A Guide to Venture Capital Deal Flow

A Guide to Venture Capital Deal Flow

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December 2, 2020
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Maintaining a strong deal flow pipeline is indispensable for Venture Capital funds. Some Venture Capitalists receive more inbound contacts than others, but the fact remains that all must assess high growth prospects and discern whether or not a potential investment could be their next ‘unicorn.’

Usually that process includes reviewing the same set of data sources for new leads and then discerning which leads are optimal targets. Venture capital deal flow is a complex and intensive process that demands efficiency. Luckily there are a few technological advantages that VC firms can bring to their deal sourcing strategies allowing them to radically improve deal flow. If your deal sourcing strategies haven’t been updated for 2020, and you’re looking to improve the venture capital deal flow process, read on to learn how.

What is Deal Flow and Why Does it Matter?

Deal flow refers to the flow, or rate, of incoming deals that signify investment opportunities for a firm and belies the foundation of a successful fund. The deal flow process is a funnel where hundreds of prospective companies go in but a small percentage are actually invested in, and an even smaller percent succeed. So why is deal flow so important?

For a VC firm, deal flow determines the ultimate success of its fund in addition to all the market factors affecting the success of the companies within the fund itself. When deal origination begins with low-quality opportunities it wastes precious time and ultimately threatens the viability of a fund over time.

Dissecting the Deal Flow & FC Investment Process

We can start to understand the severity of problems that emerge from poor deal flow by examining the VC investment or funding process itself.

All Companies that receive funding roughly go through the following process with VC firms:

  • 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.

The first stage in the deal flow process is broadly referred to as deal sourcing or deal origination. This is the process of finding appropriate leads and bringing them to your company’s attention. VCs have traditionally sourced deals through Personal networks, referrals, and direct outbound research. Through these networks, research, and referrals, VCs source deals and find companies that come into the deal flow funnel and are then screened to see whether it’s a sound investment or one to be left by the wayside.

5 Strategic Focus Areas for Improving Your Venture Capital Deal Flow

Before you can improve the efficiency and effectiveness of a funds investment process, you need to first find ways to improve and increase your overall deal flow velocity and volume.

Finding numerous high quality opportunities is important since the companies invested in from an initial meeting  can range anywhere from 1% at Homebrew to 0.7% at a prestigious firm like Andreessen Horowitz or 0.5% in more boutique funds like GREE Ventures. With only around 1% of those companies afterwards reaching the vaunted unicorn status.

There are five core areas any VC can focus on in order to improve their deal flow:

1. Modernize Networking

Networking has always been the foundation of quality VC deal flow. There are several ways you can streamline your networking practices and continue to remotely build deal flow even in a postbvCOVID-19 world.  There are a variety of new school techniques you can utilize to supercharge your networking by leveraging multiple data sources:

Be at the right place at the right time. The internet makes it easy to locate all the meetups, startup events, launch parties, & beyond happening in your niche. While these have always been a key part of building deal flow it’s so much easier to stay in the loop about events happening in your area and target verticals.

Conferences are not going anywhere. While the status of many conferences have changed amidst COVID-19 VCs and and should identify the cities and conferences they should be attending to press the flesh of the companies they want to be working with.

Modern startup aggregators, like AngelList, Product Hunt, Seed Invest etc, and private company information databases make it feasible to identify  industry-specific keywords to find viable companies & evaluate companies through various key firmographic variables. Once you know which companies you want to work with it becomes significantly easier to begin networking with and developing those deals.

2. Streamline Community Outreach

Stay relevant by putting yourself out there and building a reputation in your startup ecosystem. It’s hard to build deal flow through strong community relationships without being able to identify good targets. Luckily modern tech makes connecting with customers significantly easier. Some common tactics include:

  • Answering questions on social media, quora, Hacker News, Reddit, or elsewhere  helps nurture your local community while building the long term equity with entrepreneurs that supercharges deal flow.
  • Sponsor and/or participating in local hackathons and business accelerator events.
  • Serve as a speaker or judge at business pitch and accelerator events.
  • Be a mentor for local startups or function as an advisor to private businesses.
  • Go to launch events, tech happy hours, volunteer to lecture for your old professors, and investor meetings.

3. Build an Inbound Marketing Engine

In addition to personal networking, VCs can push their brand by creating and keeping current profiles on online platforms as well as curating compelling content through blogging and social media. Creating this content and campaigns is known as inbound lead generation and it brings visitors to your website and social platforms and converts them into potential leads.Inbound marketing strategies have been one of the biggest innovations in improving deal flow for firms. As we’re all inundated with ever more advertising, building an inbound funnel that causes founders, investors, and other potential partners to come to you for answers is the most efficient way to build trust. Most of Silicon Valley’s most successful VC firms of the last few decades rely on some or all of these tactics including:

4. Focused Brand Building

While every VC Funds brand hinges on its track record of success, the quality of your deal flow can always be influenced by how focused and on target your brand is. It’s important to keep your brand relevant by staying at the forefront of conversations within your space. Keep in mind start-up founders are interviewing you as much as you are interviewing them at this point. Thanks to inbound marketing there is ample information about how they should deal with VCs (you) during a fundraising round.

  • Utilizing market research tools allows you to understand and then leverage large macroeconomic and industry trends for all of your business communications.
  • While better communication strengthens your brand, that outward facing expertise also allows you to directly nurture current fund investments and build out more opportunities.
  • Once your brand is established and focused you can expect to gain significantly more deal flow from referrals from other investors,  referrals from portfolio companies, and referrals from other service service providers in your network.

5. Streamlined Deal Flow Management Tools

Once you’ve increased deal flow you need to implement a system that will manage your pipeline in a systematic and efficient manner. Deal flow management is a complex task that is often a shared responsibility among various team members.

The best way to do this is to utilize deal flow management software that organizes data, tracks metrics and progress, and aggregates your information in one convenient space. With deal flow management software you can avoid the mistakes, missed deadlines, and lost deals that can occur without a proper management system in place.

  • You can also apply these software tools throughout your screening process. For example SourceScrub, can sufficiently scrub valuable data on companies and compile them in a way that allows you  to perform TAM analyses before even analyzing a vertical.
  • Sorting out all your leads from conference attendance and networking is no small task. There are also a variety of company information aggregation tools that integrate directly into your existing CRM. We for example at SourceScrub match company data for your contacts directly into SalesForce, DealCloud, Affinity, or SugarCRM for continuous updated data flow about your contacts.

Weaknesses in the Old School Deal Sourcing Process

The VC deal flow process is powered by the deal origination strategies outlined above. But the problem with this current sourcing system is that most VCs rely almost exclusively on personal networks and referrals to find companies poised as potential investments.

If networks fail or referrals are slow VCs may miss out on potential big scores. Additionally, as the world grows digitized and the markets get more competitive, face-to-face meetings may not be enough to really source the breadth of investment opportunities out there.

Key Challenges in Scaling your Deal Sourcing Process

Companies need to employ a more global and far reaching method to source deals and increase their potential investment opportunities. The major obstacles encountered by VC firms include:

  • 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.
  • Screening deals accurately and efficiently both during pre-screening and due diligence.
  • Utilizing and aggregating performance data to assess the current state of a business, it’s position among competitors, and future potential for growth.
  • Understanding market maturity and gauging the total velocity of adoption within the market curve.

So, the question becomes, how can VCs accomplish these goals to increase the efficiency and effectiveness of their sourcing systems?

Streamlined Efficiencies in Sourcing Efforts

With SourceScrub, not only can you streamline both deal sourcing and screening, but you can also 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.   

Author
Josh Giglio

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