Open Deal Log or Proprietary Deal Flow?

For all of about 10 seconds the other day, we threw around the idea here of a completely public deal log--being completely open about every deal that comes into the shop.

Now, I think the reality of the situation is that our LPs would think we had lost our minds, and probably a lot of entrepreneurs might think that, too, so its kind of a non-starter.  Still, the though exercise of what would actually happen doeshed some interesting light on the notion of proprietary deal flow and market pricing.

Brad Twohig from Insight, a later stage firm here in NYC, debated this over IM yesterday and so he'll be posting a response to this post.  Nothing like a little friendly VC analyst blogger debate.

I think the first thing that people would assume would happen is that you would get all your deals swiped out from under you.  I think that assumes that there is such a thing as truly proprietary deal flow.  Is there?

I actually think there is, but not because you're the only VC an entrepreneur talks to.  There is the case where you're the only VC that an entrepreneur wants to talk to, most of the time because of a previous relationship.  If you've backed someone's previous two startups with great success, its unlikely the entrepreneur is going to go searching for another partner...at least not until you get a look at it.  In this case, you could probably be as public as you want and it wouldn't matter.

The notion of partnership is key, especially in the early stage.  Entrepreneurs are looking for someone who is going to help them build their business, not just a check. 

You probably won't have the case, though, where you never worked wth the company before and somehow, by being faster or turning over more rocks, you're the only one who gets a look at a deal.  Entrepreneurs are incentivized to test the market, not jut to get an indication of pricing, but of terms and even more than that, to hear several different people give feedback on where they should take their business.  Larry Rusoff from PEQM (which used to be the GM pension fund) had a great line when it came to claims of people getting low priced deals because they were proprietary.  He said, "I get my living room rug cleaned and I get two quotes..."  Back then, we were talking about proprietary deal flow of secondary partnership interests--interests that could be worth hundreds of millions of dollars.  Obviously they were going to test the market, and I'm pretty sure the same still aplies in early stage deals.  Entrepreneurs can be counted on to get a good sense of what current market pricing for their deal is, even is they aren't seriously considering a lot of those bids.

That brings me to the notion that the presence of more bids will necessarily drive the price up.  I'm not sure why that would be the case because its not like we're making the bid/ask pubic.  Its a blind auction and so even with 20 term sheets, one would imagine they'll all gravitate around a fair number anyway.  If there is an extreme outlier, I'd like to believe that the presense of more bids makes that price seem silly.  I mean, who really wants to accept a term sheet from a VC just tossing around grossly above market term sheets.  I think entrepreneurs are savvy enough to know that their best chance of success is when the term sheet is fair and works for everyone involved.

The other thing that I believe strongly about is the idea that there's a "right" VC, or at least a limited number of them, for every deal, and that chances are they're all seeing all the same deals anyway.  Most good entrepreneurs do their homework to figure out who are the three or four VCs with a track record of success in their space and a deep domain expertise.  And, I think the reality is that the number is really that low.  The venture market is so broad, from tech to retail to heathcare.  The number of VCs with successful track records going back more than a few years pretty small.  I doubt you're going to find more than a handful of people who are good fits for a deal who have also has some success in that area before.  So if you're doing chips, you're pretty likely to walk through the doors of USVP, Interwest, or Sevin Rosen and at the same time, I think someone without their experience would be hardpressed to out-chip them.

We've learned from our blogs that public dialogue, if it is positive, insightful, sincere, etc. is just as much "protection" from competition as keeping what we're looking at secret.  I mean, in all honesty, has it really been that difficult to figure out what we're working on here and who we're talking to?  Anyone who reads our blogs could probably make some pretty good guesses at what our deal log looks like... at least who we're really engaged in discussion with.  And by our combined public and private discussion, we're hoping that entreprenuers see us as the right kind of financial partners for their projects--people who understand what they're trying to build and feel the same way about the opportunity.

Plus, being public about your deal log would prevent venture fratricide and help us to fish out other people playing in the same space that might have better offerings, or just market confirmation that we were working with the right folks.

Now, of course there might be places where it didn't work...  like late stage where you're doing more financing and less company building, but I'm pretty sure our business wouldn't implode if we just opened up our deal log to the world.

Of course, that doesn't mean we're going to try it anytime soon either.  :)