It’s almost a buzz word, but deal flow is the life blood of accelerators, angels and venture investors everywhere. Without deal flow your ability to make investments dwindles significantly. However, there’s a strange fallacy with deal flow that everyone is aware of, but no one really talks about or if we’re being blunt, doesn’t want to think about. It’s a mentality that doesn’t help early stage investors in the least and ultimately ends up leaving the scraps for the folks who rely solely on deal flow.
The whole notion of incoming deal flow is nice… for marketing purposes. But let’s get realistic for a moment. Name a single business that thrives by sitting back and waiting for opportunity to smack them upside the head? It doesn’t happen. Forget what the media wants you to believe. No business is successful by sitting back and waiting. Building a business is a fight, a battle and a war. The only teams that survive are the teams that are willing to get out there and make shit happen. Your accelerator is no different.
It’s time to take the red pill and see reality for what it is. Deal flow is not all it’s cracked up to be. Sure you’re connected to this source or that source for deals, but if you’re not proactively seeking out the best companies you’re getting left with the scraps. If you’re accepting applications via the application sites you’re meeting with the companies focused on smiling and dialing. Will you find some good companies that way? Yes, you will. But good companies are not what accelerators need. Good companies don’t return the fund. Really, good companies suck. You need great companies with great teams. Speaking frankly, those that are great are not applying to your accelerator, unless Sam Altman or PG happen to be reading this.
Since we’re being brutally honest here let’s just go ahead and say what everyone has been thinking for the past three years. Accelerator applications suck. The whole process sucks. First you have to weed through the crap applications which represent roughly 90%. Then you have to figure out if the remaining 10% is crap dipped in chocolate. Once you determine that 5% of your total pool has potential you then have to go about hoping they really want to participate in your accelerator. Inevitably, some of the teams you’re most excited about have found better options or more funding and no longer need you. The teams who finally do accept are good, but not great and you find that you’re left with the scraps. With enough hard work and fortitude they can become great, but the potential really isn’t there.
Now, it’s important to note that there is incoming and outgoing deal flow. Incoming is relatively easy. You place applications on the usual suspects and wait for companies to fill them out. Outgoing is an entirely different animal and it’s far more expensive; or is it? You must spend your time traveling, attending events, finding interesting teams and getting rejected a lot. Further you must beef up your program to give them incentive to want to join you. Pitch practice, demo day and mentors are about the last things on these teams collective minds. The best teams want to accelerate their business by adding customers and/or strategic partners. They want to achieve real traction, not media induced hype giving investors temporary FOMO. Simply put they want to grow their true business, not get better at public speaking. They would join Toastmasters and not lose equity if they were really interested in the later.
As you can see adhering to this notion of outgoing deal flow fundamentally changes the operating procedures of the modern accelerator. What’s interesting is that you may have noticed many accelerators have been changing their model over the last 12–24 months. Why? In order to grow and improve as a business they need to increase the quality of companies signing their term sheets. They can’t do this with the old model. They’ve realized that all forms of applications suck, warm intros are nice and relatively helpful, but the thing that really moves the needle for them is proactively finding the best companies and coherently presenting their value proposition in a way that entices those teams to join their program. This is why the accelerator model is changing and morphing to look more like micro or program VC style firms.
Want to learn more about outgoing deal flow, how you can increase it with minimal effort and how Outset can help you in this area specifically? Hit me up sam [at] outset dot vc.
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