With millions of tech startups launching worldwide every year, venture capitalists need to be efficient at evaluating and sourcing promising high-growth companies that will be worth their investment and result in a liquidity event.
By having a well-orchestrated deal flow process, venture capital firms can increase the number of companies they evaluate, which increases the firm’s chances of finding investments that are likely to be successful.
What is Venture Capital Deal Flow?
Venture capital deal flow is the rate at which VC firms source, evaluate, and invest in companies.
According to Harvard Business Review, for each deal a VC firm closes, it evaluates an average of 101 opportunities resulting in a close rate of <1%. To be successful, firms must have a healthy deal flow process that allows them to source and review hundreds or even thousands of high-quality deals every year.
The best way to describe the deal flow process is using the metaphor of a funnel where thousands of prospective new companies submit their pitch decks at the top, but only a select few make it through the screening, review, committe and due diligence process to finally receive a valuation and term sheet from the VC fund.
A healthy deal flow consists of both quality and quantity since having a high volume, but a low-quality deal flow wastes firm resources and can even threaten the success of a fund. Successful investors must ensure they spend time on promising companies that fit their firm’s area of focus and investment thesis.
While many macroeconomic factors may affect the volume of a firm’s deal flow, there are many ways a VC firm can improve the quality and accelerate its deal flow.
How to Increase Venture Capital Deal Flow:
The Power of Relationships
There is no doubt that the best deals come from your network. Why? It’s simple: People prefer to do business with people they know, respect, and trust. After all, VC investments are no ordinary transactions. They are unique and have significant implications for every party involved.
Increasing your firm’s deal flow requires you to focus on the fundamentals of improving your network in health and size. It is no secret that stronger relationships lead to better deals.
According to Jim Breyer, the founder of Breyer Capital, the best deals come from his network of investors, executives, entrepreneurs, and professors. A survey by HBR found that around 60% of VC deals come from an investor’s networks and referrals.
Unfortunately, not all networks are the same, and experienced VCs with a long track record have an advantage over smaller emerging funds run by less experienced managers.
Here are some ways less experienced investors can grow the strength and health of their networks and ultimately improve deal flow.
Network and Attend In-Person Events
Interacting online is fine (and becoming more typical), but the deepest connections are always made in person. Sharing a drink or a meal with someone has a profound impact on the relationship. If you have something in common (like golf or rock climbing or comedy clubs), that will help build relationships too.
Since time is scarce when selecting events to attend, be selective and only go to those conferences or tradeshows where the most relevant opportunities will be present. If you invest in early-stage startups, it might be worth attending events at local universities, accelerators, or other startup hubs.
If events are a big part of your networking, don’t be afraid to get aggressive by presenting or speaking (sharing your knowledge and resources), sponsoring the event (monetarily or otherwise), or organizing side events (like curated dinners and gatherings with specific people).
As part of your networking strategy, being a Super Connector pays off and offers help connecting people, advice, tips, etc. The key here is to deliver value without the expectation of a return.
Pick an Investment Thesis
If you haven’t already, now’s the time to define an investment thesis that meets your business goals and suits your knowledge and experience.
We recommend you write down your investment thesis by following the format below:
(Firm Name) is launching a ($xMM) (stage) venture fund in (location) to back (geography) (sector/Market Companies) with (secret sauce).
Ideally, it would help if you focused on what you know best and where you think you can add the most value. For example, if most of your experience is working with early-stage companies in B2B SaaS, it makes sense to craft a strategy for investing in those kinds of ventures. Plus, it’s easier to be successful in industries you are passionate about.
Once you know where you’re going, it’s much easier to focus on the strategies and tools that increase your deal flow. It also narrows down the people you need to start building relationships with.
Get Referrals From Service Providers
Anyone that provides a professional service to your firm is a potential source of high-quality referrals. Lawyers, brokers, accountants, consultants, investment bankers, and other professionals can be excellent sources of high-quality deals.
You probably work with many of these service providers regularly, so you can reach out and ask them for a referral. On average, a referred company has a better chance of raising capital since this pre-screening makes referral deal flow higher quality than other sources.
With 4Degrees, you can set up alerts to get notified when members of your network have been in the news, published content, closed a large deal, etc.
Connecting and interacting with other professionals from your networks allows you to stay top of mind and grow your referral network.
Generate Referrals From Portfolio Companies
Your portfolio companies are strong sources of investment opportunities. Portfolio company CEOs and executives are usually well connected in the entrepreneurship ecosystems. They know other promising founders who may be looking to fundraise or would like to connect with a venture capital fund.
Mark Bivens, Venture Partner at Truffle Venture Capital, says it well: “If a member of one of my portfolio companies recommends I meet someone, I will most likely accept a meeting without hesitation. My portfolio company knows its market space better than I, so if they find a fellow entrepreneur’s startup proposition compelling, this is a tremendously valuable insight for me, creating some of the most relevant deal flow.”
These kinds of referrals are especially valuable if:
The referral comes from a company you have invested profitably in the past. This is because profitable companies know what investors are looking for. They can gauge whether an opportunity is worth your time. Plus, they want to keep a healthy relationship with you, so they won’t send poor opportunities your way.
The referral and the referred are in the same industry, sector, or niche. Since you have experience in the industry, there’s a good chance you’ll manage the deal properly.
Get Referrals From Other Investors
Like some investments are not suitable for your firm’s goals and strategy, other investors have similar limitations. Some firms turn down good deals because those opportunities aren’t ideal for them or don’t align with their investment thesis or strategy.
Instead of letting those opportunities evaporate into the ether, it’s wise to partner with other firms where deals are passed to the right investor. They introduce you to opportunities and vice-versa.
The value of these referrals is directly proportional to the strength of your relationship with the referer. If you provide lots of value to them, they are more likely to give lots of value to you. It also helps if you take the time to brush up on the specific strategies, objectives, and goals of other investors in your network to ensure you are referring deals that align with their area of focus.
Using a VC relationship intelligence CRM simplifies the process of tracking referrals and enables you to easily see your team’s collective network and prior interactions they’ve had with other investors.
Build Your Inbound Engine
Alongside your networking efforts, working on your digital presence is imperative. Growing a following online isn’t a way to expand your network and increase your venture capital deal flow overnight, but it has the potential to pay dividends over time.
Creating a loyal online following is a great way to punch above your weight and compete with larger, well-established venture capital firms.
If you build a large enough community that adds value and provides insight, you’ll have entrepreneurs submitting their pitches and reaching out for advice and mentorship. You could also grow your clout by getting invited to podcasts, interviews, events, etc.
Some of Silicon Valley’s most prominent VC firms have raised their profiles by building their online presence by publishing blogs, recording podcasts, being active on social media, etc.
Below are some techniques to grow your digital presence and build an inbound deal flow engine.
Email newsletters are still the most intimate way to engage with an audience.
By spending some time creating and curating content and using an email marketing platform, you can have personalized conversations at scale with your followers.
Maintaining a blog on your firm’s website or a platform like Medium is also worth considering.
Don’t worry too much about optimizing it for search engines or converting readers into email subscribers. Just use it as an opportunity to publish your thoughts and opinions and document the deals you’re working on.
If you don’t want to publish a personal blog, your firm may have a blog that you can contribute to. Just make sure your name is on it somewhere.
If you don’t want to blog on your site, you can guest post on other industry blogs. Providing content to other websites is a good way of breaking the ice with other bloggers.
Podcasting is another powerful way to connect with an audience and build your brand.
Many people at the top of their industries prefer podcast episodes over blog articles due to their intimate nature and deep dive into particular topics.
You can host your podcast if you have the time and energy. Otherwise, there are millions of podcasts out there where you can serve as a guest. Here is a list of the top venture capital podcasts that we recommend.
Social media isn’t just a distribution channel for your content.
It’s also a powerful way to build relationships with people who can offer opportunities in the future. Be active on LinkedIn, Twitter, and specialty Facebook groups (you may need to request access to private ones).
Curated private groups exist everywhere, such as on Facebook, LinkedIn, Slack, and private forums. You can create a VIP-type experience with certain people by creating a group or Slack channel and stocking it full of helpful, experienced people.
Invest in a Venture Capital Relationship Intelligence CRM
All the previously mentioned strategies will be more impactful if you have a relationship intelligence CRM system specifically designed for venture capital. This powerful relationship management system will help level the playing field by making you a more efficient investor.
Purpose-built platforms like 4Degrees help you automate time-consuming tasks, use your firm’s relationship network to uncover opportunities, get warm introductions and accelerate deal sourcing.
Your next best investment is probably hidden somewhere in your existing network. But how can you focus on fostering relationships and finding proprietary deals if you still rely on static spreadsheets to track your interactions?
With the power of relationship intelligence, you can increase the quality of your deal flow by:
Instantly determining the best path into a startup via a warm introduction to an entrepreneur, angel investor, etc.
Building stronger relationships by receiving real-time alerts of when connections have been in the news, published content, left a job, etc. Allowing you to create meaningful links and nurture new opportunities.
Easily track and identify your best deal sourcing activities so that you can devote more resources to them.
In addition to relationship intelligence, a venture capital Relationship CRM platform can save your firm thousands of hours per year by:
Eliminating data entry by automatically capturing and enriching data on potential deals, LPs, portfolio companies, etc.
Providing you complete visibility across your firm’s relationships and deals to avoid missed opportunities by ensuring all deliverables are on track.
Automate relationship-oriented tasks by seamlessly connecting to your email inbox, calendar, and other parts of your firm’s tech stack.
To learn more about how a relationship intelligence CRM like 4Degrees can help you improve your deal flow management and make you a more efficient investor click here to schedule a personalized demo.