Venture Capital and Private Equity investors do many things: evaluate a company for investment, provide advice and guidance to help them succeed, identify key talent for leadership roles. 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 an investor can’t find good investment opportunities.
Here at 4Degrees, we’re focused on authentic relationship development. To many, it’s not always immediately obvious how our values around authenticity mesh with transactional processes like deal sourcing. At its surface, deal origination feels completely transactional: find companies, stick them in the CRM, and run them through the due diligence process.
But we believe there’s so much more to it. Good deal sourcing should begin with the relationship. If you can start from a position of trust and respect, the rest of your job gets so much easier. The dividends of this upfront investment payout 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 can lead to better deal sourcing for VC and PE professionals. Those methods are 1) working with professionals at the center of an ecosystem and 2) maintaining relationships with executives over the long run.
Professionals at the center of an ecosystem
As many investors know, some of the best deals come through referrals. In order to get good proprietary deals, you must know someone in a good position to make those referrals. Identifying such professionals is its own subject and outside the scope of this article. But we believe the real differentiator is what you do after you’ve met them.
We believe there is a relatively straightforward process you can take to form a meaningful and authentic relationship with these — and many other — types of professionals:
- Form an interaction cadence
- 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 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 6 months since you’ve 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 your approach these conversations with the right spirit, the cadence can help ensure the opportunity for 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 of the professionals who are good sources of potential deals can also be excellent diligence experts 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 just 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. 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.
If you are regularly connecting over organic opportunities, providing value for them, and making it clear how they might provide value for you, then you should have no issue forming a strong relationship that can anchor your deal sourcing strategy.
Maintaining relationships with executives
Compared with its potential, tapping into business owners and company executives is one of the most under-utilized sources of 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 actually 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.
While most investors recognize that a deal may become more attractive down the road, vanishingly few have the processes in place to actually follow up with a company and stay top of mind. Just as with the central professionals from the section above, a cadence of interaction is important. Providing value to your executive connections and being thoughtful in your interactions is a great way to show that you really 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 of the 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.
In the competitive worlds of venture capital and private equity firms, differentiated deal flow can mean outsized performance for a fund. The right relationship development processes and activities can create that differentiation. By focusing on authentically developing your relationships with professionals and executives in your industry, you can establish a proprietary deal sourcing process, set yourself apart from the pack, and earn larger returns for your LPs.