Most venture capital firms want to get on the ground floor of the next promising investment, which results in a great payoff for the firm and its LPs. However, most VC dealmakers still rely on antiquated and inefficient deal-sourcing processes and deal flow management systems to meet high-potential entrepreneurs and source promising early-stage startups.
To increase their odds of success, VCs must adopt efficient deal sourcing efforts coupled with the right technologies and decision-making processes to stand out from the competition, find high-quality deals that align with their investment thesis, and have the highest probability of success.
Unsurprisingly, the best investment opportunities often hide in plain sight within the investors’ networks; unfortunately, most venture teams lack the tools to tap into their networks and access them effectively.
Having the right systems and processes to leverage the power of their organization’s relationship networks can empower firms to build a competitive advantage by sourcing a higher volume of high-growth potential deals. By leveraging their networks, venture capital funds can forgo high-effort and low-yield sourcing methods such as cold outbound outreach, attending dozens of industry events, and inefficient workflows.
What is Venture Capital Deal Sourcing, and Why Does it Matter?
Deal sourcing or deal origination is the lifeblood of every venture capital firm. It is also the first stage for finding and screening potential investment opportunities.
Once deals have been sourced (inbound through email, LinkedIn, other social media channels, deal sourcing platforms, referrals, incubator partnerships, etc.), they are ushered through the firm’s deal flow pipeline before offering them a term sheet. This pipeline includes a selection and due diligence process consisting of several steps designed to identify new investments that align with the firm’s investment strategy and investment criteria.
An effective deal-sourcing process is crucial since the standard conversion rate from initial meeting to investment is around 1% or even lower at elite Silicon Valley VC firms.
To be successful at generating an acceptable return, VC firms need to spend time finding the correct type of companies that fit their investment thesis and criteria.
Since most venture capital profits come from a small percentage of investments, a slight improvement in selecting potential investments can significantly improve or even make a fund.
At 4Degrees, we work with hundreds of venture capital firms that use our relationship intelligence technology to source more deals faster and streamline their due diligence process by leveraging the power of their relationship networks and streamlining their investment process.
Improving Deal Sourcing with Relationship Intelligence
4Degrees is a relationship management (CRM) platform built for Venture Capital, investment banking, and PE firms by a team of ex-investors who experienced firsthand the power that relationship networks can have when sourcing and evaluating deals and identifying connections that changed the trajectory of their portfolio companies.
In our experience, firms leveraging their networks can punch above their weight and deliver above-average returns. And we are not alone. According to in-depth research from Harvard Business School, nearly 70% of venture capital deals come from connections in the investor’s network, making it worthwhile for VC professionals to spend time building and nurturing their relationships since they are the best source of venture capital deal flow.
This article will review how forward-thinking venture capital firms source new companies using data-driven relationship intelligence. This new technology generates actionable insights into your team’s network based on data.
1. Building a Warm Inbound Deal Sourcing Network
Warm inbound deal sourcing can significantly increase the number of high-quality companies introduced to a VC firm. The referrers, who understand the VC firm’s investment thesis and what they are looking for in a potential investment, have already somewhat vetted these startups.
To build a network for warm inbound sourcing, many VC funds foster relationships with professionals exposed to promising startups before knowledge of the company becomes widespread.
This usually includes other venture capitalists, general partners, angel investors, investment bankers, accelerators, providers, and other intermediaries or members of the technology and entrepreneurship ecosystem.
Identifying and building relationships with these deal sources is easier said than done without the right technology.
If you are still relying on Excel spreadsheets and your email inbox, how do you know:
Who is making the most referrals to your firm?
Who in your network has the most significant impact on sourcing new deals?
Who in your network has the best track record of introducing high-quality fits?
Who in your firm has the strongest relationship with a potential intermediary?
When is the best moment to reach out to key referral sources?
Using a relationship intelligence CRM platform lets you keep track of all your contacts and access real-time updates and notifications to stay abreast of key events within your network.
This gives you an authentic event-based reason to reach out to potential deal sources you are connected to. You can also set reminder cadences to ensure you stay engaged and at the top of your mind with your best deal sources.
Building deeper relationships with your network is imperative to staying top of mind and developing an efficient deal-sourcing network.
Quick Next Steps & Best Practices:
- Establish a systematic referral channel: Encourage existing contacts, fellow investors, mentors, accelerators, to introduce startups that match your investment thesis. Log every referral in your CRM so you can analyze which sources are most productive.
- Schedule regular check-ins: Set reminder cadences in 4Degrees for monthly or quarterly follow-ups with top referral partners, ensuring they know your areas of focus (e.g., Series A) and remain motivated to send new deals.
2. Identifying Your Connections to Companies
Did you know that an associate from your firm went to school with the founder of a promising startup? Or that one of the angel investors you met at a demo day event last week was an early investor in a company you are currently evaluating?
Relying on spreadsheets and generic sales CRMs to track complex relationship and network datasets of who in your firm knows who is slowing your team down, resulting in missed opportunities.
The 4Degrees relationship strength score, automated contact enrichment, and other functionalities can instantly uncover connections you did not know existed without asking your team if they know anyone at X company, etc.
By enriching your data with top-quality data sources, including Pitchbook and Crunchbase, your CRM will remain current without having your team manually enter data to keep the system up to date.
With a few clicks, you can request a warm introduction with a better outcome than a cold email or call.
Quick Next Steps & Best Practices:
- Identify at least 10 warm introductions: Use a relationship strength scoring feature to see which team members or external contacts can connect you to your top target companies. Reach out with personalized messages and track results in your CRM.
- Create a best-practice playbook: Document processes for handling warm intro requests and share it with the entire team so they understand exactly how to leverage the CRM’s insights.
3. Keeping a List of Potential Startups in Your Network
Just because you pass on a potential deal today does not mean it will not be an exciting investment opportunity in the future. There are several reasons why a firm would pass on an investment, including valuation, stage, and many other factors.
Efficient investors keep a list of private companies and founders in their network that might be attractive investment opportunities at a later date.
A relationship intelligence platform can automatically monitor specific metrics around these companies (updated valuations, new fundraising rounds, and executives, among others). Accessing all this data and setting up alerts will let you know the best time to re-engage and continue the conversation.
Quick Next Steps & Best Practices:
- Maintain a “watch list” of companies: Tag or label potential investments you’ve passed on, then set automated alerts for major milestones (new funding, new hires).
- Leverage recurring follow-ups: Use your CRM to schedule outreach reminders at 3- or 6-month intervals.
4. Keeping Track of Experts and Advisors
In venture capital, speed is the name of the game, especially when evaluating promising companies that other investors are also courting.
Yet before your investment committee decides whether to move a company down your deal pipeline and make an investment decision, you will most likely want to speak with a subject matter expert familiar with the company's industry or space.
Unfortunately, finding and booking time with specific experts or advisors can take a long time, be expensive, or both.
With a relationship intelligence CRM, you can effortlessly search for the type of advisor you are looking for, for example, a fintech expert who has experience working with the SEC and served on a board.
Even if you are not directly connected to this individual, you can see who on your network knows them. That shared connection can warmly introduce or provide their contact information, allowing you to continue your due diligence. All this in a matter of minutes, not days or weeks.
Quick Next Steps & Best Practices:
- Create an “expertise directory”: Tag advisors in your CRM by industry, functional expertise, or past board experience. This makes it easy to locate the right person quickly.
- Formalize a quick-intro process: Outline a workflow for how to approach advisors, who handles the intros, and where to store insights learned. This ensures no bottlenecks when you need advice fast.
5. Conducting Thematic Prospecting
Many of the most successful venture capital firms move beyond broad sector searches and adopt a more focused strategy by zeroing in on specific themes or niches. Thematic prospecting involves selecting emerging trends or market shifts, ranging from sustainable food systems to new fintech applications, and proactively scouting early-stage companies aligned with these areas.
Deep-Dive Research
- Engage in ongoing market analysis to identify where growth is accelerating. Monitor industry publications, follow key influencers, and study academic research to discover nascent trends before they appear on everyone’s radar.
- Set regular intervals (e.g., quarterly) to review emerging themes with your team. This will keep your internal knowledge up to date and encourage a constant flow of fresh perspectives.
Selective Outreach
- Once you’ve pinpointed a promising theme, reach out to founders, domain experts, and relevant industry leaders. These personalized engagements often lead to meaningful insights or introduce you to opportunities still off the mainstream circuit.
- Use your CRM to track each conversation and document crucial learnings. This ensures you build a referenceable knowledge base on the theme and its key players.
Establish Clear Evaluation Criteria
- Thematic prospecting can generate a surge of new opportunities. To prioritize effectively, define a clear set of criteria to filter incoming leads, such as stage, market size, technological viability, or synergy with existing portfolio companies.
- Encourage your team to share deals that fit the chosen theme. Having everyone aligned on the targeted niche dramatically increases your chances of spotting and winning high-potential investments.
Quick Next Steps & Best Practices:
- Schedule Quarterly “Theme Summits”: Host internal meetings (or invite select external experts) to brainstorm, debate, and refine emerging themes. Document the findings in a shared resource accessible to your entire deal team.
- Create a Theme-Focused Pipeline: Segment your CRM or database by specific verticals or sub-verticals. Tag each prospect with the theme it addresses to sort and evaluate deals effortlessly with minimal friction.
Take Your Deal Flow to New Levels
Navigating the intricate maze of investment opportunities can often feel daunting, especially when relying on outdated tools like spreadsheets, emails, forums, and recollections of past conversations. This antiquated approach consumes excessive time and increases the risk of overlooking potential goldmines.
Leading venture capital and private equity firms are ushering in a new era of deal sourcing. They’re revolutionizing the landscape by integrating advanced processes and tools that harness the power of their relationship networks. This shift allows them to pinpoint high-caliber deals without the tediousness of cold outreach or sifting through endless spreadsheets and cluttered inboxes.
The message is clear for teams that aspire to be at the forefront of the investment world: adapt and evolve. Embracing the right processes and technology isn’t just a luxury; it’s necessary to remain competitive and consistently source top-tier VC deals.
Are you interested in transforming your deal-sourcing strategy? Discover how 4Degrees can redefine how you source, manage, and seal the deal.
Don’t miss out on the next big opportunity. click here to initiate a conversation with our expert team and elevate your investment game.
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