How do investors quantify the quality of deal flow?'


If you are an early-stage investor, there’s one simple hack to measure your so-called “deal flow”:

  • How many of the companies I proposed for investment got funded by a VC Firm of the same stage or a stage later than ours? (I like to go further down the funnel to  “proposed for investment”.  It’s like an Opportunity. You can lower the bar to Met With In the Office if you really want, though).
  • And how high quality was the firm? (You’ll have to rank all the VC firms).  I’d probably do this on a Fibonnaci-like scale, with 21 points to the couple of truly Tier 1 VCs.  A Fibonnaci-like scale is good because everyone can “feel” the scale.  An important nuance would be to also judge the individual partner, not just the firm.  Jim Goetz is a 21.  You can figure all the rest out yourself.

They you have a score for each proposed investment, funded or not.

But in this case, if I proposed Company ABC for investment, but we didn’t do it, and Jim Goetz did — then I get 21 Deal Flow points.  🙂

The best VCs with the best brands that I’m friends with, it’s what they always ask on companies with mutual touchpoints that they liked but didn’t fund … “Did they get funded?”  “By whom?”

Maybe things got a little out of whack in late ’14 and early ’15 in SaaS with so many start-ups getting funded.  But generally, this is awfully telling.

If you don’t want to bother with this, the simplified version is just measuring investments by who followed on in the next round.  But that takes a lot longer, and sources fewer data points.  It only measures the quality of closed deals, not deal flow.

Also, you have to have some intellectual honesty here.  Many VCs think they could have done a deal but in fact the founders never would have picked them.  But maybe that’s OK if all we are measuring is deal flow.

Judging your deal flow by these two metrics and one score will tell you how good your deal flow is.  You can measure everything.  So do it.

Deal flow may not be THAT important.  It’s just pipeline.  It’s what you fund that matters.

But if it ain’t there, then, it’s tough.

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Published on February 18, 2016
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