Most people think the way deals work inside a VC firm is that the opportunity comes into our firm, we meet with the team, we talk about it, we do some research (due diligence), we have some more meetings, we do some more research, and then we make a decision, and either invest or pass on the opportunity. And that is true for many, possibly even most of the opportunities that come into our firm.
But there is another approach and I like to call it hanging around the rim. We like to source our opportunities directly which means we go out and find the most interesting companies working in the markets we find interesting. And about half the opportunities we consider are sourced directly by us.
Many of these companies are not an immediate investment opportunity for us for various reasons. It could be that the entrepreneur isn’t ready to raise capital. It could be that the opportunity is too early for us and we need to see more development. It could be that the gap between what the entrepreneur thinks the business is worth and what we think its worth is too large. It could be that there is a key product in development and we want to see it come out of development and launch commercially. There are many reasons why a company might not be an immediate investment opportuntiy for us.
If the company is working in an interesting market and if we like the team, we will generally try to hang around the rim in these situations. We are waiting for the moment when the investment opportunity becomes attractive to us. But you can’t simply hang around the rim and be a nuisance. That is the surest way to annoy an entrepreneur I know of.
But if you can help the entrepreneur, maybe by introducing them to some interim funding (via angels?) or to some additional management team members, they might let you hang around the rim.
Grabbing the rebound and putting the shot back is always a higher percentage shot than the outside shot. If you can position your firm to have those opportunities with high quality entrepreneurs, its a great thing. But hanging around the rim takes work and you have to do it well in order to make it work.
Earlier this week in NYC, Ozzy, Tony, Geezer, and Bill got the recognition they deserve. Black Sabbath was inducted into the rock and roll hall of fame. It was only about ten years too late. These guys invented much of the heavy metal genre.