Friday, July 5, 2013

An open letter to a new VC analyst

The following are my thoughts on sourcing deals after having worked at USV for (gasp!) just over a year now. I will focus on run my own process, separate from the day-to-day collaboration with other members of the investment team. While every firm is different, there is hopefully something in here that will be useful. The underlying lesson is to try and identify the weak spots in your firm’s process and then fill them.

There are two types of sourcing: reactive and proactive. Reactive sourcing is fairly self-evident: troll AngelList, TechCrunch, Hacker News, VCDelta, and any other source that fits your sector; go to events, such as demo days, to meet promising companies; take as many (reasonable sounding) pitches as walk in the door; and, of course, VC is a networking business, so meet as many people as possible.1 Most of the value here is adding bandwidth to your firm.

My lesson from this approach is that building companies takes longer than expected. As an analyst, I started off talking to companies that were not mature enough for an investment from us. While these are all teams that would otherwise not have been in contact with someone else on our investment team, it has taken much longer than I expected to be able to bring these companies to the partnership. And, unlike a partner, I will have a much shorter life at the firm, so I unfortunately can’t be as patient.

Proactive sourcing is much more interesting. These are initiatives you can come up with, an intellectual stance for why should something should exist (and it might not yet!). Come up with an idea or a sector and dive in. If that thesis resonates with the firm, go deeper until you find a company that fits. At least at USV, the partners talk about their best deals coming out of such work. As an example, I’ve been fairly deep into Quantified Self for the past month.

Also try to identify a signal that is currently being missed by your firm. After testing out various analytics projects, I couldn’t find it became clear that tracking pageviews, app downloads, etc. at our stage of investing was not meaningful enough. But since Series A is typically the second round of publicly disclosed funding, we’re in the perfect position to use prior VC investment as a signal for good companies. And on top of this I can layer analytics. For example, given the size of the team and the date and amount raised previously it’s quite easy to estimate when they’ll be raising their next round. Once I get a handle on this signal, I should be able to at least get a quick look at every company that otherwise wouldn’t walk in the door.

My 10% project for the past few months has been to build a Django app that integrates with CrunchBase, AngelList and VCDelta. The code for the entire project will remain private, but I’ll start sharing snippets to help others build their own tools. The first is an update of a Python library for the CrunchBase API.

  1. I highly recommend breakfast meetings every day. Let’s you work through lunch and stay focused.