Deal Flow Theory: Filtering Out the Noise
Why better deal flow is better than more deal flow
Investors don’t have a problem with access to deal flow.
Investors have a problem with access to quality deal flow.
The Observer Express
Don’t have time to read the entire post right now? No worries, here are the main points:
More deal flow isn’t necessarily always better. More quality deal flow is.
Investor communities, like anyone else, prefer to focus their energy on the highest quality opportunities.
There are a lot of sources for poor deal flow. Being a “good signal” in the midst of all the noise is valuable.
PitchFact is developing a “deal flow” product - let us know if you’re interested.
Portfolio Theory ≠ Deal Flow Theory
A few weeks ago, I walked through an example of typical angel investment portfolio theory. The gist is that most startups fail, so it’s best to spread investable capital across a dozen or more companies in order to maximize the odds of one deal carrying the return on the entire portfolio.
Said another way: more deals = better.
Early in my venture journey, I thought this applied to deal flow as well. More deals to choose from must also be better, right?
Wrong.
This principle does NOT apply to deal flow.
Better Deal Flow is Better
Since launching PitchFact, we’ve had the opportunity to work with several clients, most of whom represent communities of individual investors. These include angel groups, syndicates, emerging VCs, and more.
Our “fractional” engagement structure has provided a unique perspective, and one of the things I’ve realized is that more deal flow is not better.
Better deal flow is better.
Do you Prefer the Short List or the Long List?
Each community tends to prefer different things. They all have a different “investment thesis” - whether that is explicitly defined (which, by the way, I strongly recommend) or not. Some groups have a narrow thesis, while others have a wider “aperture” for consideration.
Still, most of the time, groups receive hundreds or even thousands of applications per year, and ultimately write checks for just a few. That means most deals are not a fit.
On the surface, increasing the flow of applications is helpful, because it creates a wider pipeline to choose from.
Here’s the rub: increasing the flow of applications also creates more work because that pipeline must then be processed. A strong, well-run process can help minimize this pain and efficiently distill the good opportunities from the mix, but it still requires resources to operate.
Most communities would prefer NOT to filter through all those applicants, and instead focus on a few deals they can trust are a fit for their members.
Think about it this way - if you had to staff a team of 20 people, would you rather sort through a stack of 1,000 resumes from online job postings or work through a shortlist of 50 referrals from trusted peers?
Now, I recognize this isn’t always possible, which is why most groups also accept applications from general sources like web applications and other inbound methods.
My point here is that deals shared by trusted referrals are incredibly desireable.
Be a Good Signal
Someone recently said to me: “Be a good signal.”
Here’s what they meant - most deal flow is not a fit for any given community. Most sources are noise. If you can become a regular source of deals that ARE a fit by sharing deals that investors take a legitimate interest in, that’s valuable.
There is an overwhelming variety of ways (besides angel groups) to access deal flow. To illustrate, here are just a few examples:
Syndication platforms like Angellist Syndicates or FundersClub
Crowdfunding sites like WeFunder, Republic, or StartEngine
Thousands of slack channels, social groups, and other virtual communities
Email lists from other investors, incubators/accelerators, etc
The list goes on - the point is this: investors trust their peers and the referrals they share as sources for high-quality deal flow far more than these online sources or cold inbound applications.
A Unique Opportunity
We’ve recently begun to realize how our fractional involvement with multiple communities of investors provides a unique opportunity to create value. By connecting the dots across communities, we are well-positioned to highlight opportunities that may fit their criteria and that they might otherwise miss out on.
We’re exploring how best to start making these connections, but plan to launch a pilot within the next few months. If that sounds interesting, we’d love for you to be a part.
If you’re interested in accessing our deal flow, please indicate this by completing the following form, and you’ll be the first to know when we launch this resource.
Final Thoughts
More deal flow is not better, better deal flow is better. Most deals aren’t a fit for any one community, so identifying trusted sources for deals that are regularly on-target is massively valuable.
What do you think?
What are some of the trusted sources your community relies on? Which sources do you immediately ignore?
Weekly Observations: 3 Lessons Learned
What does it mean to be human?👶
This week I attended a fantastic conference in DC hosted by Manas Venture Studio, and one of the topics discussed was the impact of AI. Historically, common answers to the question “What does it mean to be human?” may have included things like “creativity,” or “the ability to use complex language to read, write, and communicate.” With the rapid rise and technical capabilities of AI, these responses are no longer uniquely human, and over the next few years we will all be forced to answer this question. What do you think?
Sometimes, recognizing wasted time is the best way to save time.🧗
Earlier this week, I spent about 4 hours working through an important strategic decision. I didn’t make much progress, and by the end of the day, I found myself very frustrated by what felt like “wasted” time. So I went rock climbing at our local bouldering gym to clear my head. You know what I realized? Sometimes during a climb, I discover the route I’ve chosen (which at first seemed best) is not ideal. In that situation, I can either keep trying to force it and wasting a ton of energy, or I can drop back to the previous hold and try a different path, which usually gets me to the top faster. That 4 hours may not have yielded the result I wanted, but it made me realize I needed to find a different path, which is exactly what I did.
Focus creates freedom.🎯
This week I experienced how focusing on a specific product, service, or offer at the exclusion of others actually creates freedom. For much of the week, I found myself overwhelmed by the prospect of serving all the needs and opportunities that have come across our desk. It’s exhausting to consider. However, once I worked through the logic and processed it with our team, I decided to focus my energy on ensuring that we do one thing well. Since that decision point, I’ve found myself feeling more creative, free to rest, and engaged in our work.
Thanks for reading, have a great week.
-Andrew
If you enjoyed this post, please share it with a friend, colleague, or anyone else who may benefit.
P.S. - I recently finished creating The Angel Network Toolkit: 90 Resources for Cultivating a Thriving Community of Pre-Series B Investors, and I’m sharing it with anyone who refers a friend.
How did I do this week?
About Me
I cultivate flourishing.
I'm also the CEO of PitchFact, where we help angel networks conduct efficient and collaborative diligence. I'm a proud husband, aspiring father, and grateful friend. My love languages include brisket, bourbon, and espresso.