There are three components to every investment, whether that you’re cutting an angel investment in a pre-seed or leading a Series A in a larger syndicate.
This investment funnel represents phases of each deal: see, pick, and win.
The first phase, seeing the deal, refers to your access to an investment opportunity due to pre-existing relationships or industry-specific reputation. The second, picking the deal, refers to the actual judgment of the deal and decision process to invest. The third, winning the deal, refers to your ability to act on that decision to invest and gain allocation on the cap table.
In part one of this series, we’ll focus on the first phase of the funnel.
Seeing the Deal
To borrow from Hunter Walk, “I’d rather see 100% of the top seed opportunities and win 50% than see 50% and win 100%.”
Here, Homebrew’s co-founder reiterates the importance of this first phase. Without knowing that a team is raising capital in the first place, whether you’re an angel investor or a general partner of a seed fund, steps two and three of the investment funnel are effectively wiped out.
Extending his analogy, Walk argues that “seeing the best opportunities [is] actually the strongest indicator of future fund success.”
Whether you’re investing in Silicon Valley, Hong Kong, New York, Stockholm, or London, it’s imperative that you prioritize your limited energy and attention on this first step.
As a founder or operator-investor seeking allocation in competitive deals, enhancing your reputation while deepening existing relationships becomes equally important.
There are two key determinants in improving your ability to see more high-quality investment opportunities: reputation and relationships.
Reputation refers to your standing with others; or the beliefs and opinions people hold about you privately and publicly. Reputation calls attention to your area of expertise in the industry, or the niche knowledge of a vertical that few others can compete with you on. In many cases, your professional reputation lies at the intersection of specific knowledge across multiple fields.
For example, you will likely miss out on the majority of quality opportunities in B2C commerce or marketplace companies if you’re widely known for your strong reputation in fintech or SaaS.
While it’s important to build specific knowledge and a reputation in a niche to begin with, moving into new verticals as your interests expand is critical for diversifying future deal flow.
Relationships, notably long-term, industry-specific ones, yield access to high-quality deals over an extended period of time.
Relationships typically develop alongside your reputation for an industry niche or compounding specific knowledge. Across the early-stage landscape, spanning both operator-angels and seed-stage investors, deep relationships with both founders and co-investors are a leading indicator of future success.
For example, repeat founders commonly return to their prior pool of investors without extending the invitation to new angels, even if your reputation in their specific niche is strong. In this case, it becomes critical that you maintain strong relationships with co-investors that do have access to the deal, including both upstream and downstream investors across multiple fields.
As an operator-angel, founder, or syndicate lead, understanding the process behind each funnel component is critical to the success of your investment record over time.
Conduit optimizes this investment funnel by connecting the world’s best operator-investors and founders building the next generation of startups around the world.
Next week, we’ll focus on the second phase of the funnel: picking the deal.