Sourcing, Screening and Investment Themes: Case Analysis and Recommendations

Case: Should Arbor Peak have sourced RelayOps?

Hindsight case: RelayOps metrics at intro were $980K ARR, 115% NRR, burning $250K/month. Two competitors in diligence. You write the recommendation: pursue lead, follow, or pass.

Case work forces explicit weights on theme, metrics, exit math, and team gaps.

Case facts summary

Product: incident routing integrated with Slack and PagerDuty. Buyers: mid-market tech. Pricing: $14K ACV expanding with seats.

Team: strong technical founders, no VP Sales. Cap table clean post-seed.

Recommendation framework

Score theme fit, market size, metrics vs benchmark, team, deal dynamics, fund ownership needs. Weight fund ownership heavily in late deployment.

RelayOps scores high on theme and metrics, medium on team gaps, high on competitive urgency.

Kill criteria check

No kills triggered on integrity or retention. CTO bandwidth flagged but mitigable with hire.

Proceed to lead with milestones on sales leadership hire.

Part A: Scores

Part A: Target funds

Tier 1: Arbor Peak, Ridge Infra (theme + reserves). Tier 2: generalist growth funds (higher pre, less help). Decision: prioritize Tier 1 given runway and Series B path.

Deep dive: Deal flow quality vs quantity

Sourcing is often misread as a volume game. Top firms optimize for ranked flow: deals where the firm has a right to win because of brand, expertise, or network. Arbor Peak receives thousands of inbound decks annually but partners take fewer than 200 first meetings. RelayOps entered through a portfolio CTO referral, which is high-trust channel flow with better conversion than cold inbound.

Screening transforms meetings into milestones: first partner meeting, full partner meeting, diligence, term sheet, close. Each gate has explicit kill criteria so the firm does not confuse activity with progress. A company can be interesting for learning but still fail the fund fit screen if ownership or exit scale is insufficient.

Investment themes focus partner time. Infrastructure SaaS for developers is a theme where Arbor Peak claims edge. Consumer social is not. Themes are not permanent; they update when technology shifts create new platforms. Founders should research a firm's last ten investments before pitching; misfit theme pitches waste both sides' time.

Screening also includes integrity checks early: cap table surprises, undisclosed co-founders, exaggerated metrics. RelayOps data room included customer reference calls and raw billing exports, not only a polished deck. That discipline prevents term sheet retrades that destroy trust.

Deep dive: Competitive processes and signaling

When multiple funds circle RelayOps, partners manage signaling carefully. Offering a fast term sheet without diligence depth can win the deal but increases blow-up risk. Slow processes lose deals but improve underwriting. Arbor Peak balanced with a 10-day exclusivity after streamlined diligence.

Founders can misuse competitive tension. Claiming false rival term sheets erodes trust and can trigger reference checks among VCs. Credible competition requires named leads and written ranges.

For investors, losing RelayOps to a rival is not only financial; it is information that infra SaaS pricing is moving. Firms update comp databases and may accelerate outreach to similar companies.

Signaling extends to pass emails. Respectful passes with clear reasons preserve relationship for future rounds or executive hires.

Deep dive: Founder fundraising process mirroring VC screens

Maya ran a CRM of 30 funds ranked by theme fit, stage, and reserves. She asked warm intros only after preparing a metrics PDF: ARR, NRR, burn, runway, pipeline, cap table. This mirrors investor screening and increases meeting quality.

She tracked kill criteria on funds too: no reserves, portfolio conflict with PagerDuty integration partner, or no partner who understood SRE buyers. Founder kill criteria prevent wasted weeks.

Weekly fundraising standups reviewed stages like a VC pipeline: intro sent, partner meeting scheduled, diligence list, term sheet items. Operating discipline impresses investors because it predicts post-close execution.

Extended teaching section: reading venture decisions as cash flows

Venture investing is a chain of cash flows separated by years. LPs commit cash to the fund. The fund calls cash when deals close. RelayOps receives cash at Series A close and burns it monthly to produce ARR. If the company succeeds, strategics or public markets return cash to the fund. The fund distributes cash to LPs after carry. Every classroom shortcut that skips a link in that chain creates graduates who argue about valuation without connecting to DPI.

When Arbor Peak models RelayOps, three cash moments matter most: day-zero check size, follow-on reserve deployment, and exit proceeds net of preferences. Day-zero ownership comes from post-money math. Follow-on ownership depends on pro-rata and outside investor pricing. Exit proceeds depend on preference stack and conversion decisions. Founders who understand only day-zero math are surprised when a good exit still disappoints because of preference mechanics or prior round structures.

Fund-level cash is aggregated across dozens of names. A single RelayOps returning 5x on $10M deployed is $50M toward a $750M TVPI target on a $250M fund. That sounds small until you remember many positions return 0-1x. The fund needs multiple RelayOps-scale outcomes, not one. That is why partners pass profitable but small-outcome businesses: they do not move the aggregate cash return enough to justify partner time and reserve lockup.

Practice translating any headline into cash: "20% ownership" times "exit price" equals "gross proceeds before preference." "Gross proceeds" minus "preference stack effects" equals "what investors actually receive." "Investor receipts" divided by "invested capital" equals "MOIC." MOIC weighted across the portfolio plus fee drag feeds TVPI and eventually DPI. Repeat until automatic.

Extended teaching section: stakeholder memos you should be able to draft

Three micro-memos should be easy after each ENT 405 lesson. First, the LP memo sentence: "Fund IV led RelayOps at $32M pre because infra SaaS retention supported ownership near 20% and a credible $300M exit path contributing to TVPI." Second, the founder memo sentence: "We chose Arbor Peak at lower pre because reserves and hiring support reduced Series B death risk with 3.9 months runway." Third, the associate diligence sentence: "ARR verified within 2% of billing export; NRR 118% supported by six references; VP Sales gap mitigated by funded hire."

If you cannot draft all three, you learned vocabulary without learning roles. Rotate which memo you write in practice problems so you do not default to founder-only thinking. Investors who never practice founder tradeoffs misprice competitive rounds. Founders who never practice fund math pick wrong leads. LPs who never practice diligence grading overtrust GP marks.

Tables in this course are training wheels. On the job, partners still build tables, but the decision is sentences backed by numbers. Use the tables here until the sentences come naturally. Then rebuild the tables from the sentences under time pressure. That is the fluency bar ENT 405 sets for technical mid-course lessons.

Extended teaching section: RelayOps milestone scorecard template

Copy this template into your workbook and update quarterly.

Arbor Peak ties $5M reserve intent to rows in this scorecard. Founders should negotiate which milestones are commercial vs cosmetic. Investors should avoid milestone laundry lists that micromanage product. The ENT 405 balance is a handful of measurable outcomes linked to capital and governance, not daily task management.

Variance commentary matters as much as the table. If ARR beats plan but NRR slips, the memo explains whether expansion masked churn in large accounts or whether small accounts are dying. Single-metric celebration is how boards get surprised two quarters later. Write variance in prose, not emoji dashboards.

Extended teaching section: term sheet and memo crosswalk

Every economic term in a term sheet should appear in the investment memo with a number attached. Pre-money $32M. Raise $8M. Post-money $40M. Ownership target 20% fully diluted. Liquidation preference 1x non-participating. Option pool refresh 12% pre-money. Pro-rata for major investors. Board: four seats, one investor. Reserve intent $5M on ARR and NRR gates.

If the memo and term sheet disagree, you have a process failure, not a negotiation victory. Associates earn trust by catching mismatches before counsel drafts definitive agreements. Founders earn trust by refusing to sign term sheets they cannot map to a cap table model.

Crosswalk practice: open any sample NVCA term sheet and label each section with the unit where ENT 405 taught it. Economics sections map to Units 1 and 4. Control maps to Unit 5. Return scenarios map to Unit 6. Sourcing and diligence provide the narrative above the numbers. This crosswalk is the capstone study guide.

Extended teaching section: common exam and interview prompts

Prepare short written answers for: Explain 2 and 20. Explain power law in venture. Walk through RelayOps Series A ownership math. Define DPI vs TVPI. Name three diligence kills and three diligence passes for RelayOps. Compare lead vs follow for a $250M fund in year three of deployment. Explain 1x non-participating preference at $40M and $200M exits.

Strong answers use one named example, one formula or definition, and one managerial implication. Weak answers define terms in circles without RelayOps numbers. Interviewers and graders notice the difference immediately.

Time yourself: eight minutes per prompt, handwritten or typed without looking at solutions. If you miss check lines, slow down and fix arithmetic before adding prose. VC interviews punish fuzzy math more than fuzzy strategy language.

Extended teaching section: reading venture decisions as cash flows

Venture investing is a chain of cash flows separated by years. LPs commit cash to the fund. The fund calls cash when deals close. RelayOps receives cash at Series A close and burns it monthly to produce ARR. If the company succeeds, strategics or public markets return cash to the fund. The fund distributes cash to LPs after carry. Every classroom shortcut that skips a link in that chain creates graduates who argue about valuation without connecting to DPI.

When Arbor Peak models RelayOps, three cash moments matter most: day-zero check size, follow-on reserve deployment, and exit proceeds net of preferences. Day-zero ownership comes from post-money math. Follow-on ownership depends on pro-rata and outside investor pricing. Exit proceeds depend on preference stack and conversion decisions. Founders who understand only day-zero math are surprised when a good exit still disappoints because of preference mechanics or prior round structures.

Fund-level cash is aggregated across dozens of names. A single RelayOps returning 5x on $10M deployed is $50M toward a $750M TVPI target on a $250M fund. That sounds small until you remember many positions return 0-1x. The fund needs multiple RelayOps-scale outcomes, not one. That is why partners pass profitable but small-outcome businesses: they do not move the aggregate cash return enough to justify partner time and reserve lockup.

Practice translating any headline into cash: "20% ownership" times "exit price" equals "gross proceeds before preference." "Gross proceeds" minus "preference stack effects" equals "what investors actually receive." "Investor receipts" divided by "invested capital" equals "MOIC." MOIC weighted across the portfolio plus fee drag feeds TVPI and eventually DPI. Repeat until automatic.

Extended teaching section: stakeholder memos you should be able to draft

Three micro-memos should be easy after each ENT 405 lesson. First, the LP memo sentence: "Fund IV led RelayOps at $32M pre because infra SaaS retention supported ownership near 20% and a credible $300M exit path contributing to TVPI." Second, the founder memo sentence: "We chose Arbor Peak at lower pre because reserves and hiring support reduced Series B death risk with 3.9 months runway." Third, the associate diligence sentence: "ARR verified within 2% of billing export; NRR 118% supported by six references; VP Sales gap mitigated by funded hire."

If you cannot draft all three, you learned vocabulary without learning roles. Rotate which memo you write in practice problems so you do not default to founder-only thinking. Investors who never practice founder tradeoffs misprice competitive rounds. Founders who never practice fund math pick wrong leads. LPs who never practice diligence grading overtrust GP marks.

Tables in this course are training wheels. On the job, partners still build tables, but the decision is sentences backed by numbers. Use the tables here until the sentences come naturally. Then rebuild the tables from the sentences under time pressure. That is the fluency bar ENT 405 sets for technical mid-course lessons.

Using the scorecard, change NRR to 102% and recompute weighted score. Does recommendation flip? Write 100 words for IC.

Solution

Metrics score drops to 2 → weighted metrics 0.50, total ≈ 3.75. May flip to follow/not lead depending on thresholds; IC should demand retention fix plan and delay lead until NRR >110% or price adjusts.

Arbor Peak reviews 1,800 decks, takes 180 meetings, runs 40 diligences, issues 12 term sheets, closes 8 investments per year.

1. Compute conversion rate deck-to-close.
2. If RelayOps entered at meeting stage, what odds apply from meeting to close using these averages?
3. Why might referral flow beat these averages?

Solution

1. 8 / 1,800 ≈ 0.44% deck-to-close.

2. Meeting to close = 8 / 180 ≈ 4.4%.

3. Referrals pre-screen for fit and trust, skipping low-quality decks and improving meeting-to-diligence conversion.

Key takeaways

• Cases combine weighted scorecards with kill criteria.
• RelayOps clears bar with strong theme and metrics.
• Team gaps are mitigable with capital deployment.
• Competitive dynamics affect lead urgency.
• Founders mirror process when picking investors.

Reference appendix: RelayOps and Arbor Peak deal facts

Use this appendix across ENT 405 exercises. Numbers are consistent course-wide.

When you rework problems, change one variable at a time and recompute check lines. If post-money ownership times exit value does not match proceeds, your cap table or dilution assumption is inconsistent.

Managerial synthesis prompt

Write one paragraph answering: "Would Fund IV still lead RelayOps if NRR were 104% but growth doubled?" There is no single correct answer. A strong response names fund ownership math, retention risk, pricing power, and reserve policy. This is the judgment ENT 405 trains: numbers inform, they do not replace, partner-level tradeoffs.

Applied case narrative (RelayOps thread)

Arbor Peak partner meeting notes should read like decisions, not journalism. For RelayOps, the partner records: why infra SaaS, why now, why this team, why $32M pre, why $5M lead, what kills the deal before close, what milestones unlock reserves, and what exit path makes Fund IV math work. Associates turning class notes into this format practice the job.

Founders can mirror the document: one page answering the same questions for your top fund target. If you cannot answer ownership math or milestone plan crisply, investors will not answer with a term sheet.

Diligence converts stories into graded evidence. Valuation converts evidence into ownership. Term sheets convert ownership into governance. Memos convert governance into accountability through exits. ENT 405 is linear for a reason.

Repeat the check lines until automatic: post-money equals pre plus raise; proceeds equal ownership times exit value; MOIC equals proceeds divided by invested capital; fund contribution equals proceeds divided by target fund return need.

Study drill: connect metrics to terms

RelayOps 118% NRR supports premium ARR multiple near 26x at Series A. If NRR slipped to 105%, the same growth might justify only 18-20x, cutting pre-money toward low $20Ms unless growth accelerated. Term sheet price is a compressed forecast of future metric quality.

Burn $280K/month with $1.1M cash forced financing speed. Term sheet signing within 45 days was not courtesy; it was survival. Investors price speed risk by tightening milestones or tranches when runway under four months.

Board seat plus standard protective provisions is the control package paired with $32M pre. Founders negotiating away board seat without tightening protective provisions rarely gain freedom; they often lose support when things get hard.

Investor and founder office hours questions

Students and practitioners should practice answering these aloud without slides: What ownership does Fund IV need for RelayOps to matter? What happens to proceeds at $100M exit vs $300M exit? What is the difference between TVPI and DPI for LPs in year four? Why does referral sourcing change meeting-to-close odds? What three diligence items would you verify first on a revenue chart?

If any answer wanders without numbers, return to the RelayOps appendix and rebuild the sentence with one metric and one implication. Fluency is specificity under time pressure.

1. Build a scorecard for a company you follow.
2. Draft IC recommendation pass/follow/lead.
3. Return for Unit 2 quiz; continue Unit 3 Lesson 1.