📶 The modern VC sourcing method

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Good morning 👋

If you’ve worked in venture long enough, you’ve probably tried your fair share of tech tools.

The venture game is changing, and more often than not, the best funds are using the best software to give themselves unfair advantages.

Harmonic is one of those tools, and their software helps investment teams like Craft, Accel, and YC gather more signal while wasting less time on the sourcing front.

In this article, we’ll tease what some other funds are using with their software so that you can start doing the same.

THE STANDARD

VCs spend hours studying markets, business models, and new technologies to match their investment thesis.

Ironically, the tools they use for sourcing the people and companies are still pretty far behind what you would expect. There’s a reason that the majority of VC deals are sourced primarily through referrals and personal networks.

Will this result in the best-possible outcomes? Probably not.

One thing that took me a long time to figure out: proprietary deal flow is a myth 99% of the time.

Instead, the funds that see the highest volume of deals earn that volume in one of two ways:

1. Hiring an army of analysts. This is the default for large funds with the AUM to support it, but it is unrealistic for smaller funds with a more limited budget.

2. Using software to gain more leverage. This is the way for emerging managers and smaller teams that want to create more output from less input.

These two approaches have different results and different second-order effects.

Using an army of analysts

Put yourself in the shoes of an entrepreneur. Do you want to talk to a decision maker, or do you want to talk to somebody who has a quota for the number of companies they are supposed to talk with every week?

Sure, having more people doing outbound prospecting will bring you a higher volume of deal flow, but how can you ensure the quality of that deal flow?

How do you make sure junior investors are incentivized especially when the standard is to not offer them any upside in their work?

How do you realistically review the sheer number of companies that come in without inevitably letting some of the good ones fall through the cracks?

How do you protect the brand of the fund when you have dozens of junior employees primarily evaluated on the number of deals they bring in (and not the follow-up communication with the 99% they say “no” to)?

We are biased, but these are some of the reasons we prefer a tool like Harmonic to simplify sourcing and help set up more meetings with founders you are actually looking to invest in.

Using software

The reason startups have advantages over companies 10x their size is because they can use software to 10x their output. The same approach should be applied for VCs - hire an analyst or associate and equip them to be 10x better by using software.

The first step of the equation is to identify where analysts and associates are spending their time. That answer is simple: sourcing.

Finding great companies is a full-time job and a half, and good analysts and associates exhaust every sourcing channel they can to find people worth betting on. This includes talking to investors at other funds, following funding announcements, seeing what companies are sponsoring different newsletters, and going to different events.

All of these are great, but they create a reactive sourcing strategy where you are at the mercy of whatever comes across your desk. Venture is a game predicated on outliers, and sometimes this strategy works.

We’d rather take a more proactive approach.

Enter Harmonic.

Say you’re looking for a very specific type of founder. Maybe you only want to talk to AI founders who have raised venture funding before. Maybe you want to narrow down that list even further and create a shortlist of companies that were founded over the past 18 months, have a headcount under 50, and have experienced headcount growth of at least 50% over the past 90 days.

Just feed those inputs into Harmonic, and it will spit out a hyper-relevant list of names that you can track, contact, and integrate into your CRM. It will even use AI to give other company recommendations based on your preferences, which improves as you use the tool.

THE SUMMARY

At the end of the day, wasted meetings are a huge part of being a good investor. The more meetings you take, the more conviction you have when something truly great comes across your desk.

The goal should be to spend more time in the meetings that matter and less time in the ones that don’t.

In the past, if you wanted to see every deal, you needed to hire the equivalent of an outbound sales team. Some funds still operate using this approach, but we think that is an expensive way to do business.

VCs love talking about leverage, and the best funds of tomorrow are being built with this in mind.

Especially on the sourcing front, we’ve seen more and more funds start using Harmonic and other tools to give their investment team more leverage. After using the software ourselves, we’re convinced every major fund will start using it soon.

If you’re looking to give your investment team an edge, here’s a link to get in touch with the Harmonic guys. (Mention you came through us, and they might have a deal in store for you).

Thanks for reading this far and giving us a little bit of your attention this week.

Feel free to unsubscribe whenever this stops becoming valuable to you.

- Clay and Tyler

P.S. We’re running our fourth annual VC comp survey.

If you work full-time in venture, growth equity, or private equity, this is a chance to let us know how you’re compensated, and we’ll let you know if you’re over / underpaid.

Take the 2023 VC comp survey.