Venture Capital and Social Media: A New Numbers Game

As recently reported in the Harvard Business Review, there is a new and unlikely entrant into the emerging Social Media arena:  The venture capital firm.

Normally circumspect about their deal origination techniques, venture capital and private equity investors are increasingly placing their cards in full view on the Social Media table.

According to David Teten, the CEO of Teten Advisors, an investment bank specializing in sourcing new investments, and his co-author Chris Farmer, a managing partner at Ignition Search Partners, a hybrid venture search firm, a “first-ever study of deal-origination best practices at more than 150 VC and PE firms, along with other research, shows that some of the top-performing investors increasingly use such technologies to discuss the very information they once held close to the vest.”

For aficionados of Social Media, it is no surprise that B2C companies, like the Ford Motor Company, Mountain Dew Beverages and Dunkin’ Donuts are taking full advantage of emerging media and revolutionizing their business practices.  However, what would motivate a venture capital and private equity firm to join in the Social Media conversation?  The answer is deal flow.

As is axiomatic in most other industries, the numbers game required to generate new business in venture capital follows the traditional cycle of identifying prospects, meeting with them under favorable circumstances, negotiating and closing sales.  Just as a typical automobile dealer must keep 500 cars in inventory to sell 200 cars per month, the typical venture capital firm must review eighty opportunities, meet with twenty management groups, negotiate with four and perform due diligence on three, to result in one investment.

Mr. Teten’s firm “specializes in using Social Media and other internet technologies to source proprietary deals, which typically provide a buyer with an informational advantage and in some cases a lower purchase multiple.”

Is this Social Media approach a trend that might develop in other traditionally guarded industries?  Perhaps.  If sharing details about their investment strategy propels venture capitalists into successful targets of opportunity, and if that Social Media engagement results in an improvement over keeping their cards off the table, then other financial services and insurance companies may follow suit.

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