Deal Sharing Dynamics Among Early Stage Investors

A friend on Twitter recently requested a blog post, and I thought it was a good idea. He wrote: “would love nuanced seed stage view on dealflow and the sharing dynamics amongst early stage firms/super angels.” Well, here you go, with the caveat I can only (1) explain what I do, as that’s what I know, and (2) generalize a bit on what I observe, though can’t say so with absolute certainty.

I try to invest at two points in a company’s cycle. One, very, very early, too early for even the microVC funds to get involved. Two, when a round has come together, and I meet the founder who has allocated some space for individuals like me, even though a firm is leading. I’m happy letting the market dictate things for now, and this gives me a good deal of latitude to write different check sizes and swing early or late depending on the specific case.

In situations where I’ve decided to invest (whether early or toward the end of the round), I’ll ask the entrepreneur if there’s room left and if I can help fill out the round. Some times, the founder will be all set; other times, they’ll say, “sure!” In those cases, I first email the LPs in Haystack, as I’ve initially committed to the company out of a joint fund, and on occasion (though it’s rare), someone will like the option to invest more directly. Then, after 24 hours, I will email a specific list I’ve created of angels, microVCs, bigVCs, family offices, and foundations that I all know personally. There are about 45-50 people on the list. The criteria for being on the list is simple — do I know the person and would I feel comfortable sending a founder to them in the event there was mutual interest in meeting. (I’ve only had to remove one person from the list.) There are also cases where syndicating on AngelList makes sense, as I’ve written about earlier.

The reason I elected to create this email list is that because I’m investing so early, there’s not much data to work off of other than the fact that I’ve vetted the opportunity in some way. So, instead, I just email the list and everyone on the list gets the email at the same time. They’re free to act on it if they choose, or simply ignore it. Very lightweight. On rare occasions, something will be very tailored to another investor I know, and in those cases, I’ll personally reach out to that investor, but I’d say that’s happened less than 10 times.

After doing this email sharing list for about a year, it’s been interesting to see some patterns emerge. Most people don’t reply, as I’m sure they’re inundated with dealflow these days. Some people habitually love to meet new founders, and some bigger VCs like to meet to build a relationship early. Some people who follow-on an investment write back to say “thank you” or give feedback, and some just move on to the next thing. A few people will share back in sort of a reciprocal way, and some won’t. I don’t have any expectations around it because, at the end of the day, I go early and direct with founders and it’s all about getting them the right investors and dollar amounts once I’ve committed.

For those who nerd out on VC happenings on Twitter, you may notice lots of “small A” rounds ($2-5m level) getting done by the same cast of syndicate microVC firms quite often. I’d gather many of them share deals based on years of working together and relationships. Companies that raise these new “small A” rounds need runway to breathe, and when you unpack how these microVC firms are capitalized and their check sizes, it makes sense they collaborate often and work together on forming rounds. I’d also imagine, however, that there’s lots of jockeying and “hey, can you make room for me?” texts and emails going on to get into deals, and if something heats up in this environment with strong signals (say, the right branded investor, getting into YC, and having something unique), that company could raise way more than they need…there’s an oversupply of money for those companies, so they have to choose and or cut down peoples’ allocations. This is part of a challenge facing microVC stage, which I’ve written about earlier.

Ultimately, I’m more of a wallflower to all of this. I’m still learning. Sometimes I time things well or move early enough, and sometimes, I’m a shade too late or just not making the cut to get into a deal. This is also why I spend time speaking and writing about what I’m interested in, with the hopes that some founders will reach out to me, even if early, to talk and brainstorm. I may miss things this way, but for now, it provides calmer waters to swim in.

Haystack is written by Semil Shah, and is published under a Creative Commons BY-NC-SA license. Copyright © 2018 Semil Shah.

“I write this not for the many, but for you; each of us is enough of an audience for the other.”— Epicurus