With thousands of early-stage startups launching every year, venture capitalists need to be efficient at sifting through the noise, sourcing and evaluating promising high-growth companies that will be worth their investment and result in a profitable liquidity event.
By having a well-orchestrated VC deal flow process, venture capital investors can increase the number of startup companies they evaluate, which increases the firm’s chances of finding new investments and making the right investment decisions.
What is Venture Capital Deal Flow?
Venture capital deal flow is the rate at which VC firms source deals and evaluate potential investment opportunities.
According to Harvard Business Review, for each deal a VC firm closes, it evaluates an average of 101 opportunities, resulting in a close rate of <1%. To succeed, firms must have a healthy and efficient deal flow and decision-making process that allows them to source and review hundreds or even thousands of high-quality deals annually.
The best way to describe the deal screening process is using the metaphor of a funnel where thousands of prospective new companies in the fundraising process submit their pitch decks at the top. Still, only a select few fit the investment criteria and make it through the screening, investment committee review, and due diligence process to finally receive a valuation and term sheet from the VC fund.
A healthy deal flow consists of both quality and quantity since having a high volume, but a low-quality deal flow wastes firm resources and can even threaten the success of a fund. Successful VCs must ensure they spend their limited time on promising companies that fit their firm’s area of focus and investment thesis.
While many macroeconomic factors may affect a firm’s deal flow volume, a VC firm can improve its quality and accelerate its deal flow in many ways.
How to Increase Venture Capital Deal Flow and Deal Sourcing:
The Power of Relationships
Regardless of your investment strategy and whether you invest in seed stage, series A, or series D deals, your network will undoubtedly offer the best deals. Why? It’s simple: People prefer to do business with people they know, respect, and trust. After all, VC investments are no ordinary transactions. They are unique long-term partnerships with significant implications for every party involved.
Increasing your firm’s deal flow requires you and your team members to focus on improving your networks in both health and size. It is no secret that a strong relationship network can lead to having access to proprietary deal flow.
According to Jim Breyer, the founder of Breyer Capital, the best deals come from his network of investors, executives, entrepreneurs, startup mentors, and even limited partners. A survey by HBR found that around 60% of VC deals come from an investor’s networks and referrals.
Unfortunately, not all networks are the same, and experienced dealmakers with long successful track records have an advantage over smaller emerging funds run by less experienced managers.
Here are some ways less experienced investors can grow the strength and health of their networks and ultimately improve deal flow.
Network and Attend In-Person Events
Interacting online is fine (and becoming more typical), but the most profound connections are always made in person. Sharing a drink or a meal with someone profoundly impacts the relationship. If you have something in common (like golf, rock climbing, or comedy clubs), that will also help build relationships.
Since time is scarce when selecting events, be selective and only attend conferences or tradeshows where the most relevant opportunities will be present. If your fund invests in early-stage startups, networking events at local universities, accelerators, or other startup hubs might be worth your time.
If industry events are a big part of your networking, don’t be afraid to get aggressive by presenting or speaking (sharing your knowledge and resources), sponsoring the event (monetarily or otherwise), or organizing side events (like curated dinners and gatherings with specific people).
As part of your networking strategy, being a Super Connector pays off and offers help connecting people, advice, tips, etc. The key here is to deliver value without the expectation of a return.
Pick an Investment Thesis
If you haven’t already, now’s the time to define an investment thesis that meets your business goals and suits your knowledge and experience.
We recommend you write down your investment thesis by following the format below:
(Firm Name) is launching a ($xMM) (stage) venture fund in (location) to back (geography) (sector/Market Companies) with (secret sauce).
Ideally, it would help to focus on what you know best and where you think you can add the most value. For example, if most of your experience is working with early-stage companies in B2B SaaS, it makes sense to craft a strategy for investing in those kinds of ventures. Plus, it’s easier to be successful in industries you are passionate about.
Once you know where you’re going, focusing on the strategies and tools that increase your deal flow is much easier. It also narrows down the people you need to start building relationships with.
Get Referrals From Service Providers
Anyone who provides a professional service to your firm is a potential source of high-quality referrals. Lawyers, brokers, accountants, consultants, investment bankers, and other professionals can be excellent sources of high-quality deals that result in a good deal flow.
You probably work with many of these service providers regularly, so you can reach out and ask them for a referral. On average, a referred company has a better chance of raising capital since this pre-screening makes referral deal flow higher quality than other sources.
Connecting and interacting with other professionals from your networks allows you to stay top of mind and grow your referral network. Using a relationship intelligence CRM platform like 4Degrees, you will quickly know when to best reach for referrals to your service providers.
Generate Referrals From Portfolio Companies
Your portfolio companies are vital sources of high-quality investment opportunities. Portfolio company CEOs and executives are usually well-connected in the entrepreneurship ecosystems. They know other promising founders who may be looking to fundraise or would like to connect with a venture capital fund.
Mark Bivens, Venture Partner at Truffle Venture Capital, says it well: “If a member of one of my portfolio companies recommends I meet someone, I will most likely accept a meeting without hesitation. My portfolio company knows its market space better than I do, so if they find a fellow entrepreneur’s startup proposition compelling, this is a tremendously valuable insight for me, creating some of the most relevant deal flow.”
These kinds of referrals are especially valuable if:
- The referral comes from a company you have invested profitably in the past. This is because profitable companies know what investors are looking for. They can gauge whether an opportunity is worth your time. Plus, they want to keep a healthy relationship with you, so they won’t send poor opportunities your way.
- The referral and the referred are in the same industry, sector, or niche. Since you have experience in the industry, there’s a good chance you’ll manage the deal properly.
Get Referrals From Other Investors
Like some investments are unsuitable for your firm’s goals and strategy, other investors have similar limitations. Some firms turn down good deals because those opportunities aren’t ideal for them or don’t align with their investment thesis or strategy.
Instead of letting those opportunities evaporate into the ether, it’s wise to partner with other VC firms or private equity firms where deals are passed to the right investor. They introduce you to opportunities and vice-versa.
The value of these referrals is directly proportional to the strength of your relationship with the referer. If you provide lots of value to them, they are more likely to give lots of value to you. It also helps if you take the time to brush up on the specific strategies, objectives, and goals of other investors in your network to ensure you are referring deals that align with their area of focus.
Using a VC relationship intelligence CRM simplifies the process of tracking referrals and lets you see your team’s collective network and prior interactions with other investors.
Build Your Inbound Marketing Engine
Alongside your networking efforts, working on your digital presence is imperative. Growing a following online isn’t a way to expand your network and increase your venture capital deal flow overnight, but it has the potential to pay dividends over time.
Creating a loyal online following is a very effective way to punch above your weight and compete with larger, well-established venture capital firms.
If you build a large enough community that adds value and provides insight, you’ll have entrepreneurs submitting their pitches and reaching out for advice and mentorship. You could also grow your clout by getting invited to podcasts, interviews, events, etc.
Some of Silicon Valley’s most prominent VC firms have raised their profiles by building their online presence by publishing blogs, recording podcasts, being active on social media, etc.
Below are some techniques to grow your digital presence and build an inbound deal flow engine.
Email Newsletters to Build Your Fund’s Brand
Email newsletters are still the most intimate and cost-effective way to engage with an audience.
By spending some time creating and curating content, you can have personalized conversations at scale with your followers.
Using a relationship intelligence CRM platform like 4Degrees, you can easily send mass email newsletters by leveraging the Campaigns email marketing functionality. This allows you to share value with your network and the business community.
Effectively using an email newsletter can help your firm share thought leadership, demonstrate expertise, and gain a foothold as a recognized firm in the industry.
Blogging and Publishing Content
Maintaining a blog on your firm’s website or a platform like Medium is also worth considering.
Don’t worry too much about optimizing the content for search engines or converting readers into email subscribers. Just use it as an opportunity to publish your thoughts and opinions and document the deals you’re working on.
If you don’t want to publish a personal blog, your firm may have a blog that you can contribute to. Just make sure your name is on it somewhere.
You can also guest post on other industry blogs, providing your thoughts or in-depth analysis on a particular topic.
Podcasting
Podcasting is another powerful way to connect with an audience and build your brand.
Many people at the top of their industries prefer podcast episodes over blog articles due to their intimate nature and deep dive into particular topics.
You can host your podcast if you have the time and energy. Otherwise, you can be invited as a guest to an established podcast. Here is a list of the top venture capital podcasts that we recommend.
Social Media
Social media isn’t just a distribution channel for your content.
It’s also a powerful way to build relationships with people who can offer opportunities in the future. Be active on LinkedIn, X (Twitter), and specialty Facebook groups (you may need to request access to private ones).
Some VCs are going beyond the traditional social media channels and experimenting with TikTok, creating YouTube channels, etc.
Private Groups
Curated private groups exist everywhere, including Facebook, LinkedIn, Slack, and other private forums. You can create a VIP-type experience with certain people by creating a select group or Slack channel and stocking it full of helpful, experienced people. Building an online community is an excellent way to provide value and showcase your expertise.
Invest in a Venture Capital Relationship Intelligence CRM
All the previously mentioned strategies will be more impactful if you have a relationship intelligence CRM system specifically designed for venture capital. This robust relationship management system will help level the playing field by making you a more efficient dealmaker.
Purpose-built platforms like 4Degrees streamline your workflows by automating time-consuming tasks while using your firm’s relationship network to uncover opportunities, get warm introductions, and accelerate deal sourcing.
Your next best investment is probably hidden somewhere in your existing network. But how can you focus on fostering relationships and finding proprietary deals if you still rely on static spreadsheets or a generic sales CRM to track your interactions?
With the power of relationship intelligence, you can increase the quality of your deal flow by:
- Instantly determining the best path into a startup via a warm introduction to an entrepreneur, angel investor, etc.
- Building stronger relationships by receiving real-time alerts of when connections have been in the news, published content, left a job, etc. Allowing you to create meaningful links and nurture new opportunities.
- Easily track and identify your best deal-sourcing activities- allowing you to devote more resources.
- Get a quick snapshot of all your firm’s metrics and deals in your deal flow pipeline.
- Automate data entry by enriching profiles with top-quality data from Crunchbase, Pitchbook, and other high-quality sources.
In addition to relationship intelligence, a venture capital CRM platform can save your firm thousands of hours per year by:
- Eliminating data entry by automatically capturing and enriching data on potential deals, LPs, portfolio companies, etc.
- Ensure all deliverables are on track by providing complete visibility across your firm’s relationships and deals to avoid missed opportunities.
- Automate relationship-oriented tasks by seamlessly connecting to your email inbox, calendar, and other parts of your firm’s tech stack.
To learn more about how a relationship intelligence CRM like 4Degrees can help you improve your deal origination deal flow management and make you a more efficient investor click here to schedule a personalized demo.
