How to Build a Deal Sourcing Army

The side effect of seeing so many deals is that you’ll develop strong pattern recognition. You’ll begin to see why certain companies are getting funded over others and what fundamentals you should hone in on.

I have 17 of the country's top investors sourcing deals for me.

They have a great track record. Collectively, they’ve invested in companies like Coinbase, Twitter, Lattice, Lyft, and Airbnb.

The best part? I only pay them when they perform. 

This is the story of how I built a deal sourcing army.

Let’s dig in!

Can you see the opportunity?

To capitalize on this opportunity, you need to recognize the significance of a very specific trend that's fundamentally changing the VC ecosystem.

This trend is the rise of the 💸 Operator-Angel 💸. 

Operator Angel’s are typically successful entrepreneurs that also spend some of their time investing in early-stage companies.

Here's a few examples of operator angels: They’re running successful companies & actively investing.

Over the last few years, this group of investors has come into a lot of money, and is fundamentally changing the dynamics of early stage startup investing.

I’m not the only one excited about this shift...

Here’s a conversation between Scott Belsky, Chief Product Officer at Adobe & Venture Investor Harry Stebbings.

So how is this happening? Let's break it down further. 

When a startup CEO is raising their first round of capital, they ask other entrepreneurs to invest small checks of $5k to $25k to help them get the business off the ground.

Other entrepreneurs are great investors for a few reasons: 

  • They know the struggle: They are in the trenches building their own business and have a deep understanding of current startup challenges. 
  • They move quickly: They don’t have the operational anchors of a traditional VC. 
  • They are value-add investors: They have deep industry knowledge and strong connections within the startup community.

There is one glarding problem though...operator angels are poor 🥺.

Not actually poor, but relatively poor 😄.

High-growth startups require a substantial amount of capital to grow, and unless these angels have very deep pockets, startups need to find alternate sources of funding. 

This is where venture capital firms enter the picture - they have the capital and appetite to invest the $500k to $1M+ necessary to take the business through its next stage of growth.

That is...until now.

With platforms like AngelList, operator angels with a good track record of investing can now start their own rolling funds and syndicates, enabling them to invest much larger checks into early-stage companies.

Here’s an example: Shaan Puri, angel investor and host of the popular podcast My First Million, set out to raise a $1M rolling fund, entirely from strangers, within 21 days.

The result? 

He blew past this goal, raising a $2.5M rolling fund. 100% via twitter.

So what does this mean for you?

If operator angels have access to more capital, competition will increase, and venture capital funds will be forced to invest at a later stage where they can more effectively deploy their $100M+ funds.

The Result (and my prediction)

Operator angels and specialist micro-funds will increasingly dominate the early stage investing ecosystem becoming the primary funders of the country's top young companies. 

To compete, VCs will raise larger funds and invest in later stage companies.

This leaves us with an interesting opportunity.

We can back these top operator angels by directly investing in their rolling funds and syndicates.

How to build your army!

Step 1: Sign up for AngelList and join syndicates

  • By signing up for syndicates led by top operator angels, you get first-right of refusal to invest in the best early-stage companies...a right that used to be reserved for high net worth individuals and institutions.

Step 2: Monitor The Deal Flow

  • You’ll begin to receive emails from the syndicates that you follow. Typically, they’ll include a company fundraising deck and investment memo, which outlines the investors rationale for supporting this company.

I consume these things like coffee ☕...5 a day (is that healthy?)

The very best way to learn about startup investing is to submerge yourself in these investment memos and fundraising decks. Over time you’ll begin to pick up some interesting patterns.

What are my results from this strategy?

  • High quality deal flow: These investors send me ~30 really interesting deals per month.
  • Top co-investors: I get to invest alongside some of the country's top investors.  
  • I pay when they perform: Most syndicates have a carry fee of 20%. Meaning if the company exits, I pay them 20% of the profits. Not a bad deal considering they do all the work. This is a #winwin. 

I hope this strategy helps you fill your deal funnel with some really exciting investment opportunities! 

The side effect of seeing so many deals is that you’ll develop strong pattern recognition. You’ll begin to see why certain companies are getting funded over others and what fundamentals you should hone in on.

Thanks all. See you next week ✌️