This article was originally written on October 26, 2022
With inflation in the USA at a record high of 8.2%, the federal funds rate sitting at 3.25% (as of September 2021) after five rate hikes this year, and a GDP reduction of 0.6% in the second quarter of 2022, it is clear we are in the midst of an economic downturn. Although these economic indicators, coupled with the S&P 500 down 15% YTD, can scare some investors, it is still a great time to be a venture capitalist investing in early-stage companies.
Younger VC investors might not remember the recisions brought about by the early 2000s economic crisis or the great financial crisis of 2008, where the S&P 500 fell by 43% and 48% from its peak, respectively. Yet, the VC average return in those years was 18% (2002) and 14% (2009).
This means that success in venture capital is not correlated to the public markets. The most important traits for venture capital success are: being efficient with your time, curious, and knowing how to build and leverage relationships.
Economic downturns are ideal times to get introduced to, meet with founding teams, and write checks. Historically, some of the most successful companies of the past decade emerged during a downturn, including Airbnb, Slack, WhatsApp, Uber, etc. The multiples the initial backers of these companies made were much higher than average, partly due to the timing of their investment. For example, if you invest in a company during a downturn at a lower entry point compared to other investors, your Multiple on Invested Capital (MOIC) will be higher if we assume the same exit point years later.
By backing promising early-stage companies during downturns, your firm might get better deals than when markets are hot and valuations inflated.
This article covers how using the right Venture Capital CRM platform is instrumental in running a lean VC shop and increasing your firm’s efficiency during a financial downturn.
Have The Right Technology in Place
Implementing the right venture capital technology stack is crucial to your firm’s success, especially when you want to keep overhead low and “do more with less.”
Unfortunately, most VC firms still rely on archaic tools like Excel spreadsheets and contact management software to run their organization. Using these tools requires teams to spend hundreds of hours manually entering data while keeping information siloed, increasing the risk of errors and distracting investors from other high-value tasks.
The right CRM platform can automate this cumbersome process, making you a more efficient investor.
At the heart of the VC tech stack lies the CRM. Well-known transactional CRMs like Salesforce, Hubspot, etc., are great for sales teams, but as a VC, you need a platform designed to address the specific pain points and use cases your firm faces. VC firms should avoid transactional CRMs, especially during a downturn when you don’t want to spend extra resources and time customizing a platform or paying for an expensive CRM consultant.
Sourcing More High-Quality Deals in Less Time
Effectively sourcing deals is vital for your firm’s success since consistently finding high-quality companies is the lifeblood of any VC. Unsurprisingly, your team’s existing relationship networks often hide the best opportunities. According to a report by HBR, over 60% of deals originate from connections in a VC’s network, but how can you focus on building and nurturing these relationships if you rely on spreadsheets and your colleagues’ memory to manage relationships?
A relationship intelligence CRM like 4Degrees empowers you to leverage your network to find prospective deals by:
- Identifying the top introducers from your network and automatically reminding you to stay in touch with them so that follow-ups don’t “slip through the cracks.”
- Notifying you of what people in your network are doing; this way, you have a genuine reason to reach out, engage with them and build a stronger relationship.
- Warm introductions can increase the odds and time you spend trying to connect with a company. The 4Degrees relationship strength score can uncover who on your team is connected to a company and can make an introduction.
Conduct a More Thorough Due Diligence in Less Time
Gone are the days of 2020-2021 when deals got closed in days with no real due diligence. As an investor, you owe it to your LPs to conduct proper due diligence before committing capital.
When evaluating a deal, you might ask yourself, “do we know anyone who can give us more insight into this specific company, industry, etc.?” The answer might lay in your or a colleague’s inbox.
With 4Degrees, you can find these subject matter experts in minutes, and they can start working with you faster without paying for an expensive expert network service.
On the project management front, 4Degrees is a central source of truth, where you can store all due diligence notes and keep all stakeholders abreast and the diligence process moving smoothly.
Supporting Your Portfolio Companies
Great early-stage investors take their jobs as advisors seriously. Exceptional VCs are always there for their portfolio companies, ready to introduce them to potential new hires, key advisors, or new key customers.
It is during economic downturns when things are not doing so great that portfolio companies, especially early-stage ones, need the most support from their investors and advisors. As an investor, ensuring your portfolio companies have the best people onboard is in your best interest since talent can mark the difference between a company’s success and failure.
If large tech firms lay off staff during a downturn and the labor market shifts, startups can capitalize on the changes and afford more experienced talent that seemed unattainable just a few months ago. Using 4Degrees, you can search and filter your team’s relationship network by area of focus, allowing you to find high-quality talent looking for new opportunities; by facilitating these introductions, you are positioning your portfolio company for success.
Similar to talent, you can unlock your team’s networks to help your portfolio companies find customers, increasing the company’s value and financial position. For example, in just a few seconds, you can discover who in your firm’s network knows someone in Amazon’s marketing department and can facilitate a warm introduction.
Introducing a portfolio company to a new enterprise customer that results in a significant jump in revenue can increase the company’s valuation, resulting in a substantial boost to the value of your stake in that company.
Increase Collaboration and Overall Team Efficiency.
The typical venture deal consists of hundreds or even thousands of touchpoints, including emails, notes, calls, meetings, etc. Manually entering all this data into spreadsheets or CRMs is a tedious task that can take hundreds of hours per year. A relationship intelligence CRM platform that automates data entry and enriches your data frees up hundreds of hours so you can focus on what matters most: building relationships.
From a collaboration perspective, when your data is siloed and scattered across multiple systems or spreadsheets, it is almost impossible to find it when you need it the most. Siloed data and a lack of transparency can lead to overlapping work and time spent manually searching for information, resulting in inefficient processes. Armed with 4Degrres, your team will be able to:
- Eliminate data entry by automating data capture from emails, calendars, etc.
- Ensure all data is accurate by enriching your information with high-quality data from third-party sources.
- Keep every stakeholder aligned and on the same page by accessing the most up-to-date contact and deal information.
- Eliminate busy work by automatically generating reports to provide insights into your network, deals, and LPs—allowing you to know where to focus your efforts.
Even though some investors tend to run for the hills during economic downturns, VCs willing to break the status quo by embracing new technologies and leveraging the power of their networks will surely benefit during these uncertain times.
A current 4Degrees customer recently told us, “Having 4Degrees has allowed us to unlock our network’s full value,” a key ingredient to venture capital success.
Click here to schedule a personalized demo to see how 4Degrees can help you prioritize your time and unlock the full value of your firm’s relationship network.