Pro-active company scouting
There is a massive volume of innovative companies, but only a limited number that becomes successful. For the even higher number of investors, innovation managers, M&A and R&D teams competing for the same companies, it is therefore not sufficient to attend the odd conference or wait for pitches to arrive in their inbox. This has led to proactive company scouting is an essential approach for the leading players in the industry. In this blog, we will explain the benefits and the importance of proactive sourcing of companies.
What is proactive sourcing?
With proactive company scouting, teams go out to find companies themselves. Whereas with reactive company scouting, teams only process inbound leads (or target companies) that come to them. With proactive company scouting, teams must select a topic they want to be proactive in. They dedicate a proportion of their time to searching for companies that fall within their proactive scope and approach the most interesting companies that they find. The promise is that the time teams invest in proactive company scouting returns higher quality leads than reactive company scouting.
The benefits of proactive sourcing
- With proactive sourcing, your team is in control of the topics that matter as they decide what to focus on.
- Your team can avoid spending time reading and processing business plans, pitches, or solutions that are less relevant.
- Deciding not to pursue a lead you found yourself taking less time than declining an inbound lead that typically expects an explanation and some level of comfort that it was fairly assessed.
- Inbound leads will typically be biased towards lower quality. High-quality or more successful companies will be less inclined to reach out to you unless you have a significant and unique added value that is known to them. Proactive sourcing can allow teams to avoid this quality bias.
- Proactive sourcing is a way for investment funds to differentiate themselves from Fund investors (Limited partners) that are looking for teams that can generate a high-quality deal flow. They will never impress their investors by claiming that quality leads just walk into their office.
- Proactive searching brings your knowledge level to par with the management teams of the companies you are interested in, giving you a better position to assess and recognize quality companies. Only relying on inbound deal flow would mean that you are always behind the (information) curve and are the underlying party in the information asymmetry that always exists between investors and management teams.
- All the points above culminate in the main conclusion that proactive scouting leads to better decisions made on partnerships, acquisitions, or investments.
Typical obstacles for proactive company scouting
- “We already have more deal flow than we can process” is what we often hear. It is likely however that the teams that say that, are actually just receiving poor quality leads and/or take too long in processing companies, meaning their reservoir of inbound leads does never shrink(s).
- Proactive company scouting is labor intensive, and teams need to have the capacity and the right tools to get good results.
- Reaching out to companies is not something that everybody is comfortable with. There is always the risk of being declined and/or some teams might not feel that they have the mandate to enter conversations without support from management.
- You need to come up with an investment theme that is worthwhile to investigate. Most people do not have such an investment theme immediately at hand when they want to start proactive sourcing. You typically only develop worthwhile investment themes by proactive company scouting. Investigating one theme will give insights that can lead to a better theme. Only by doing it often, can you build superior ideas.
Do top-tier VCs scout proactively?
Yes, all the successful VCs that we know do so. At the same time, however, successful VCs with strong brand names typically also attract the best deals by virtue of their success. Still, we believe most VCs will recognize that proactive sourcing is required for success.
Should you stop reactive company scouting activities?
Altogether abolishing reactive sourcing might not always be possible, as people will probably always be able to find you and you will need to process and professionally respond to those leads. But let’s consider why you might not want to advertise yourself too much and boost the flow of reactive leads. The main reason is that there is only a very small chance that successful companies will come to you by themselves, especially when all your successful peers are proactively scouting and finding quality leads. In addition, your funnel management strategy should always be to spend the least amount of time assessing companies that will not make it to the next stage in your funnel. As reactive leads will typically demand a relatively high level of work to process in a professional manner, they will demand more of your deal processing capacity than they probably deserve. Therefore, we often advise new corporate VC teams that it might help them to keep a low profile as they might otherwise risk being confronted with a substantial flow of pitches from companies that are already rejected by all other VCs.
What are proactive company scouting strategies?
For each strategy, your team will need to come up with promising investment themes that could lead to quality leads. Developing good investment themes is a skill that your team must learn and is typically learned by trial and error. The learnings from investigating one investment theme should lead to a more promising subsequent investment theme. Below we will list the various strategies that all have their merits and challenges.
- Conferences: Your team can visit conferences that are focused on technology and innovation. Ask around industry experts what the most interesting conferences could be to attend
- Experts: Build a network of experts that you trust in your industry that can be your eyes and ears in spotting exciting leads.
- Databases: You can take a subscription to databases that track VC funding, which has the benefit that such databases can often give a good insight into the funding status of a company. These paid databases are mainly interesting if you focus on later stage deals. Investors that are looking for seed investments or series A will find that most of these databases are less valuable since most companies they find will have their seed or series A rounds raised already. Another challenge with these databases is that they are difficult to search if you have a specific theme you are interested in that is less common. A typically paid database will for example not have a filter for “phospholipid extraction”, just to name one of the search topics we searched for in the past. As your investment themes will most likely often be less popular (finding suitable investment opportunities in crowded investment categories is notoriously difficult), finding quality investment opportunities with those databases is difficult. To summarize: no one database is complete and searchable in the ways you want; relying on these will limit your universe of potential leads.
- Internet: When you have an investment theme you can search for sources that contain interesting companies: conferences, news feeds, top 50 lists, portfolio pages of other investors, twitter, innovation challenges, accelerator programs, etc. This is where the labor-intensive part comes in. Teams that adopt this strategy typically have a couple of analysts to perform this work.
- Data scientist: You could hire a data scientist for your team that could help you build a data driven approach whereby many sources will be frequently scraped to continuously identify new companies and whereby high growth potential companies can be spotted early by relative traction compared to similar companies. Alternatively, you could hire Venture IQ which has the platform and the experienced team to do this for you, but more on that later.
What about innovation challenges?
A warning is in place here, as Venture IQ does not have a lot of experience with running innovation challenges. These challenges feel counterintuitive to us. We do not regard them as a proactive sourcing strategy, but more of a marketing strategy. Innovation challenges can probably be a good marketing instrument and can help expose a corporate organization to innovation themes.
How Venture IQ could help with Proactive sourcing
Venture IQ has developed a data processing platform that allows you to build and screen custom datasets at scale. At the same time, it radically reduces the time it takes to discover potentially interesting target companies by scraping millions of sources, identifying companies, creating and enriching profiles for each company, and highlighting companies that show more traction than their peers. Our team of data scientists and analysts can help you set up your dedicated system on which you can collaborate with your team to assess the most interesting companies. Interested in learning more about our scouting platform and our services? Looking for more information? Reach out to us!