Assess and Win Competitive Deals With Data & AI
DDVC #40: Where venture capital and data intersect. Every week.
👋 Hi, I’m Andre and welcome to my weekly newsletter, Data-driven VC. Every Thursday I cover hands-on insights into data-driven innovation in venture capital and connect the dots between the latest research, reviews of novel tools and datasets, deep dives into various VC tech stacks, interviews with experts, and the implications for all stakeholders. Follow along to understand how data-driven approaches change the game, why it matters, and what it means for you.
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Last week, we explored how data-driven approaches provide unique LP leads for your next raise as a fund manager. Following this effort to showcase how innovative approaches change the VC value chain all across, I’d like to focus today’s episode on the deal-winning process that spans the due diligence and closing stages.
What characterizes a “competitive deal”?
Competitiveness from an investor’s point of view is a function of the supply of investment opportunities and capital to be deployed (=dry powder). In my mental model, I split competitiveness into two components:
Market-specific part: It’s the more macro level that compares competitiveness over time. This “market baseline” is the result of ALL available investment opportunities IN THE MARKET and ALL available dry powder IN THE MARKET. The less (more) opportunities, the more (less) competitive the market. The more (less) dry powder in the market, the more (less) competitive the environment. Ceteris paribus for both ofc.
While we’ve seen substantial effacements of VCs between 2000 and 2010 (and let’s see what happens in the next few years..), the average market baseline seems to continue to move up and to the right as a consequence of overall more capital inflow versus a steady number of relevant investment opportunities. Generally, VCs should keep a close eye on this baseline as it defines the required alertness and reactiveness when spotting a promising opportunity. Have heard a VC mentioning that this year is so much slower in deal flow than the previous years? This is what I’m talking about ;)
Company-specific part: This is the more micro level that allows us to compare all opportunities at a given point in time. It’s the result of the “hotness” of a company and the dry powder chasing this specific company. The “hotter” (weaker) the company, the more (less) competitive the investment opportunity. The more (less) investors have this company on their radar, the more (less) competitive the deal becomes.
While “hotness” is a function of fundamentals and hype (worth noting that VCs are prone to herd mentality..), capital chasing a specific opportunity depends a lot on the point in time of a fundraising process. The earlier an investor gets in touch, the less competitive a deal is. This is why superior sourcing and screening approaches are of utmost importance. Independent of the market-specific level, hot deals will always become competitive.
As stated in my “The Future of VC” post in 2020, early identification is a great differentiator today (likely also tomorrow) but will fade in the long run as more VCs will understand and leverage the power of data-driven approaches and AI. Therefore, I’d expect the access component to become increasingly important.
The time between a growth signal and an initial meeting will decrease across the industry. A promising growth signal, be it a jump in Github stars or Upvotes/“Hunt of the Day” at ProductHunt, might lead to several automated “Hi Founder, let’s speak! Choose a slot in my Calendly here”-emails from VCs.
In this extreme (but IMHO likely) scenario, access to deals will become increasingly important as most investors will compete for very few high potential deals — at (more or less) the same time. Clearly, not all of them will be able to invest. While historically the best VCs could choose which founders they wanted to work with, today and even more so in the future, it will be the other way around: the best founders can choose which VCs they want to work with.
What does it take to win a competitive deal?
As highlighted in my Future of VC post, it takes (1) a sufficient fund size (which means that ceteris paribus you can pay a higher price per company for your target shareholding) as well as (2) a superior firm and personal brand.
As the VC industry becomes more efficient, two “access components” will become core: capital availability (which VC is able to pay the highest valuation) and VC brand (firm brand + personal brand of the individual investor) — besides personal fit (which will remain key)!
Today, a few years after writing the above-mentioned piece, I’d add