Lesson 1 of the CB Insights Quantitative Venture Capital Class explains how to use data to expand your network and its value.
This class will cover one very important topic:
How can you scalably increase the size of your network using data?
Let’s stop digging in the same hole
When looking for a new way to solve problems, there is an approach called Lateral Thinking (a strategy developed by Edward de Bono) that is quite interesting. He describes it as follows:
With logic you start out with certain ingredients just as in playing chess you start out with given pieces. But what are those pieces? In most real life situations the pieces are not given, we just assume they are there. We assume certain perceptions, certain concepts and certain boundaries. Lateral thinking is concerned not with playing with the existing pieces but with seeking to change those very pieces. Lateral thinking is concerned with the perception part of thinking. This is where we organise the external world into the pieces we can then ‘process’.
One of the things de Bono believes is that it is impossible to look in new directions or at new approaches to solve a problem while looking HARDER in the same direction.
“You cannot dig a hole in a different place by digging the same hole deeper”
Sometimes, changing direction and approach gets you a better outcome.
WTF? I signed up for a course on Quant VC.
Alright, so why am I starting a course on Quant VC with this new-agey stuff on lateral thinking?
Because this course is about digging holes in different places.
Attending demo days, getting “proprietary dealflow via our network,” holding office hours, scouring for companies on AngelList, attending conferences, grabbing coffee with entrepreneurs, building alerts based on web traffic jumps, etc. are things everyone is doing. They may be good things to do, but there is nothing proprietary about them (although everyone seems to think so for some reason). And many of these are not even worth doing. Activity ≠ Progress.
We’re not going to talk about how to dig those holes deeper.
How About a Puzzle
Here is a lateral thinking puzzle to get your juices going.
You are driving down the road in your car on a wild, stormy night, when you pass by a bus stop and you see three people waiting for the bus:
1. An old lady who looks as if she is about to die.
2. An old friend who once saved your life.
3. The perfect partner you have been dreaming about.
Knowing that there can only be one passenger in your car, whom would you choose?
(Think about how to solve that for a bit. The answer is at the end)
Lesson 1: Build Relationships with Investors Who Share Your Thesis
Here is one really important thing you should know.
Venture capital fund performance is related to the quality of a VC firm’s network. A VC firm’s network is a function of its team’s network (that is you). This, hopefully, should come as no surprise to you if you’ve been in venture for even 5 minutes as the importance of the network comes up frequently.
Researchers at the University of Pennsylvania analyzed this and quantified the impact in a seminal research paper they issued entitled “Whom You Know Matters: Venture Capital Networks and Investment Performance”. In it, they write:
We find that better-networked VC firms experience significantly better fund performance, as measured by the proportion of investments that are successfully exited through an IPO or a sale to another company
The measure of this quality is called network centrality. You can think of network centrality as being akin to the Google PageRank algorithm. It is a measure of your number of connections and the quality of those connections.
For example, a website that has a link from www.harvard.edu is more important than one that doesn’t. This is true for a website that has 1000 sites linking to it versus one that doesn’t. Of course, the perfect storm is when a site has links to high authority sites like Harvard.edu and lots of sites linking to it.
Venture capitalists can be assessed and analyzed similarly based on both the # and quality of their connections. That is network centrality.
I hope you’re now convinced about the importance of network. So now, we’re going to show you some ‘data hacks’ that we’ve seen VCs use to scalably increase the size of their network. Increasing your network means you see more deals, you get more information and find follow-on investors for your companies more effectively. In the market for private companies where information asymmetry is high, any way to reduce that represents a big advantage.
We’ll walk through the process and then share some tools and templates people have used successfully.
- I know some of you will cringe at some of these tactics. Remember – we’re digging new holes. They work. We’ve seen VCs work these tactics to no end.
- Some of you will wonder if the tactics will be effective if everyone is doing them. Here is a not so dirty little secret on this. 90 of you will learn these tactics by virtue of this class. Probably only 5% of you will actually do them. Yup, only 4 to 5 of you will actually do these things because they require work. I hope you’ll prove me wrong but that’s what we’ve seen.
Back to digging.
Example: Connect me with early stage digital health investors
Let’s say you and your firm are very keen on the Digital Health space. And you’re investing at the Series A and B stage. Given your industry of interest and your stage of interest, you realize that knowing all the early stage investors (at the seed and angel stages) doing deals in Digital Health companies could be a great source of dealflow and industry intelligence.
But beyond knowing who they are, your goal is to increase the size of your network meaning they think of you the next time they have a deal or are looking for a deal. Here is how we’re going to do that using data:
- Build a target list of these investors based on their prior investments
- Start building a spreadsheet with key fields on each investor
- Reach out via email (mail merge when ready to scale) to start networking like a pro
Step 1 – Build a target list
Again, you can do this in any way you like, but since you have access to CB Insights, let’s use that.
The video below will walk you through how to identify the early stage investors in digital health (here are step-by-step written instructions as well and a much more polished video for how to use ranking put together by our team). When you’re doing this, you should customize the industry filters for what is relevant for you whether it is biotech, big data or biofuels. You don’t need to do this for digital health.
With data on your investor target list in hand, it’s time to make it scale.
Step 2 – Build a spreadsheet with key data on each investor
Here is an Excel / Google Docs template modified slightly that one of our VC clients uses (used with permission). They’ve had success with these columns, but you can add to it if you want. I’d add things like Twitter handle and LinkedIn profile if I were you. But here are the core fields of this template:
- First Name
- Last Name
- Firm Name
- Their Company #1
- Their Company #2
To get email addresses, investor websites are probably the best place to look or you can use services like Data.com (owned by Salesforce) or InsideView to get those. Or if you want, you can try tools like this handy Email Permutator created by Rob Ousbey of Distilled Media. You can also try to engage your target list investors on Twitter LinkedIn or even AngelList to reach them.
I’ll explain what each of the fields above means in Step 3.
Step 3 – Reach out via email
With your target list created, you’re ready to make the magic happen and do the outreach. In the beginning, I’d do individual emails to these investors. But once you feel like you have a “formula”, you can use mail merge tools to send more emails quickly. For mail merge, we’ve seen folks who use Google Apps use Yet Another Mail Merge. If you use Microsoft Outlook, Easy Mail Merge by Outlook Apps is one we’ve seen which our clients really like.
Here is the email sent using that tempalte:
Let’s deconstruct the message a bit:
First is the subject line. There are two that we’ve heard work.
Subject: your investment in Fitbit.
Subject: Where’s wearable fitness going? Fitbit
You’re not going to make a meaningful connection just because of your email subject line, but I can guarantee if they don’t open the email, you won’t make a connection. As a result, the key is to drop a portfolio company into the headline. It piques curiosity and your goal is to get them to open the email. These are busy people just like you.
Now to the email and how you can use the mail merge to do this at scale. The email is below with mail merge fields inserted to illustrate:
Saw your investments into [Their Company#1] and [Their Company#2]. I’m a big fan of [InterestingCompany] and [InterestingBlurb].
I’m with CBI Ventures and we’ve invested in a number of companies in [IndustryOverlap] as well including [PortfolioCo1] and [PortfolioCo2].
I’d love to share some data (financing and exit trends) we’ve put together on the [IndustryOverlap] market and some trends we’re seeing in [CuriosityHook].
Do you have some time next week to chat?
Say Monday at 3pm ET?
Let me know.
3 Reasons This Works
When a few clients approached us about doing this, we were kind of blown away. It sort of debunked the whole VC as a guild of skilled artisan thing that has been perpetuated for a long time. It was a practical acknowledgement that we need to try new things and that we want to do things that scale.
And so we sat down with each of them and worked out ways to improve their processes. And the mash-up of all those learnings is what you see here.
Here is why it has worked so well for them and why it’ll work for you.
The target list is insanely focused and relevant
You’ve identified investors who have actually done deals in an industry (and/or geography, stage) that are interesting to you. It is not based on what an investor says they invest in but actual deals (where they put their money). The reason this is important is because most investors don’t actually say no to any industry immediately if you ask them about their interest in it. So using this method, you don’t waste time chasing bad leads because you’ve used data to identify investors who actually have done deals in the space and hence who share your thesis.
It also helps immensely with personalization of the message.
The spreadsheet scales
If you start doing this in a spreadsheet and get comfortable with the mail merge at some point, this can put your networking efforts on steroids. Again, as I mentioned earlier, many of you won’t do this because it requires work or because you feel that venture really is a trade of artisans and not something that scales. By virtue of the fact that you signed up for this class, I am optimistic you’ll prove me wrong 🙂
But filling out all of the fields for an investor in this spreadsheet (a single row) if you get good using some of the tools mentioned earlier along with Google News and CB Insights should take you max 5-10 minutes per potential investor contact.
Let’s say you add 5 people per day for a year, that is 250 work days x 5 people per day which equals 1250 potential contacts. Even if you get a 10% response rate (that’s way low), you now have 125 new sources of dealflow and industry intelligence. It will likely be higher.
How many industry events would you have to travel to and back from and attend to find 125 relevant investor contacts?
The email gets responses
How many VC emails have you seen or sent that say generic things like “let me know how I can be helpful”. That sounds good in theory, but you know what. It actually sucks.
Here is what it actually says:
I’ve not spent any time thinking of how I can be helpful to you. I’m going to put the onus on you to figure it out and come back to me.
I know that “how can I be helpful” line is a sacred cow in venture land, but our clients have A/B tested that line in their outreach and it doesn’t convert well because it sounds good but is really just lazy.
For the same reasons that the “let me know how I can be helpful” line doesn’t work, this email does for our VC clients. It works for a few reasons:
- It’s short
- It shows you did your homework and understood the person and their interests
- It offers specific value and creates curiosity
Those 3 things combine to get your email opened and responded to.
You’re now ready to network at scale. Start digging.
Of course, as you have success, there are things you can do to automate and make the process more efficient.
- Drip marketing – Like you, these are busy people and so your first email may get missed just because it got buried in their inbox. Setting up a cadence of follow-up emails via a drip marketing campaign is one thing we’ve seen VCs do as well to drive engagement and which has yielded great results. It is something many SaaS companies do but the concept of drip marketing can work in any situation where you’re trying to engage a “prospect”. Some sources of info on drip marketing: Wikipedia or Zapier
- CRM / dealflow system integration – You can get fancier with this and integrate data feeds from an API into your CRM or dealflow management system, but before over-engineering this, I’d recommend doing it in Excel or a Google Doc. Once this works, we can talk about these more advanced integrations.
- Going beyond the phone – The email requests a phone call but you should do what you prefer and what sells you the best. It could be coffee or a group lunch. We’ve seen clients try to get folks together via dinners or events as well. Obviously, those take time to plan and have a direct cost element (not just your time) but those are other venues you can use to connect based on your preferences.
Use Rankings on CB Insights (or any other tool) and identify 5 investors who should be part of your network who currently are not. Send me the Google doc spreadsheet filled out with the information on each investor who you want to target to add to your network.
If you want to go even further, send me an email that you’re going to use on 1 of them. I’ll take a look and suggest edits as necessary.
Please send your homework to me at firstname.lastname@example.org
Answer to the Puzzle
The old lady of course! After helping the old lady into the car, you can give your keys to your friend, and wait with your perfect partner for the bus.
If you are interested in more Lateral Thinking puzzles, you can see more here.
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