Venture Capital and Private Equity investors do many things: fundraising, evaluating companies for investment, providing advice and guidance to management teams, identifying key talent for leadership roles, etc. However, before any of that can happen, there is one critical step: deal sourcing. The best evaluation process and value-add practices in the world don’t do any good if venture capitalists and private equity investors can’t build a robust deal pipeline to find good investment opportunities.
Here at 4Degrees, we are focused on authentic relationship development. To many, it’s not always immediately apparent how our values around the power of networking and authenticity mesh with transactional processes like deal sourcing. At its surface, deal origination feels entirely transactional: find companies that could be potential investments, research their contact information, stick them in the CRM and run them through the due diligence process.
But deal origination is much more than a mere transactional process. Good private equity and venture capital deal sourcing should begin with relationships. For example, suppose you have a broad network that can introduce you to potential investment or acquisition targets. In that case, you can start from a position of trust and respect instead of cold email or LinkedIn outreach or using an online deal sourcing platform. This upfront investment pays out dividends even more over the long term, as every portfolio company relationship begins with the first meeting or introduction.
In this post, we’ll talk about two ways that authentic relationship development is an effective deal origination strategy that can lead to better venture capital and private equity deal sourcing. These methods are not only restricted to the aforementioned industries, in fact, other finance professionals such as investment bankers, angel investors and those executives looking for M&A deals can also benefit from developing authentic relationships.
These include:
- Working with professionals at the center of an ecosystem
- Maintaining relationships with executives over the long run.
Individuals at the Center of an Ecosystem
As many investors know, some of the best deals come through referrals. To get good proprietary deals, you must know someone who is in a good position to make those introductions. Identifying such people is outside the scope of this article. But we believe the real differentiator is what you do after you’ve first met them. It is a reasonably straightforward process to form meaningful and authentic relationships with other professionals and organizations like startup accelerators, etc. In broad strokes, you should follow this process:
- Form an interaction cadence. Use email, social media, texts, etc.
- Be upfront about your intentions
- Determine how you can help them
- Identify organic opportunities to connect
One of the most important things is to stay top of mind with people who are in a position to refer good deals to you. Essentially, you’re allowing your network to source deals for you in real-time as they’re hitting the market. To this end, there is no substitute — particularly at the beginning of a relationship — for regular interaction. You can’t expect a top expert in a field to be thinking about you if it’s been six months since you last talked with them. To make sure conversations are happening regularly, figure out how often feels right to you (a cadence) and hold yourself accountable for sticking to it. As long as you approach these conversations with the right spirit, the cadence can help build an authentic relationship.
In the spirit of authenticity, it can often be helpful to be upfront about your intent in forming a relationship. If you’re looking for deal flow, say so. At the same time, you should be long-sighted about the potential for a relationship. Many professionals who are good sources of potential deals can also be excellent diligence experts, mentors, or executives for your companies. It’s often hard to know which direction a relationship might head in its early stages; it’s completely fine to frame your intentions as something like “getting to know an expert in this space as I spend more time in it and opportunities arise.”
While plenty of people will be happy to help, it’s beneficial to be thoughtful about how you can help them. Generating value for someone else is one of the best ways to cultivate authenticity in the early days of a relationship. Of course, value will mean something different to everyone, so you have to do a lot of listening and a bit of digging to find something relevant for each professional you work with.
As time goes on, you should look for organic opportunities to connect. While it is probably okay to reach out saying it’s time to catch up, that doesn’t always promote a lot of confidence that you consider a connection to be authentic. Begin thinking about your interaction cadence as less of a fixed point in time and more of a window. If you know you’re supposed to catch up with someone by next week, begin looking out for reasons to connect: a trip to their city, an article they might be interested in, a blog post that they wrote recently. By finding something organic and meaningful to them, the entire conversation will feel more natural.
Suppose you are regularly connecting over organic opportunities, providing value for them, and making it clear how they might provide value for you. In that case, you should have no issue forming a solid relationship that can anchor your deal sourcing strategy.
Deal Sourcing by Maintaining Relationships with Executives
Compared with its potential, tapping into entrepreneurs, business owners, and company executives is one of the most under-utilized sources of business development and high-quality deal flow.
After considering — and passing on — an investment, most investors tend to write off the executives of the company they were considering. There may be some vague intentions to keep in touch, but doing so is a remarkable rarity. This is because, for many investors, the value of the relationship is no longer clear after you pass on a deal.
The first source of value is the deal itself. In many cases, you may be uninterested in an investment because it’s not a good deal yet. That may change as the company refines its value proposition, gets more revenue, or cleans up its operating margin or other metrics.
While most investors recognize that a deal may become more attractive down the road, vanishingly few have the processes in place to follow up with a company and stay top of mind. Just as with the professionals from the section above, a cadence of interaction is essential. Providing value to your executive connections and being thoughtful in your interactions is a great way to show that you care about the relationship (not to mention set you apart as an investor).
It’s worth mentioning that these executive relationships can flourish into much more than just a way to be top of mind if the deal shapes up. In many cases, these executives are the exact type of experts who can also be a great source of deal flow from around the industry. Similarly, they may be potential due diligence experts and future sources of talent for your portfolio companies. As with any relationship, all potential may not be obvious upfront. That’s why it’s so important to grow the relationship and take time to learn about the person.
Summary
In the competitive worlds of private equity and venture capital firms, differentiated deal flow can mean outsized performance for a fund. The right relationship development workflows and activities can create that differentiation. By focusing on authentically developing your relationships with professionals and executives in your industry, you can establish and streamline a proprietary deal sourcing process, set yourself apart from the pack, and earn larger returns for your LPs.
