VC deal flow management strategies and best practices

Deal flow management for VCs requires sound strategy and tools that work with sophisticated and complex deal processes—systems designed to fit the non-linear way VCs make deals. Without these things, VC deal teams risk losing track of valuable data and can waste time on poor-fit opportunities while the good opportunities slip through the cracks.

In an ever-changing venture capital ecosystem, few things impact a firm’s bottom line more than quality deal flow. Top VC firms are getting (and staying) ahead of the competition by efficiently managing their incoming opportunities and ensuring the best deals don’t pass them by. They are vigilant about increasing deal flow and quickly identifying top deals that may be heading their way with the help of a purpose-built VC tech stack.

In this post, we explore what constitutes effective deal flow management, introduce the stages of the deal flow process, outline some key strategies for organizing deal flow, and discuss how you can most effectively use technology to streamline your venture capital deal flow management processes.

What is VC deal flow and why does it matter?

Venture capital deal flow is the velocity and pace (flow) of incoming investment opportunities (deals) for a VC firm. Like in private equity and commercial real estate, strong deal flow is a determining factor of a successful VC firm. 

Deal sourcing conversion rates—opportunities that go from referral to initial meeting to closed deal—are incredibly low (often less than 1%), which means volume is the name of the game. Successful VCs connect with hundreds, or sometimes thousands of potential portfolio companies, founders, stakeholders, and intermediaries each year.

But volume isn’t the only factor that matters. The quality of the deals in the pipeline is also an indicator of the health of your firm. Low-quality deals in your pipeline waste your firm’s time and resources on due diligence for what end up being poor opportunities.

Deals can originate via inbound or outbound channels, and the percentage of each will differ by firm. In Affinity’s 2024 predictions report, 46% of firms said most of their deals would come from outbound efforts in the year to come, whereas 54% thought most of their deals would be inbound.

Inbound deals come from many places, including word-of-mouth in startup communities, third-party data sources, angel investors, and activity in other investment firms. Still, they primarily come through your VC firm’s existing network relationships. How your firm manages those relationships—and all the communication and activities that happen as those relationships are established, grown, and maintained—directly impacts your venture capital deal flow management and your firm’s ability to withstand changes in the market.

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The stages of the deal flow process

While every VC approaches the deal flow process differently, there are seven common phases during which investment teams collect information to prove whether a company is a fit for their firm’s thesis.

1. Sourcing

Sourcing is the process of finding potential investment opportunities that have the potential to be high-quality deals and fit the firm’s thesis and fund goals. This can involve attending networking events, communicating with LinkedIn connections, researching market activity, and tapping into your existing network to learn more about available opportunities.

In a webinar, ‘Sourcing hidden gems beyond major VC hubs,’ Sakib Dadi, Partner at Stage 2 Capital, describes deal sourcing as similar to a sales funnel: 

“You have inbound leads and you have outbound generated leads. The inbound can come from earlier-stage investors, folks in your network who might already be looking at a particular geography, vertical, or a particular focus that you have a relationship with and might be able to introduce you to those companies [...] there's also a good chunk of outbound that you might have to do.”

2. Screening

The screening process involves investors—usually at the associate level—digging a bit deeper into each opportunity, examining basic assets like pitch decks to determine which opportunities should proceed.

Learn more: Affinity’s AI will automatically analyze pitch deck content and map it back to the Affinity CRM. Read the guide.

3. Outreach and first meeting

When investors believe an opportunity has the potential to be a good investment, they will reach out to set up a first meeting to better understand the leadership team, the company’s competitive advantage, and the market health of their industry. 

The outreach process is usually the responsibility of associates, who use tools like LinkedIn to  find the best introduction path to a target company. Ideally, they’re looking for colleagues that have a connection to the founder or executive team and/or shared time at a previous company. This can be hard to do when the context of each relationship is missing, and it’s where relationship intelligence can help.

Depending on the outcome of the first meeting, additional meetings will be set where the investment team can ask more questions.

4. Due diligence

After the first meeting, if the team feels the deal has the potential to be a good investment, they’ll initiate the due diligence process. Now is the time for the VC to ask questions to understand the company’s financial, technological, legal, and market opportunities and risks.

5. Investment committee

Once due diligence has been completed, the investment team or committee will review all the information, listen to the company’s pitch, and ask any additional questions. They will then take all this information into consideration during the decision-making process and vote on whether to invest.

Sakib Dadi, Partner at Stage 2 Capital, notes that selecting the right companies to invest in remains the most critical aspect of a VC’s job. He says, 

“In today's world where capital has become constrained, and growth is a lot harder [picking the right companies] suddenly becomes more important, or seemingly more important. But it always mattered. Doing the work, finding the right investment, and having conviction in it because you've done all that work really matters in this job.”

A committee may choose to invest for various reasons. These might include balancing risk, building relationships, supporting an investment thesis, and having confidence in a substantial ROI. 

6. Term sheet and negotiation

When the VC decides to invest in a company, they begin negotiations using a term sheet. Term sheets are used to outline the terms of the deal and typically include:

• Deal size/ownership percentages
• Cash flow rights
• Liquidation right
• Control rights
• Pro rata rights
• Employment terms 

7. Capital development

The final stage of the deal flow process involves transferring capital from the VC firm to the company’s bank account.  

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Key metrics venture capitalists track during the deal flow process

All VCs should track key metrics to ensure their deal flow process runs smoothly. Understanding what is and is not working in your process is essential. 

• Conversion rates: Tracking how many companies make it to each stage of the pipeline can help identify inefficiencies in the process. 
• Diversity: Measuring and evaluating the diversity of deals in your pipeline—for example, founder or geographic diversity—can help you understand and remove any potential bias from your deal flow process.
• Relevance: Understanding if the opportunities in your pipeline are qualified can help you eliminate inefficiencies. If a high number of deals in your pipeline are unqualified, you can work to improve how you communicate your investment thesis. 
• Volume: Measuring how many new opportunities are coming into your pipeline each week can determine brand recognition and awareness. 

How top VC firms manage deal flow with a relationship intelligence CRM

Let’s look at two specific ways top firms use deal flow management software, like Affinity, to manage and organize deal flow.

Centralize inbound deal flow

If your firm has a strong track record and your team is effectively managing and using its network, chances are they’re getting bombarded with introductions and one-pagers on companies seeking investors. With so many emails, it can be tough to sift through the noise and ensure that valuable information is not lost. 

Connecting your email inbox and contact information with a deal flow management tool centralizes all communication related to your most important deals automatically, so you never miss out on valuable information. 

Improve collaborative work

If centralizing data is the first step in optimizing your deal process, the next is making sure that when one person receives important information, it can be accessed by anyone connected to the deal. Relationship intelligence platforms eliminate data silos so everyone on your team can stay up to date while retaining granular privacy controls so others can remain on a need-to-know basis.

For example, Sakib Dadi, Partner at Stage 2 Capital, highlights how his firm maps out their network of LPs to facilitate matching of LPs with founders: 

“Do we have a good sense of the mapping of the nodes within our network of LPs—so individual LPs who we can rely on for support on sales, customer success, marketing, and all of that. Where might the gaps in our coverage be based on function or even vertical?” 

The same data silos that thwart your ability to nurture connections are also walls between your team and new deal opportunities. Efficient knowledge-sharing helps your team move harmoniously to do complementary—rather than overlapping—work. Utilizing every avenue in your professional network to drive toward your next deal requires that your team understands who owns what.
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With a relationship intelligence platform built for deal flow management, you can more easily collaborate on the following:

• Sourcing introductions within your CRM without accidentally overreaching and connecting with a prospect someone else is already working with.
• Learning who on your team can provide a warm introduction to a prospect in their network. 
• Ensuring that deals are easily visible and shareable throughout the deal management process.

Improve deal flow by identifying warm introductions

As a VC, relationships shape your business, and the role that relationships play in closing deals shouldn’t be underestimated. 

With relationship intelligence data, teams can access data-driven insights to make confident investment decisions based on the most accurate, up-to-date data on the people and organizations in your firm’s collective network.

CRM software with relationship intelligence functionality can help VCs prioritize their deal flow by uncovering warm introductions, which help to close deals 25% faster. 

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Why leading VCs are using Affinity for deal flow management

Affinity is a CRM purpose-built for venture capital firms. Unlike standard CRM software solutions, Affinity’s core features support deal flow and relationship management automation, including automated contact profile creation, contact management, activity tracking, and relationship intelligence. 

Affinity works with your deal team’s existing email software and calendars (including Gmail and Microsoft Outlook), freeing dealmakers from hundreds of hours of manual data entry per year. The time they save with Affinity’s automation features can be spent sourcing deals, building and nurturing relationships, and fundraising. The platform also offers extensive custom integrations with third-party providers, including file management tools like Dropbox, email marketing tools like Mailchimp, and even other CRM platforms like Salesforce.

Affinity’s pipeline management features support the sophisticated, long-term dealmaking that constitutes venture capital deals. This is a competitive advantage in an industry that requires speed to action over long periods to win the best deals.

However, what makes Affinity a game-changer for VC firms is relationship intelligence—insights into your team’s collective network, business connections, and client interactions that help you find, manage, and close more deals and make smarter investment decisions. Affinity’s proprietary algorithms assess and analyze every relationship across your firm to help you find the right connection point, unify your team’s collective network, and find the best path to an introduction to new opportunities.

Built-in business intelligence also makes updating limited partners (LPs) with automatically generated reporting and analytics dashboards easier than ever. Share your most important business metrics and KPIs with LPs, report on deal flow pipeline status, and keep your firm’s brand top of mind as one of their leading funds.

Talk to our team today to learn more about how a relationship intelligence CRM can help your firm optimize your deal flow management workflows.

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VC deal flow FAQs

What is good deal flow?

For venture capitalists and investment bankers, deal flow is considered good if it brings in enough new high quality opportunities or fulfills another requirement defined by the investment committee—balancing risk, building relationships, supporting the investment thesis, etc.

What are the stages of the VC deal flow?

There are seven stages of deal flow. They are:

1. Sourcing opportunities
2. Screening using basic assets like pitch decks
3. Outreach and conducting a first meeting
4. Completing the due diligence process
5. Bringing the opportunity to the investment committee
6. Negotiating the term sheet
7. Capital development

How do VCs get deal flow?

One of the most effective ways of creating deal flow for VCs is to build and use their network. Building relationships within their network keeps them top of mind when high-quality deals arise. 

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