Venture capital funds are responsible for sourcing, analyzing, investing, and supporting their portfolio companies while also fundraising from limited partners (LPs).
With most VC firms having less than ten employees, adopting the right technology is imperative to increase the employee’s productivity and the fund’s chances of success.
Ironically, even though most VC firms are at the forefront of technological disruption by investing in technology-focused startups or scaleups, many are still relying on outdated systems that make their work harder and slower than it needs to be. Yet, according to one survey, investors are motivated to improve their tech stack to create value at every stage of the venture capital investment process.
The global pandemic has served as a catalyst accelerating the move to digital technologies. As a result, the in-person “coffee meeting” and almighty spreadsheet are being replaced, and if VC investors are to remain relevant, they need to start leveraging data, automation, and other technologies.
Some larger VC firms have devoted resources to building bespoke internal systems to fit their existing ecosystems and address specific use cases. Unfortunately, these products require a considerable investment to create and maintain.
With the onset of SaaS tech companies, off-the-shelf products are more efficient, less expensive, and will most likely address the common pain points VC firms are trying to solve. With integrations, APIs, and other programs, VC funds can weave together an off-the-shelf tech stack without spending thousands on custom development.
This article goes over various technologies and specific pieces of software General Partners at VC firms should consider adopting when building their VC tech stack, focusing on increasing productivity and gaining a competitive advantage.
Deal sourcing is the lifeblood of any venture capital firm. The more efficient a firm is at sourcing new deals, the easier it is to close more deals quickly. However, sourcing requires specialized technology, an extensive network, manual research, and detective work. Leveraging alternative data can help firms gain an edge and increase returns in powerful ways.
Private Company Data
Depending on the industry a fund invests in, they might follow several niche publications; however, every fund should use some of the tools outlined below.
PitchBook and Crunchbase are industry-standard research tools that offer insights into traditional data points, including company data, financials, team, and other crucial metrics VC firms should consider when evaluating a potential deal. In addition, these platforms, especially PitchBook, also provide insights on limited partners looking to invest in venture capital. Other players in the space include CB Insights, Mattermark, and Tracxn.
News + Alternative Data Sources
Sometimes the best deals are outside a firm’s network. By using alternative data sources such as market trends, social media discussions, customer satisfaction data, talent information, and analyzing these large data sets, VC investors can pick up strong signals that may lead to a lucrative deal.
Some investors use ProductHunt, BetaList, and AngelList Venture to supplement their research and discover innovative companies. Other databases used to extrapolate alternative data include Coresignal and Aura.
When researching consumer trends, sources include Gartner, eMarketer, IBIS World, the United States Census Bureau, and Statista.
Twitter is another source to keep a pulse on the early-stage ecosystem. The key is to filter out all the noise and look for reliable sources that report on companies or industries that matter to your fund. To do this, some funds use Feedly or a similar RSS reader to catalog tweets and organize data.
Comps Analysis and Software Benchmarks
Investors evaluating potential investments often need quick access to data to perform comparable company analyses (comps). They might also need access to up-to-date data to develop benchmarks for specific industries. Unfortunately, without the right technology, investors rely on an assortment of legacy databases and time-consuming methods that are not always accurate. Tools such as CapIQ and Public Comps make the process more efficient.
Network and Deal Tracking
Relationships are crucial for success in venture capital, with professional relationships driving most deal flow. As a result, firms need to have the right tools and processes to manage and capitalize on their complex network of relationships.
A CRM system is an essential tool VC firms should implement to automate, optimize and standardize the deal-making process. However, not all CRM’s are created equal. Most generic CRM’s such as Salesforce, are designed for sales teams focused on closing transactions, NOT managing sophisticated venture capital deals.
Investing in private companies is very different than selling a product or service. That is why VCs should look for industry-specific CRMs that understand the workflows and nuances of deal-driven teams. In addition, VCs would not get much value from a CRM without the proper functionality.
At 4Degrees, venture capital is in our DNA. Our founders are former VC investors looking to change the relationship between venture capital and CRM by creating a system designed to address their specific pain points.
We built our venture capital CRM for busy investors who want to leverage the power of their networks to improve their ability to find and execute deals while also managing their portfolios and internal processes.
4Degrees automatically captures an investor’s email communications, meetings, and contact information and analyzes these data points to help VC teams find the proper connection and best path to a warm introduction that might result in a deal.
Key features include:
- Automated data enrichment to replace manual data entry
- Easy and intuitive pipeline management designed for VC teams
- Relationship Intelligence to find the best path to a warm introduction.
As Lance Dietz, Partner at KP Partners- a Chicago VC firm said, “4Degrees makes us collectively smarter, with powerful relationship and deal management tools in one compelling package.”
Other vendors in the space include Affinity, Copper, and Attio.
Portfolio Support- Talent, Customer Introductions
GPs committed to the success of their portfolio companies should focus on increasing the founders’ odds of success while also lightening their workload. For example, most early-stage founders spend 50% of their time recruiting new talent.
Proactive investors and their platform teams should have the tools and resources necessary to solve the most pressing problems facing their portfolio companies, including recruitment. For example, industry titan a16z has a talent team of over 25 professionals focusing on executive and technical hires.
Providing platforms services is no longer optional for venture funds wishing to remain competitive. Fortunately, not every fund needs dozens of people focusing on recruitment. Software tools like Jobbio, Getro, and Recruitee can add value by connecting portfolio companies with top talent.
Funds can also leverage their vast networks to introduce portfolio companies to customers, partners, and future investors. By having a relationship management system, funds can record their contact’s priority needs, allowing them to identify early clients for their portfolio companies quickly.
Backoffice administration, keeping track of cap tables, IRR, valuations, communicating with LPSs, and compiling metrics, have historically been very time-consuming processes. GPs should spend less time on fund admin and more time with portfolio companies or meeting founders.
Without a dedicated team of data analysts and accountants, VC funds spend hundreds of hours managing their back offices. By having a fund administration system like Carta or Ledgy, GPs can be more efficient while providing Limited Partners with a better, more transparent investment experience.
Ideally, these processes should be running in the background with little to no input from the GPs.
Limited partners expect to access fund-level performance data and key metrics quickly and securely.
By having the right LP portal, VC funds can offer their LPs a better investing experience by providing the option to create high-quality reports, see active capital calls, access fund commitment information and data on active investments. Some of the most well-known vendors in the LP portal space include Carta, Allvue Systems, and Navatar.
Portfolio Data Tracking & Management
Typically, VC investors collect quarterly quantitative and qualitative data from their portfolio companies. According to Visible’s report Best Practices for VC Portfolio Data Collection, most investors use this data to share internal portfolio updates and identify when and how to help their portfolio companies. In addition, some funds also use this data for LP reporting and to fundraise for their next fund.
Frequently investors initially start collecting data from their companies using email and excel files templates and later switch to more scalable solutions like Visible for Investors. Visible has tools to streamline the collection, analysis, and reporting of portfolio data.
Gaining trust and building relationships with startups and their founding teams is critical for investors. With a well-thought-out content marketing strategy, funds can differentiate themselves by showcasing their unique expertise and adding value to potential founders looking to raise capital.
Having a website blog and leveraging existing content platforms such as Linkedin and Medium is crucial for firms to grow their audiences and ultimately source more deals. After publishing content, firms should distribute via social media channels and email using apps like Hootsuite, Sprout, MailChimp, Constant Contact, and SendGrid.
In recent years, firms have also embraced video and podcasting; however, these mediums usually take more time and resources compared to publishing written content.
Underlying Technology Infrastructure
To ensure all of the firm’s processes are running smoothly, VC firms need to set up a technology ecosystem that includes various applications ranging from everyday productivity and data storage apps to automation systems that ensure all systems are working together. Below are the different technology areas a VC firm should consider adopting.
- Communication: Outlook and Gmail are a must, but several new email clients and extensions like Superhuman or Mixmax simplify replying to emails and let you get to “inbox zero” without spending hours answering emails. For internal communications, some teams rely on Slack or Microsoft Teams.
- Document Creation: These applications are essential for fully distributed or remote teams to collaborate and share multiple versions of documents, decks, or spreadsheets—Google Workspace and Microsoft Office 365 are the most common.
- Calendar Management: Meeting scheduling is always a pain. The back-and-forth “What time works for you?” is exhausting. However, scheduling apps have lightened the load for everyone. Some apps worth considering include Calendly, Clara, and Acuity Scheduling.
- Virtual Meetings: When hosting virtual meetings, it’s essential to use standard apps that everyone is comfortable using. No one wants to wait around while one of the parties figures out how the app works. So VCs typically host the meetings themselves in simple conferencing apps like Zoom, UberConference, or Google Hangouts.
- Data Organization and Financial Modelling: VC investors need to keep track of thousands of data points from multiple data sources. To create financial models, Excel is usually the go-to system. Even though Excel remains the most common, VCs can use many other emerging cloud-based systems for data organization. These include Airtable, Coda, or in some cases, Google Sheets.
- Note Taking: Investors need to keep detailed notes of interactions with partners, entrepreneurs, portfolio companies, etc. The right tools to organize knowledge can help create a historical record that provides VC firms with a living, breathing working memory to retain and grow institutional knowledge. The most effective note-taking tools are Evernote, Hive, Notion, OneNote, or Google Keep.
- File Storage and Sharing: Most firms have virtual data rooms to share and store pitch decks, reports, legal docs, and other fundraising material with LPs, as well as to facilitate the due diligence process. There are two types of vendors, those specializing in virtual data rooms such as Caplinked, Drooms, Securedocs, and more generic solutions such as Box, Dropbox, Google Drive, and OneDrive.
- Contracts and Document Management: Effective document management is a must for venture capitalists. This includes having simple and easy ways to sign, store, categorize, and find documents. Many funds use apps like DocuSign, HelloSign, and SRS Acquiom.
- Automation: An effective tech stack needs all the elements to work together, and automation tools are the glue that makes it happen, enabling firms to automate repetitive tasks, prevent data silos, and streamline inefficient processes. For example, If a firm wants to send a Slack message and add a new entry to a spreadsheet when an entrepreneur books an appointment via a Calendly link all in real-time, having a tool like Zapier, IFTTT , or Catalytic is a must.
- Project Management: Several of the tools mentioned above can be used for project management ranging from a basic spreadsheet to a combination of Slack and Airtable. However, some teams have decided to bring in a dedicated project management tool to track the progress of strategic objectives across the firm and streamline repeatable internal processes. The most popular providers include Trello, Basecamp, and Asana.
As venture capital firms invest in technology, some are developing their tools to collect, organize, and process data using artificial intelligence and machine learning to help them spot patterns and make intelligent decisions.
For example, Signalfire, a VC fund from San Francisco, calls itself the first venture capital firm built from the ground up as a technology company. Their team has pioneered the use of data with “Beacon,” their proprietary platform that tracks the performance of millions of companies in real-time, providing investors with the data they need to make informed decisions.
Lisa Edgar, Managing Director at the fund of funds Top Tier Capital Partners, isn’t surprised that investors are leaning into custom software:
“The VC landscape has gotten much more competitive and crowded over the past several years,” she says, “and if investors are not using software tools — they are definitely at a disadvantage. In addition to off-the-shelf products, many VCs talk about their proprietary systems.”
We hope you found this article helpful as you consider what solutions you would like to add to your firm’s tech stack. Having the right tools in place coupled with the right processes can help your team evaluate more deals, stay ahead of the competition and attract the brightest and most promising founding teams.
To learn more about how a venture capital CRM like 4Degrees can form the backbone of your tech stack and empower your team to become more efficient and provide a higher level of service, click here to talk to a 4Degrees expert.