"We end up funding only 1.234567% of the number of deals evaluated!"
- VCs humblebragging!
What are they trying to say?
Their threshold for investment is so high, that not many companies can clear it
Their scope is so wide, that they evaluate every company they can find
These are neither awe-inspiring nor productive. It is no secret that most VCs consider the number of deals screened every year as a barometer for 'hustle' and 'grind'.
Gary Vee would not be proud fellas!
Consider the following
A VC firm with 2 Partners & 4 associates, screens and evaluates 400 companies a year and ends up funding 12 of them, implying a 3% acceptance. Cool. If we dig a bit deeper and divide the effort among the team, it means one associate probably screened 8 deals a month, or 2 a week (yes she was grateful for a 2 week leave!). Is this really possible to do with the same level of effort, engagement, productivity, and relationship?
Screening a deal, taking it up for evaluation, conducting diligence, primary & secondary research, reference checks, product demos, investment memos, partner meetings, IC meetings, term sheet negotiations, SHA negotiations, closing a deal, and finally going from a company to a portfolio company takes a huge amount of effort.
If you want to fund 12 companies a year, is it really important to screen hundreds?
A VC firm with 1 Associate and 1 Partner knows they can not physically screen and evaluate three-to-five hundred deals a year! But even they have to fund 12 companies a year and deploy that capital in the first few years of the fund. So, they decide to be more productive - they set a very high threshold of parameters beyond which they do not evaluate companies. They work with a narrow scope so as to only spend time on companies that they believe they can potentially fund.
In doing so, while they generate sizeable inbound interest, they only end up evaluating a handful of companies that they really believe in. A less number of companies to evaluate mean more time available to spend per company, thereby providing them the ability to engage deeply and develop an insight that other investors do not have the liberty to.
Guess what, they are still able to fund 12 companies a year!
At Malpani Ventures, we believe QUALITY and not QUANTITY matters in deal flow. We do not have internal targets to present 'X' number of deals for funding every week/month/year. While we do measure our acceptance rate, we see a low number not as a badge of honor for doing more work than the next investor - but as a reminder to not spend a lot of time doing unproductive things. The number of deals screened per year is a vanity metric that we do not fall for. Being a family office, we have the liberty of deploying capital faster or slower than others.
If an investment team spends the majority of its time finding 'the next big thing', how will it find time to engage with the existing next big things in the portfolio?
And this is precisely why, at Malpani Ventures, we are fiercely protective of our time. Just as capital is a finite resource for most investors and funds, excluding some Japanese & American ones, time is a finite resource for our investment team. We have very high threshold parameters for companies we taken from incoming deals to evaluation. It does not behoove us to spend time evaluating 20 companies we would never fund, thereby expending precious bandwidth of both - the founders of those companies and our investment team. Any company that does not fit our investment thesis, will be a quick no. And for companies we evaluate but do not take to the next stage, we offer explicit reasons as to why we can not take the evaluation ahead - signifying our level of engagement in understanding the company, and as a mark of respect for the founders.