Improving VC deal sourcing with relationship intelligence

One of the biggest challenges for venture capital firms of all sizes is building repeatable due diligence and deal sourcing processes. Without the right structures in place, teams lose out on valuable opportunities and waste time searching for intel that may already be at their disposal.

But to get in on the best investment opportunities, you need to know where to find them. And for many VCs, your best opportunities are already in your existing network. 

In this article, we’ll share some of the ways that the world’s top  VC firms source deals. Plus, we’ll dive into how relationship intelligence—insights into your network, business relationships, and customer interactions that help your team track, manage, and close deals—plays a role in your deal sourcing efforts.

What is VC deal sourcing?

VC deal sourcing is the process firms use to find potential investment opportunities for their VC fund. Effectively scaling and maintaining quality deal flow starts with sourcing high-quality deals. 

Once a deal is sourced, it’s ushered through the company’s internal assessment and due diligence processes and pushed onward from there to a potential investment. At various stages of the deal pipeline, investors, General Partners, and Limited Partners (LPs) have the opportunity to review deal flow and build relationships with new, valuable connections.

A survey conducted by Harvard Business Review of 900 VCs found that nearly 70% of deals come from connections in their network. By monitoring these connections, you can make a plan to keep in contact and maintain the potential for investment or partnership in the future.

If you’re looking to optimize your VC ecosystem, the first step is to identify the key contributors to your current deal flow and diligence process. Building and nurturing relationships throughout a professional network is the first step to sourcing quality deals.

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6 essential steps in the deal flow process

Let’s take a brief look at all the steps in the deal flow process.

1. Deal sourcing

The first stage of deal flow management is sourcing new investment opportunities. The goal is to curate a list of leads that fit your firm’s investment thesis. The quality of the deals sourced in this stage is critical for setting the rest of the deal flow process up for success. There’s no one VC deal sourcing strategy, but investors will often look into their own networks, attend industry events, or conduct market research to find high-potential opportunities. 

2. Deal screening

The next step is to take the opportunities identified in the sourcing stage and further qualify them. The objective is to better assess the specifics of the company so your team can determine how it stacks up against other potential investment opportunities.

3. Partners review

Once the firm has collected enough information about every company, the opportunities will be presented to the partners for review. At this point, the partners will decide which of the sourced deals they’d like to move forward with.

4. Due diligence process

Due diligence is a detailed review of a target company’s state of affairs. The goal is to evaluate risks and opportunities, so the firm can make a data-driven investment decision.

 Most firms have a due diligence checklist that includes looking at the company’s finances, legal standing, assets and liabilities, and other key operational insights. The comprehensive nature of due diligence means that the process can take up to multiple months. 

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5. Investment committee review

Once the firm has completed the due diligence process, all the information is presented to the investment committee. They’ll have the opportunity to ask additional questions, review the information, and make a final decision on whether or not to move forward with the sourced investment.

If they choose to move forward, they’ll then draft and present a term sheet to negotiate the details of the investment.

6. Deployment of capital

When the deal is finalized, the firm will disperse the funds to the company. This will then be used to grow and scale the business. 

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How relationship intelligence improves VC deal sourcing

Effective venture capital deal sourcing is a prerequisite for success. But in many ways, deal sourcing is also an art. And the most successful venture capitalists rely on a careful combination of sourcing methods. Often, how VCs secure high-quality deals comes down to who they already know—not who they should know. 

Here are some ways to use relationship insights to elevate your deal sourcing strategy.

1. Stay in touch with top introducers

You likely already have individuals in your network who are regularly sending you deals. These critical individuals include other investors, early-stage startup founders, entrepreneurs,  investment bankers, and more. 

Alexander Ross is a General Partner at Illuminate Financial, a firm that specializes in late seed to series B investments. He described their process of building relationships with key individuals in order to find out about and win deals: 

“For us, it’s definitely about depth. If I think about what success looks like in terms of our relationships with large strategics, it’s 10-15 very senior change agents within an organization who actually care about innovation and adopting early-stage solutions—versus necessarily quantum of new contacts.”

Start by answering questions like:

• Who are the people who make the most referrals to your firm?
• Who has the biggest impact on the effectiveness of your deal sourcing?
• Have you identified these individuals?
• Do you have a system for keeping track of them?

Using an intelligent CRM platform helps your team keep track of all of these contacts in a single place, and they can also easily set reminders to guarantee an important follow-up doesn't slip through the cracks. 

Learn how 700+ dealmakers are sourcing and closing more high-quality deals in 2024.

Staying in touch via email, phone, virtual meetings, conferences, or even via social media platforms like LinkedIn or X (formerly Twitter) will ensure that you build strong relationships with high-quality connections. By forming a deeper relationship, you increase the likelihood that your network keeps you in mind when they come across a great investment opportunity in the future. 

2. Build relationships with co-investors

Another way to increase the effectiveness of your deal sourcing efforts is to build better relationships with the co-investors in your existing portfolio or investors in the companies your firm wishes to invest in. 

Collaborating with other investors—from angel investors to late-stage investors or even co-investing with your LPs—can dramatically expand your network to new areas typically outside of your portfolio. Even if you don’t pivot to start investing in a new industry, you can open doors to new connections that can pay dividends further down the line. Every deal that closes in your network is another data point for your potential investments.  

Tracking these deals in a CRM built for private capital allows you to enrich your internal datasets with details from external data vendors. Combining the information you have about your co-investors' investment activity and these industry datasets, you can create a complete picture of every deal in your collective network. Your team can see the timing of certain deals or identify key leadership changes that could indicate new investment opportunities, so you can make more informed about your own potential investments.

3. Create watchlists of startups in your current network

The most successful VCs recognize the value of getting ahead of the competition. They identify opportunities and reach out early. 

As a VC, you’ll likely turn down many potentially promising investments simply because the timing just isn’t right. While timing is everything, a company you pass on today and maintain a connection with may be a valuable investment opportunity a few months or years from now. 

Adam Shuaib, Partner at Episode 1 Ventures reflected on the way his team works with founders, saying “Being able to work with founders over a period of 2, 3, 4 months prior to when they raise is a great way to show your value.”

Take some time to list and label these companies based on the criteria your team cares the most about. Were they early-stage Series A companies that looked promising but were in the wrong sector? Was the company’s most recent valuation not what you’d expected? In this way, your team can quickly develop a go-to watchlist based on your investment thesis and disqualify companies that you know you don’t plan to revisit.

Periodically revisit this watchlist during your Monday Meetings, and use your CRM’s reporting and analytics to create easily reviewable, custom dashboards that visually showcase changes that matter to you. New valuations, recent leadership changes, and new funding rounds are commonly tracked data points that can signal upcoming opportunities. Keeping in touch with these startups means that your team can fast-track deal origination, and avoid missing the next important fundraising round.

4. Keep track of strategic advisors

VC firms shouldn’t have to work in a silo when evaluating opportunities. 

How many times have you looked at a compelling deal and wondered, “Who can I reference check this against? Do we have contact information for anyone in this space?”

The answers to these questions often lie buried in your firm’s inbox. More often than not, there’s likely someone in your team’s network who can help you in the deal sourcing process.

For example, a new team member may be looking for an individual working in healthcare, located in New York, who has served on an advisory board to help vet a new opportunity. After a brief search in your CRM, this new team member can identify the right contact. Even if they’ve never contacted this person directly themselves, they can easily review their history with your firm, surface a warm introduction, and open up the conversation. 

Finding advisors in your network doesn’t need to feel like searching for a needle in a haystack either. 

A CRM for VC firms, like Affinity, allows you to create tagging systems in your CRM that help you categorize and easily search for the contacts you need quickly. Building these systems allows you to streamline your due diligence process so any member of your team can quickly find the right person at the right time.

Accelerate and simplify your deal flow with relationship intelligence

The deal sourcing process is the foundation for building successful portfolio companies. Consistent, high-quality deal sourcing is driven by relationships. This means bringing in a steady stream of opportunities takes time and resources. But you can’t focus on building those relationships if you have to rely on your colleagues’ memories or static Excel spreadsheets to track the details of your firm’s interactions. 

The best VC firms’ sourcing strategies and deal sourcing best practices rely on relationship intelligence CRM solutions. These tools are purpose-built for deal teams in relationship-driven industries like venture capital, private equity, investment banking, commercial real estate, and consulting. 

At Affinity, we work with thousands of venture capital firms—from pre-seed to seed stage to growth equity to help them surface deals from right within their networks.

A relationship intelligence CRM platform, like Affinity, can help your firm find, manage, and close more deals faster with:

• Relationship insights to uncover warm paths of introduction that help you source and close deals 25% faster.
• One-click pipeline management to easily manage all deals in your pipeline—from your email, browser, or Zoom meetings—without interrupting your workflow. 
• Analytics to better understand where your best deals originate and streamline the deal flow process.

Episode 1 Ventures, an Affinity customer, has used the platform to shift to a more proactive, relationship-based sourcing strategy. Shuaib says:

"Affinity has been a big part of helping us manage our network. When you can have it in such an explicit way, it’s very easy to track where the holes are, what you need to expand upon, and it’s become a much bigger focus for us recently.”

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VC deal sourcing FAQs

How are VC deals sourced?

To source VC deals, investors attend networking events, research potential opportunities in the market, reach into their own network of relationships, or even quality inbound opportunities. The most successful VCs rely on a combination of sourcing methods and make the most of their existing relationships to uncover the best opportunities. 

What is the deal sourcing process?

The deal sourcing process includes all the steps involved in finding quality investment opportunities for VC or private equity firms. Throughout the deal sourcing process, firms will search for and research potential companies and deals that fit their investment thesis and strategy.

Once they’ve sourced a list of deals, they’ll push the most-qualified opportunities through the deal flow process to determine which companies they’ll ultimately invest in.

What are the metrics for deal sourcing?

There are many metrics that VC firms review to determine whether an opportunity is the right fit for their investment strategy. 

Common metrics might include:

• Conversion rates
• Revenue
• Customer lifetime value (LTV)
• Customer acquisition costs (CAC)
• Monthly or annual recurring revenue (MRR and ARR)

VCs will often look at metrics along with market conditions, growth potential, and other factors in the decision-making process.

What are the deal sourcing channels?

There are many deal sourcing channels investors can use to fill their pipeline. Some channels include:

• Existing networks: Including current portfolio companies and relationships that can connect you with qualified deals.
• Programs: This includes startup accelerators, incubators, and competitions.
• Industry events: These are events that allow investors to connect with industry leaders and founders.‍
• Deal sourcing platforms and databases: These marketplaces can help VCs discover and source potential deals.