Our data-driven approach to VC

This article was originally published in MSM's Medium Account here.

In MSM, we invested in 37 companies in the past 3.5 years, putting the average at one investment per month. To invest in these 37 companies, the MSM investment team assessed more than 15,000 opportunities throughout these 3.5 years. But where did we find these opportunities? In this article, we break down how our investment funnel used to be structured and how we applied a data-driven analysis to change how we source new investment opportunities in the impact sphere.

From a venture capital perspective, having a strong pipeline of potential investment opportunities is crucial. A pipeline refers to the collection of potential investments that a VC firm evaluates and decides whether to pursue or not. To have a steady stream of potential investments, VCs need to diversify their sources of leads and opportunities.

Where do we find investment opportunities?

MSM ensures a high-volume funnel mainly through 6 sources/networks:

Co-investors: strong relations with other funds that operate in the same stage as MSM are essential to access a high-value and curated list of opportunities. The investment and growth teams have been developing these relations with the aim of positioning MSM as the impact partner of choice for early-stage funds across Europe.
Accelerators: accelerators that target early-stage companies are a great source to feed the top of the funnel. In particular, MSM relies on our partner maze X, which targets newly-founded impact-driven teams. This close partnership allows MSM to have an insider view of the startups and follow their progress throughout the program. MSM has invested in 3 companies participating in the maze x program, accounting for 8% of our portfolio.
Referral Network: MSM also taps into our close community of founders to access interesting opportunities vetted by them. These include our portfolio founders, MSM Venture Partners (who are part of our extended team and support us with sourcing and our founders with growth), and the founders we’ve interacted with across time. Still, we did not necessarily invest in their companies.
Direct inbound: As part of our platform work, MSM also wanted to ensure that founders who could not reach us through their networks and enjoy what VCs call a warm intro have the opportunity to share with us their companies and investment opportunities. For this, we’ve created a section on our website where founders can send this information — see here. We have a good example in our portfolio where a direct LinkedIn message resulted in one of our first investments — kudos to tl;dv for the initiative.
Direct outreach: Part of the opportunities MSM assesses come from the proactive work that our team does by identifying promising sectors we would like to discover and potentially invest in. For this workstream, MSM usually conducts market research, most often in the format of a market mapping that we publish, to identify the early-stage companies in that sector that we would like to reach out to. The final step is to find someone in our network to introduce us to the founders or to cold email (aka stalking them on Linkedin).
Events: Tech events are a good source of volume and to be exposed to several ventures at once. In the early days of MSM, we relied on these events to grow MSM as a brand name for impact and to increase the top of the funnel of our pipeline.

However, not all sources result in the same outputs.

Since I started my efforts to build my network as an investor, it didn’t take much time to understand that volume and value are very different outcomes and usually go in different directions. Of course, VC is a numbers game — you need to increase your top of the funnel to have a diverse number of opportunities to assess and choose the best ~1% out of it. However, the sources that give you a big volume of investment ideas are not necessarily the ones that give you high-quality ones.

As described by our head of platform in the article How we built a VC platform to serve impact founders across Europe, one of the principles of our growth platform is to follow the Pareto principle. This means that we take an 80:20 approach, and, in this case, our goal is to focus on developing relationships with the few sources that bring us the most valuable ideas. To understand if we were allocating our resources in the best way possible, we decided to track the data about sources of venture referral.

The results were crucial to inform the allocation of resources towards relationship-building with the sources of high-quality ideas.

Learning #1 Spend time with your biggest advocates

By applying the Pareto principle, it becomes evident that two of the sources of investment ideas that result in more outputs (high-quality companies discussed in MSM IC) when compared to the inputs (number of investment referrals) applied are co-investors and our portfolio companies.

This means that our champions are those with whom we spend valuable time and build a relationship of trust and collaboration. However, showing your value as an investor takes time — both with founders and investors.

With founders, we found that it is crucial to spend proper time in portfolio management to demonstrate the value that you can add as an investor. If the founders in your portfolio recommend you to others in their community, it’s a good indication that you are doing a good job as an investor. Leveraging founder’s networks gives us a competitive edge in identifying vetted, promising startups in the early stages. This has been particularly important for us as impact communities have a tight link, and founders rely on these communities for fundraising support and referrals.

“The best source of deal flow for venture capitalists are the founders. If you can build a reputation as a supportive and value-additive investor, founders will come to you with their best ideas.” — Fred Wilson, venture capitalist at Union Square Ventures

With co-investors, it is important to spend time with those whose opinion you value, like to share board seats and ultimately like to spend time with as they are interesting people to be around. Knowing a lot of people only takes you so far, as you need to dedicate time to building those relationships if you want to get beyond the name-dropping phase in your catch-up calls. Sharing your opinion about the world, sharing experiences and learnings from your portfolio, collaborating in investment memos and co-authoring articles are some examples of ways we have been deepening these relationships.

Building your personal network as an investor is one of the most important tasks in the job, as this is what will allow you to have access to interesting opportunities before others (crucial for early-stage investors). Just like in any other relationship that you value, you need to dedicate time to those that you like and cherish.

Learning #2 Deconstructing our biases

Before collecting and analysing this data, we thought that tech events (such as Websummit, etc.) could generate interesting ideas for new investments. However, as you can see in the funnel above, despite receiving 10% of the opportunities we source from events, we never invested in a Company we met there.

Events are a good source of volume; they can add a lot of companies to your top of the funnel and add a lot of investors to your contact list. However, it is challenging to add value and build relationships in these hectic setups. Thus, we started to look at events as a way to meet targeted people, with the aim of deepening those relations later on.

So, what did we change in our process?

We decided to allocate our resources to portfolio management and spend more time with founders to prove our value as investors.
We decided to build a Venture Partner programme with people (seasoned founders and investors) that know our value and are well-positioned to recommend it to other founders.
We mapped our best friends — the VCs with whom we have relevant relationships and exchange value on a regular basis (in the form of board meetings, catch-up calls, coffees, drinks, you name it). Then, we focused on nurturing those relationships.
We built content on areas we were curious about and built a thesis around to showcase our opinions and thesis to founders. See here our article about carbon measurement and here and here our mapping and thoughts on the mental health space.

At MSM, we are hyper-focused on finding the best impact opportunities of our time and building a structure to help these companies grow their impact. To test if our strategy is getting us any closer to achieving this goal, we continue to gather data about our processes, learn, and iterate to optimise how we work as a team and support our portfolio companies. This data-driven mindset forces us to continually reassess perceptions and methods and then adapt; in this case, by reinforcing an understanding that the depth of our relationships is the best predictor of the quality of the investment ideas our network provides. In many ways, there is nothing particularly novel in this; it is something that we would intuitively expect to be the case. Venture is at its core about relationships, and the data shows that this is as empirically true as it is intuitively expected. Keep checking this channel for our next learnings 👀