal flow invest in 1% or less in the aggregate of their deal flow.  I know that sounds like a small number, but the great majority of companies presented to us to invest in are easy rejects.

As for division between sources, I think a healthy VC might see the following division:

1. Personal Networks; 30-50%

2. Repeat Entrepreneurs; 30-50%

3. Other VCs; 10-20%

4. Email / Blog / Cold Calls; 5-10%

5. Professional Service Providers; 5-10% and

6. Venture Shows / Trade Shows. 0%

So what does this mean?  The low hanging fruit is VC / Trade shows.  If you are presenting at a show, you’ve already struck out the normal routes of VC investment and you are pitching to "everyone."  I think that most VCs who have healthy and proprietary deal flow don’t go / care about these types of events.

Clearly personal networks / repeat entrepreneurs (what I call "proprietary deal flow") are the major sources of companies.  This is why investors should chose one VC over another. 

As for the cold call / email / blog category – yes it does happen.  In our newest fund, we have one deal already in this category and we are working on another that fits this bill. A VC with a strong web presence can attract good deals.

The professional service providers can also be a source of deals.  While I’ve spent plenty of time making fun of lawyers and accountants, occasionally they have good clients to fund. 

So bottom line – you have a much greater chance of getting a deal done if you are already in a VC’s network or if you get a warm intro from someone in our network.  Your other avenues are much less likely, but not impossible.