How do VCs find and choose startups for investment?

Networking is one of the most ideals ways of meeting and selecting startups for investments. The good thing there is that there are several networking avenues today. From industry specific events, to online platforms and meetups to alumni networks, there's a vast pool to choose from, and founders can effectively position themselves.

We @tiburon hunt for deals in our hometown Munich and it‘s rich startup ecosystem. Beyond that we have built a network of likeminded investors that bring us selected pre-screened deals that we can co-invest into. After 22 years of pre-seed investing we know the right people all across Europe and can easily diversify our portfolio through these trusted sources.

"It's not what you know, it's who you know..." Like in other parts of our personal and professional lives, our networks are oftentimes the most important factor in determining the outcome. If I'm an investor in very risk early-stage startups, one way I can derisk an investment opportunity is to have it come from someone I know and trust that has already qualified the opportunity as a fit for my fund. Knowing that an entrepreneur or management team has earned the confidence of someone in my close network, allows me to focus on other risky aspects of the investment, such as the size of the addressable commercial opportunity or the company's competitive advantage (i.e. "right to win").

In the venture capital landscape, networks and referrals serve as the cornerstone for sourcing investments. A strong referral from a trusted source not only adds credibility but also provides a layer of pre-vetting. We cultivate and maintain extensive networks, tapping into alumni, industry experts, and fellow investors to uncover promising startups that may not yet be on the mainstream radar.

Events, focused on founders presenting their companies, are great ways to discover investment opportunities. This is particularly true when founders have to deliver a compelling pitch in 2 minutes or less. I'd advise founders participating in these events to consider not only the investors in attendance, but to consider the "friends of friends" networks. Word of mouth is very powerful, so even if no one at a pitch day event wants to invest, you never know who those people know. A founder should include in the talk track, "If any of you know others who might be interested in hearing about our company, I would appreciate any referrals or introductions that you could make.

Try to make your startup visible not only at one-off events, but also continuously on platforms such as r/SaaS (Reddit) or other builders communities where you're gathering feedback from other founders, i.e. ProductHunt. The ideal place where a VC can find you is where you're also searching for your customers and their feedback. Those VCs that comprehend your Ideal Customer Profile (ICP) and the value you provide will align more effectively with your mission.

By actively participating in industry events, pitch days, and leveraging online platforms, we broaden our horizon to identify emerging trends and innovative startups. These arenas provide a unique opportunity to meet founders face-to-face, observe product demonstrations, and gauge the current market’s pulse, ensuring a diverse and comprehensive investment portfolio.

VCs find startups through events like pitch competitions, demo days, hackathons, and conferences, as well as digital platforms including webinars, podcasts, newsletters, blogs, and social media. These avenues help VCs spot new trends, connect with founders, and assess potential investments.

For public-sector supported funds, the identification of suitable investee companies is particularly difficult, as entrepreneurs see the public sector as an easy, non-commercial investor. In fact, such funds are keen to achieve returns and secure their own survival, even if the motivation of the managers is less pecuniary. It is fair to say, however, that the search for prospects by such funds will tend to be more passive. An online presence is created and the availability of funds advertised through existing networks of advisers, who will tend to be sector experts, such as the officers of arts bodies, rather than financial professionals. One tool to raise profile is to organise awards in partnership with a local university.

Reverse research can attract more startups to you. Having a media presence where your niche is known (within the rules of the SEC) will bring deals to your desk. When you are truly excited about a niche market, you are engaged with all the people in it and word spreads that you are someone who can provide value through feedback, mentorship, advising, incubating, and potential capital.

All of your research culminates in your overall investment thesis. Trying to do the job of a VC without a thesis is like going about your day without a schedule or to do list. But.. what even is an investment thesis? Is it a presentation? A memo? How long does it need to be? I believe the only guideline you need for a great thesis is this: the ability to talk about the topic coherently in an interview with a firm for 30-45 straight minutes uninterrupted and unrehearsed.

- Product/Technology: Assessing the uniqueness, scalability, and defensibility of the product or technology. - Traction: Analyzing key metrics such as customer acquisition, revenue growth, user engagement, and market validation. - Business Model: Evaluating the revenue model, pricing strategy, customer acquisition cost, and path to profitability. - Scalability and Growth Potential: Assessing the startup's ability to scale operations, penetrate new markets, and achieve significant growth. - Risk Factors: Identifying potential risks and challenges, such as regulatory issues, competitive threats, technology risks, or market dynamics.

Investing predominantly in the healthcare sector, we leverage a wealth of public resources to comprehensively screen potential investment opportunities. This includes utilizing databases of clinical trials, patent registrations, and the rosters of major specialist conferences. From this wealth of data, we construct an internal map detailing all identifiable opportunities at various stages of development. For example, we can pinpoint that there are 5 companies actively addressing Hepatitis B in Phase 2 clinical trials. We then prioritize 2-3 of these opportunities for proactive outreach, leveraging our extensive networks to determine whether any of these are transactionable in the near term. But it all starts with a list of many thousands.

Database Utilization: Crunchbase, PitchBook, CB Insights. Using these you can discover new startups, track the growth of existing ones, and analyze trends in the ecosystem across various industries and geographical locations. Market Scanning: This includes going through reports and surveys, studying new technologies, following industry-specific publications, and maintaining a close watch on emerging markets and their developments. Online Search and SEO Tools: Using the right keyword combinations or SEO tools can surface articles, press releases, and websites of innovative startups that fly under the radar. Direct Outreach: It's not uncommon to send cold emails or LinkedIn messages to startup founders.

I think it is important for founders to understand what different VCs are looking for. Different VC will prioritise different things at different stages, and as a result, may have a completely different due-diligence process. Founders may want to find out early on in the process, what does the investment process looks like for each VC - timeline, due-diligence topics, approvals required etc.

R3i invest 12 weeks in rocket ship due diligence with our founders, maturity assessment on all core business functions, founder education, cohesiveness testing, product market fit, financials and governance.

A simple framework for evaluation can be this 5T model: TAM - Is the opportunity huge? Timing - Why now? Team - Why these founders? Traction - Is it working? Threats - Can you stop competitors? The last point implicitly includes being unique in some way, and having an idea about eventual moats.

In my experience, selecting the right startups for investment requires meticulous evaluation and due diligence. Assessing team expertise, product scalability, market potential, and deal terms ensures informed decisions and maximizes returns. This process is crucial for mitigating risks and aligning investments with strategic objectives.

4. Value Proposition and Differentiation: VCs look for startups with a compelling value proposition and clear differentiation from existing solutions or competitors. They seek disruptive innovations or unique approaches that address unmet needs or pain points in the market. 5. Alignment with Investment Thesis: VCs consider whether the startup aligns with their investment thesis, strategic focus, and portfolio diversification goals. They assess the potential for synergies with existing portfolio companies or strategic partners.

Choosing the right investors is vital for entrepreneurs. Avoid those who exert undue pressure during negotiations, as their behavior likely won't change post-investment. A harmonious partnership is key, with the investor as the company's primary advocate. They should aid in fundraising by introducing their own connections and assist with shareholder matters, like exit strategies. An ideal investor offers support when necessary and steps back when not, ensuring their involvement promotes growth without impeding the entrepreneur’s vision.

In my opinion, this is the most exciting part where, as a pro, you can really create value by actively contributing to the growth and success of the startups in your portfolio. In addition to providing financial support, you offer mentorship, facilitate essential connections, provide access to tools and resources, and advocate for the startup. This is how you add value and generate higher financial returns. The downside, however, is that it's an extremely time-consuming activity that tends to limit the (already small) budget of the VC and the possibility of getting deeply involved with all the startups in the portfolio.

The process of finding and choosing startups doesn't end with the investment. The post-investment support is a crucial part of this journey. VCs who decide to invest in a startup commit time, expertise, and networks for their growth. At times they work closely with the startup founders to help them navigate through their strategic and operational challenges. Furthermore, they leverage their vast network for introductions and partnerships for portfolio companies with potential customers, partners, and even future investors. Last but not least, they are strong advocates for portfolio companies by bringing them into the limelight through interactions with the media, industry events, and our wider community.

Probably the most important support investors can offer portfolio companies is to be "there for them". Challenges will emerge and will come in all possible shapes. Investors have to adapt the same way as their companies do to changing contexts.

Open doors but don't choose the doors. And don't feel a necessity to walk through them with founders. Trust them and get out of the way.

In today’s investment landscape, the impact of our dollars extends beyond financial returns. We are increasingly mindful of ethical, environmental, and societal impacts, aiming to support startups that not only promise lucrative returns but also contribute positively to society. This involves evaluating the startup’s governance, its approach to sustainability, and its potential for driving positive change, aligning our investments with broader goals of societal progress and environmental stewardship.

Many VCs nowadays have automated platforms to scout for and track entrepreneurs. If you want to be found, it's important to have some online presence and indicate that you're a founder. On the flip side, if you'd like to stay off the radar, it's best to keep what you're working on offline. Setting your current role to 'Founder at Stealth company' is a sure way to get a lot of inbound requests :) It's good to keep in mind that investors also track your company's performance over time. Team dynamics, website traffic, news, etc. are all easily accessible information that can indicate how well your company is doing.

With unbiased outreach and spectacular due diligence...it's that simple. Finding talented founders/CEOs requires a tremendous amount of non-bias energy (which is difficult) and then conversely/on the contrary "Not believe your bias eyes and have suspicious senses...called due diligence.

Working out which VCs will write a check first and who just kicks tyres until they see someone else lead the round is important. Many investors want the confidence that another investor has also done due diligence and liked the opportunity before they also invest. Particularly if an opportunity sits outside of their core area of expertise.