Week 2 – Sourcing

Who knew there were so many different investing strategies, right?! Until I read the “sourcing” section in Winning Angels: The 7 Fundamentals of Early Stage Investing, I would have never imagined there were so many different strategies. I always thought first person shooter video games were complicated (that’s one of the reasons I never played them…the other is that my hand eye coordination doesn’t work that fast!), but they have nothing on sourcing investments. I did, however, start to notice some common themes in the strategies.

The first common theme that I noticed is that the vast majority of the strategies were meant to attract 1-5 medium to high-quality deals. There are two parts to this theme, in my opinion. Investors are NOT looking for low-quality deals…and why should they? It doesn’t make sense to invest in someone who is clearly doing things wrong. As an aspiring entrepreneur, it is nice to know that I can’t just “go out on a limb” and expect investment. It helps an entrepreneur to stay focused on making their business one that attracts investors. The other part to this theme is the number of candidates. Even though many of the investors mentioned in the book have seen many deals, they invest in much fewer than they review. This shows me, as the entrepreneur, the extremely competitive nature of seeking investment. This can help to reassure an entrepreneur that their deal has to look great to an investor.

The next common theme that I noticed was sharing. Just like many other people who think they know something about investing, I got much of my knowledge from watching Shark Tank before enrolling in a Masters degree program in entrepreneurship. When this book mentioned many instances of sharing, I couldn’t help but think back to the show when the Sharks would go in on deals together. I also thought about the time they wouldn’t want to share a deal. Lastly, I thought about how a solo Shark would almost always lose to Sharks that went in on a deal together. The reason the entrepreneur(s) went with multiple Sharks: niche experience. The same phenomenon was described in this section. Angel investors were mentioned sharing deals, or even working exclusively in groups, for the shared experiences in vetting. This would make each investors’ job a bit easier and the deals a bit less risky.

Speaking of vetting, that’s the name of the game when it comes to sourcing! Some investors won’t look past the valuation, some will interview, some prefer to only look at pre-vetted deals. The point here is this: each one has been vetted in some way or another. This makes sense though…nobody wants a babysitter that hasn’t been screened to watch their kids, right? Vetting is how an investor knows which deals they need to focus their energy and effort on.

With the common themes I found in the Sourcing section, my takeaway is that as an entrepreneur, I need to have a great team, promising numbers, and an excellent business plan to gain an investor. As an investor, however, seeking help from colleagues, sharing deals, and multiple vetting stages will ensure I am only investing in medium to high-quality deals.

4 Comments

  1. Hi Alex,
    I love that you referenced Shark Tank in this post. I think that show has given so many a broader, albeit a highly entertaining and significantly streamlined, view of entrepreneurship and investment. Certainly, there is strength in multiple investors, as you point out, because it brings together more knowledge and experience as well as money. This approach should go well, but do you think that having a pool of investors might also be problematic for an entrepreneur?

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  2. Hi Alex,
    Your post a refreshing perspective that highlights why an entrepreneur could potentially benefit from having a few investors interested in helping their venture. I also liked the comparison to Shark Tank and how you put yourself in their shoes when it comes to vetting a business because depending on who invests and how much the entrepreneur has already invested themselves in the company can make or break a deal.
    thank you for sharing

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  3. Shark Tank is great. Something I’m sure any viewer of the show has noticed is that if you don’t have your numbers committed to heart, they eat you alive. It definitely gives you an appreciation of what that group tends to zero in on when they get a pitch. By extension, it’s worthwhile for the entrepreneur to study on why those particular numbers matter. Nice post.

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  4. Hi Alex,
    Thanks for sharing – I also enjoy the show Shark Tank; this book has really given me a better understanding of why the sharks makes some of the decisions they do; I use to think they were being selfish..lol; but after reading about sourcing – it is a great opportunity to gain more than lose. They always say, there is power in numbers. Also, there is also sharing of information, new fresh perspectives when you are in a group.

    Like

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