Most venture capital firms are looking to get on the ground floor of the next unicorn or $1 billion+ company, resulting in a great payoff for the firm and its LPs. However, most VC firms still rely on antiquated and inefficient processes to meet high-potential entrepreneurs and source promising early-stage startups.
VCs need to adopt efficient deal-sourcing strategies coupled with the right technologies to stand out from the competition and find deals with the highest probability of success.
Unsurprisingly, the best investment opportunities are hiding in plain sight within the investors’ relationship networks; unfortunately, most venture teams lack the tools to effectively tap into their networks and access these potential opportunities.
Having the right tools and processes to leverage the power of their organization’s relationship networks can empower firms to punch above their weight by sourcing a higher volume of high-quality deals. By leveraging their networks, firms can also forgo high-effort and low-yield sourcing methods such as cold outbound outreach.
What is Venture Capital Deal Sourcing, and Why Does it Matter?
The lifeblood of every venture capital firm is deal sourcing or deal origination, which is also the first stage for finding and screening potential investment opportunities. Once deals have been sourced (via inbound through email, LinkedIn, deal sourcing platforms, referrals, etc.), they are ushered through the firm’s selection and due diligence processes which consist of several steps designed to identify new investments.
An efficient process for high-quality deal sourcing is crucial since the standard conversion rate from initial meeting to investment is around 1% or even lower at elite VC firms.
To be successful at generating an acceptable return, VC firms need to spend time finding the right type of companies that fit their investment thesis and criteria.
Since most venture capital profits come from a small percentage of investments, a slight improvement in selecting potential investments can significantly improve the fund results.
At 4Degrees, we work with hundreds of venture capital firms that use our relationship intelligence technology to source more deals faster and streamline their due diligence process by leveraging the power of their relationship networks.
Improving Deal Sourcing with Relationship Intelligence
4Degrees is a relationship management (CRM) platform built for Venture Capital firms by ex-VCs who experienced firsthand the power of their relationship networks when sourcing and evaluating deals, as well as identifying connections that changed the trajectory of their portfolio companies.
In our experience, firms that know how to best leverage their networks can punch above their weight and deliver above-average returns. And we are not alone. According to research from Harvard Business School, nearly 70% of venture capital deals come from connections from the investor’s network, making it worthwhile for VC professionals to spend time building and nurturing their relationships.
In this article, we will go over the four ways forward-looking venture capital firms source new companies by using relationship intelligence- a technology that generates actionable insights into your team’s network based on data.
1. Building a Warm Inbound Deal Sourcing Network
Warm inbound deal sourcing can significantly increase the number of high-quality companies that get introduced to a VC firm. These startups have already been somewhat vetted by the referrers who understand the VC firm’s investment thesis and what they are looking for in a potential investment.
To build a network for warm inbound sourcing, many VC firms build relationships with professionals exposed to promising startups before knowledge of the company becomes widespread. Usually, this includes other venture capital investors, angel investors, investment bankers, and other intermediaries or members of the technology ecosystem.
Identifying and building relationships with these deal sources is easier said than done without the right technology.
If you are still relying on Excel spreadsheets and your email inbox, how do you know:
Who is making the most referrals to your firm?
Who in your network has the most significant impact on sourcing new deals?
Who in your firm has the strongest relationship with a potential intermediary?
When and how to reach out to key referral sources?
By using a relationship intelligence CRM platform, you can keep track of all your contacts and have access to updates and notifications to stay abreast of key events happening with your deal sources and giving you an authentic event-based reason to reach out. You can also set reminder cadences to ensure you stay engaged and top of mind with your best deal sources.
Building deeper relationships with your network is imperative to staying top of mind and developing an efficient deal-sourcing network.
2. Identifying Your Connections to Companies
Did you know that an associate from your firm went to school with the founder of a promising startup? Or that one of the angel investors you met at a networking event was an early investor in a company you are currently evaluating?
Relying on spreadsheets to track complex relationship datasets of who in your firm knows who is slowing your team down and resulting in missed opportunities.
By using non-purpose-built technology (Excel, generic CRMs, etc.), there is no way to know who all your team members are connected to, let alone the strength of their relationships with their connections.
The 4Degrees relationship strength score and automated contact enrichment can instantly uncover connections you did not know existed without asking your team if they know anyone at X company, etc.
With just a few clicks, you can request a warm introduction that results in a better outcome than a cold email or call.
3. Keeping a List of Potential Startups in Your Network
Just because you pass on a potential deal today does not mean it will not be an exciting investment opportunity in the future. There are several reasons why a firm would pass on an investment, including valuation, stage, or a myriad of other factors.
Efficient investors keep a list of companies and founders in their network that might be an attractive investment opportunity at a different time.
A relationship intelligence platform can automatically monitor specific metrics around these companies (updated valuations, new fundraising rounds, executives, among others). By accessing all this data, you will know the best time to re-engage and continue the conversation.
4. Keeping Track of Experts and Advisors
In venture capital, speed is the name of the game, especially when evaluating companies that other investors are also courting.
Yet before your investment committee decides whether to move a company down your deal pipeline and ultimately invest, you will most likely want to speak with a subject matter expert familiar with the industry or space in which the company operates.
Unfortunately, finding and booking time with specific experts or advisors can take a long time, be expensive, or both.
With a relationship intelligence CRM, you can effortlessly search for the type of advisor you are looking for, ex: a fintech expert who has experience working with the SEC and served on a board. Even if you are not directly connected to this individual, you can see who on your network knows them and can make a warm introduction so you can continue with your due diligence. All this in a matter of minutes, not days or weeks.
Take Your Deal Flow to New Levels
Finding a steady stream of investment opportunities can be very time-consuming, especially if you still use spreadsheets, email, and your colleague’s memories to keep track of all contacts and conversations.
Top VC firms are changing the game by incorporating processes and tools to activate and leverage their relationship networks to source higher-quality deals without spending hours doing cold outreach or pouring through spreadsheets or their inboxes.
If your team is looking to stay ahead of the competition and source higher-quality VC deals, implementing the right processes and technology is the best place to start.
To learn how 4Degrees- can source, manage and close more deals, click here to schedule a conversation with our team.