Screening due diligence #1: Quality of Source

From what source did the deal come or by whom was the deal referred?

A simple and effective screening mechanism used by many venture capitalists is to scrutinize the routes from which deals emerge. Venture capitalists overwhelmingly tend to favor deals referred to them by trusted sources. Kevin Fong, general partner of the Mayfield Fund, states that his firm relies consistently and heavily on its network of lawyers, portfolio companies, and other respected contacts to uncover the best deals. According to John Doerr, general partner of Kleiner Perkins Caufield & Byers, of the over 250 ventures in which his firm has invested, almost everyone was referred by a trusted source: 'a CEO, an engineer, a lawyer, friend, or another venture capitalist - known to both the founders and [the] partnership.' The reason that venture capitalists take this approach is that they usually know much more about the quality of the source by which a deal was referred than about the quality of the referred deal itself. It makes sense, then, for them to use the quality of the source of the deal, which is well known, as a rough proxy for the quality of the deal, which is not.