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How to Improve the Venture Capital Deal Flow Process

Maintaining a strong deal pipeline that is consistently providing new and high-quality opportunities is indispensable for venture capital firms. Some VCs receive more inbound than others, but the fact remains that all must assess future growth potential and discern whether or not the potential investment could be the next ‘unicorn.’ Usually that process includes reviewing the same set of data sources for new leads and then discerning which leads are optimal targets. Is there a way to automate this process and to what degree, ensuring data quality is not compromised? Perhaps more importantly—how can your current deal origination strategy leverage automated efficiencies with Investment Research Software to help better inform your deal sourcing efforts?

If your origination strategy is still largely manual and you’re looking to improve the venture capital deal flow process, read on to learn how through keys to deal pipeline management.

Venture Capital Deal Flow Process

Picture the deal flow process as a funnel, where hundreds of prospective companies go in and three or four per year come out (depending, of course, on the size of the VC). A simplistic model is as follows:

  • Stage 1: Venture capital deal sourcing and screening – Within a year, a mid-sized VC might source and screen anywhere from 200 to 1,000 potential investments. These are typically through referrals from other investors, portfolio companies, or service providers.
  • Stage 2: Initial meeting – For the first couple of weeks, VCs focus on the company’s internal team, management, work processes, etc. Once they’ve done that, they meet with the company to decide whether their fund would be a good fit. Most of the ‘No’s come after the initial meeting.
  • Stage 3: Assessment and analysis – The few months following the initial meeting involve numerous discussions between the VC and the prospective company regarding potential strategies, partnerships, future projections, and more. Only a select few will move onto the end of the funnel.
  • Stage 4: Investment – At this stage, the VC will make an investment offer with the company and move forward from there. 

While each stage can be improved and made more efficient, there is one part of the funnel that must be working optimally in order for the VC to succeed. 

Improving Stage 1: Sourcing and Screening

The primary focus for venture capital firms is to widen the top of the funnel, allowing more companies to run through the fund managers’ hands. Improving the efficiency of the first stage requires obtaining consistent, updated information on market changes, prominent themes within a vertical, and key firmographic data so you can source investment opportunities that fit your thesis. 

That being said, sourcing is only half of the deal origination strategy in the investment process. The fact is, 99% of deals aren’t going to be right for some VC firms. Screening these deals efficiently must be integrated into the financial investment strategy as a whole. This requires research of key performance data to assess the current state of the business and future potential for growth.

Partially or fully automating these processes can improve deal flow and allow VC firms to evaluate significantly more businesses.

Automating Deal Sourcing

As the number of angel and seed funding deals rises consistently year over year, so does  the number of companies seeking VC funding. As a fund manager, you want to target and evaluate companies before the market becomes oversaturated. This means creating your own opportunities so you have a competitive advantage. Using an automated service like SourceScrub allows you to:

  • Search through an extensive database using industry-specific keywords to find viable companies
  • Evaluate companies through various key firmographic variables
  • Integrate company data with SalesForce, DealCloud, Affinity, and SugarCRM for continuous updated data flow

Automating Deal Screening

To understand where the company needs to go, you first need to gain a better understanding of the firm’s foundation and history. This involves collecting basic firmographic data that outlines and evaluates a company’s current position and past growth, such as:

  • Cash flow
  • Revenue
  • Debt
  • Employee numbers
  • Job postings
  • Startup date

How this data is collected can be done one of two ways:

  • Hiring a team of research analysts – The traditional method of acquiring this data on hundreds (sometimes thousands) of companies is to hire research analysts that will manually research companies and identify variables to track growth and performance for each company.
  • Automating research through a data platform – With the availability of information online, software such as SourceScrub can sufficiently scrub valuable data on companies and compile them in a way that allows the user to perform TAM analyses, identify leading indicators for growth, assess the future viability of businesses, and ultimately beget more meaningful interactions with high-quality prospective companies. By automating these processes, you save time, decrease massive overhead costs, and can screen more deals on a daily basis.

Automated Efficiencies in Sourcing Efforts

To improve your origination strategy, you should consider automation that will help improve efficiencies in deal sourcing efforts. With SourceScrub, not only can you automate both deal sourcing and screening, but also you can automatically integrate it with your CRM platform to ensure your data is consistently up-to-date. In addition to being a tool for deal sourcing, you can also use the platform to create an effective marketing strategy around transactions you complete or events you’re attending. To learn more about how to use a search-optimized Company Data platform and the efficiencies one can bring to your deal flow strategy, visit our website today. 

Sources:

  1. Venture Beat. Here’s a look inside a typical VC’s pipeline (a must-read for entrepreneurs). https://venturebeat.com/2014/04/19/heres-a-look-inside-a-typical-vcs-pipeline-a-must-read-for-entrepreneurs/
  2. Medium. State of Seed Investing in 2018. https://medium.com/the-mission/state-of-seed-investing-in-2018-25eb28ac0e93