This is a summary of an article published on Medium.
In venture capital, it is hard to keep track of all the start-ups in the ecosystem. They are under different verticals and are at different stages of growth. Therefore, that is where deal flow comes into play.
When talking about deal flows, there are 3 main type of flows:
- Warm, when start-ups are introduced by an acquaintance or known organisation.
- Cold, when start-ups directly contact the VC regarding its fundraising activities.
- Outbound, when VCs directly contact start-ups for investment opportunities.
Based on the study about deal flow cited by the article, majority of the deals that VCs receive are from cold deal flows (81%). However, the inverse happens when money is involved, 81% of all investments made by VCs are via warm deal flows. This shows that VCs are more comfortable in investing in start-ups that are recommended by someone they know, who might be an expert in that vertical.
Although majority of investments on start-ups are from warm deal flows, for the investments made to cold deal flow start-ups, it is shown that they required less capital to invest, have higher return of investment(ROI) and are more diverse in their founding team. The capital and ROI rates can be attributed to the effort the start-up has to undergo in order to clinch an investment, usually with better terms for the VCs.