How to build deal flow for venture capitalists

The world’s most successful VC firms manage a large quantity and a high quality of deals. A common rule of thumb is that a VC firm will close 1% of deals by the end of the due diligence process. Incremental growth in both the quality and quantity of deals determines the success of the firm. When sourcing at the top of the funnel is slow or companies routinely fall outside of the fund’s scope, a team will either take longer to find good deals or waste time on poor ones.

What is venture capital deal flow?

Venture capital deal flow is the process by which venture capitalists bring in, evaluate, and hopefully win, deals. In the world of venture capital building a quality deal pipeline and increasing deal flow are a firm’s most important considerations.

New deals mean new investment opportunities and new investment opportunities mean potential wins. A firm may find and evaluate thousands of potential companies per year. Quality deal flow then—from sourcing new companies and contacts to making an investment—determines a firm’s success.

Let’s take a look at some ways you can build an efficient, high-quality deal flow pipeline in venture capital.

How to increase deal flow

For most firms, the only thing more important than saving money is saving time (which, in turn, saves you money). This means that merely increasing deal flow isn’t a catch-all solution. Teams have to increase quality venture capital deal flow. Rosalie Seriese, an investment associate at AngelHub Ventures, recalled that in one year, AngelHub only invested in 0.5% of the deals they reviewed.

That number may seem low, but of the five deals the firm funded in that year, four came via a trusted referral. The fifth investment received “an endorsement from a trusted source shortly after they contacted us.” A survey conducted by Harvard Business Review of 900 VCs found that nearly 70% of deals come from connections in their network. This isn’t a coincidence. Deal sourcing is a VC’s single most powerful tool to improve deal flow.

Sourcing comes in many forms, but quality sourcing often comes directly from your network and existing relationships. Unfortunately, not all networks are created equal, and VCs that have been in the industry for longer periods of time typically have a huge leg up on growing their deal flow pipeline.

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Network for the long haul

While networking is a reliable way to increase quality venture capital deal flow, networking efforts will backfire if the intent is superficial and there’s no mutual benefit. The key is to become a super-connector and adopt a long-term view of relationship management.

Reflecting on his firm’s most successful investment decisions, Alexander Ross, General Partner at Illuminate Financial said, “That depth of relationship, being in the conversation gives you the opportunity to execute on what we thought were some of the best deals.”

It can also be helpful to connect with individuals who work in other capital market sectors—such as investment bankers, angel investors, or limited partners (LPs). Although under some circumstances, you may be competing with private equity firms or others within the industry, at other times, you may be a vital referral source for them.

How to improve deal sourcing

Effective deal sourcing shapes your entire deal flow pipeline, so it’s vital to understand deal origination. Connecting with a new lead starts with finding new inroads in your network. But if you’re starting small or trying to scale your individual network, there are a few other options to get you started.

Evaluate your network for referrals

Finding the right introductions to new connections is an effective way to improve your deal sourcing, but it’s also the biggest problem: how do you make new connections if you don’t have connections to make new introductions? The first step is to evaluate your existing business relationships.

When reviewing your network for possible introductions, make sure to look beyond other investors in your network. For example, David Nevas of Edison Partners says that service providers like lawyers, accountants, banks, and consultants they’ve worked with have served as great sources of referrals. “Many of these service providers also use referrals as a way to differentiate themselves to companies, so it can be worthwhile to build your network with these folks even if you don’t currently have a need for their service.” The same can be said for executives of companies you’ve previously evaluated.

Revisit referrals from executives you’ve passed on

Your current portcos can offer a great window into meeting other leaders in their industry, but it’s equally important to record interactions with executives whom you’ve passed on so you can revisit them later. Even if you pass on an opportunity initially, your decision may change at a later seed stage. Or, the company may refine its value proposition or scale and decrease your sense of risk in the investment.

Automatically capturing all of your touchpoints (emails, calls, meetings, and summary notes) and setting automated reminders in an intelligent CRM platform can ensure you are always able to follow up with your important connections and ensure you are able to revisit a potential deal. This is critical for quality potential investment opportunities.

Beyond that, even if a deal doesn’t go through, it’s still possible to create a lasting connection with the executives of that company and open the door to others in their industry—and a growing list of opportunities.

Search in new regions

One of the most effective means of increasing deal flow and investment performance is to diversify your network and investment pipeline geographically. Although the best performing venture capital firms are based in major technology centers—Silicon Valley, Boston, New York, and increasingly, Miami—the success of theie funds comes from outsized performance across the country and around the world.

A lot of investors have a tendency to source deals and invest in companies based in their backyards. According to data from Crunchbase, the tendency to invest “close to home” is apparent among investors specializing in all deal stages, though it is especially pronounced among earlier-stage investors. By consolidating and evaluating your network in a single system, you can easily review your deals by region and work to diversify your portfolio.

Build your reputation

Regardless of which channels you rely on for deal flow, competition is inevitable. A strong reputation is the single most effective way to differentiate from the masses. A VC’s reputation is often fortified with a solid track record of providing valuable resources (in the form of capital, access to customers and new hires, and institutional knowledge, for example) to portfolio companies.

Adam Shuaib, Partner at Episode 1 Ventures spoke to the consistency required for VC funds to build a brand reputation that generates inbound deals. He said, “I think the very best funds don’t ever want to drop the ball. There’s always the fear you’re going to miss the next big deal. So it’s a lot of maintaining that reputation, seeing as many [deals] as you can, and always staying focused.”

There are other actionable ways for VCs to develop their reputation. David Rose, CEO of Gust and a managing partner at Rose Tech Ventures, recommends several potential outlets for VCs to fortify their reputations.

• Create and keep current profiles on online platforms like LinkedIn
• Participate as a judge in business plan competitions
• Serve as a mentor for local accelerators
• Answer questions on Quora
• Attend local startup meetups or networking events and provide proactive, helpful advice
• Write a blog about areas in which you're seeking deal flow and promote it on social media

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Deal flow best practices

As deal flow picks up, you’ll need to keep your venture capital deal flow pipeline well-managed and organized. When your team is managing hundreds of deals—deals that involve months of research, follow-up meetings, and negotiations—it’s easy for pieces to slip through the cracks or for leads to go cold.

Even if you're using deal flow management software, like a venture capital CRM, or other tools in your VC tech stack to track that data, it’s easy for it to become outdated if people aren’t manually logging their records. This is doubly true for cumbersome enterprise systems that can take weeks or months to properly set up and meet your firm’s needs.

Making relationship and deal data management as seamless as possible can set your team up for success. Your technology stack can help, whether you’re using SaaS, on-premises solutions or, most likely, a combination of both. If you’re looking for a new CRM platform, you can explore the functionality in these venture capital CRM alternatives to learn more.

Let’s take a look at some key ways you can organize your deal flow to make data maintenance as easy as possible, keep your team aligned, and help you close more quality deals.

Automating data entry

The first step to organizing your deal flow is to automate old, manual processes. When you eliminate manual data entry, your team has more bandwidth to focus on deal sourcing. While the team connects with new leads at a big conference, Affinity will automatically log emails and build new contact records for them.

The prospect of spending hours creating a slew of new accounts in a CRM or logging every single phone call you have with promising entrepreneurs feels more like a necessary evil than a need. But it is necessary. When that information isn’t tracked firms lose out on opportunities.

Building a strong venture capital deal flow pipeline requires both a consistent volume of prospects and a quality pool of opportunities within that group, while automation ensures that the sourcing work is captured and logged, so you can spend time doing what you do best—closing deals. Automated data capture also ensures that your data is always accurate, so the entire team can take action with confidence.

Centralizing valuable information

Centralizing opportunities—whether they are inbound or actively sourced—is an invaluable part of keeping your firm working as a team. It’s one thing to have the ability to automatically log important data, but if every member of your team is managing their own network and their own deals in silos, it’s easy to overlook valuable touch points and potential introductions.

By tracking opportunities and related communications (e.g., emails, calls, meetings, relevant attachments like pitch decks and growth plans, internal conversations, etc.) in one place, you can systematize and organize your entire deal flow management workflow at the firm level. Activity timelines can show clear connections between events like status changes and individual interactions so you can review every connection at every stage of the deal.

A single system allows you to create team-wide tags like identifying specific deals by sector or company size, enabling you to focus on deals within a defined investment thesis. Being able to easily filter out prospects that don’t fit your thesis or goals can help narrow your deal funnel sooner and save you from unnecessary meetings.

When a quality meeting does come through, centralized notes (especially when automated with an AI notetaker) keep other investors aware of updates in real time. This makes it easier for everyone on your team to model successful deals, collaborate, and optimize your investment strategy.

Reflecting, analyzing, and optimizing

Simply having deal and relationship data in one place makes managing your deal flow pipeline easier but acting on that data in a meaningful way will help you iterate and optimize your pipeline.

Start by reflecting on the data you’ve collected using data visualization tools. This can include using a Kanban board-style view to visualize your entire pipeline at a glance. Affinity’s Kanban view allows you to easily drag and drop deals to different deal stages and clearly share a view with other members of your team.

Whether you’re using boards for individuals or for full teams, tracking all of your deals (both good and bad) in one place means you can easily monitor key KPIs and unique data points. For example, introduction sources is an important metric for a lot of teams.

Nothing hurts more than closing a great deal and then realizing you don’t remember where it came from. With your historical and active pipeline logged together, you can get a complete picture of your deal flow process and uncover answers to questions like:

• How many deals has X person provided to us this month/quarter/year?
• We have three key sources that we’re drawing our best deals from. What’s our fourth best source, and how can we improve it?

You can dive even deeper with data analysis and business intelligence (like Affinity Analytics) to turn the answers to these questions into easily reviewed dashboards. Commonly used dashboards can be customized and preset to measure your most valuable data points, so the data you need for your Monday morning meeting is always ready.

Armed with answers, you can build custom lists that outline your most valuable relationships, set reminders to check in with them, and effectively track and manage every deal from pitch to close.

What’s next for your deal flow?

Scaling your VC deal flow pipeline requires major investments at both the top and bottom of the funnel. The quality of your network will determine the quality and volume of your leads, so it’s important to go above and beyond to create new, impactful relationships wherever possible.

Attending industry events, carving out a clear brand online, and digging deep into your existing network can all help improve your deal sourcing. It’s equally necessary to work from the bottom up with a technology stack that supports the pace you set for your firm. Faster decision-making shouldn’t come at the expense of keeping your relationship data clean and organized. Organized deal flow data empowers you to more easily evaluate and scale your current tactics so you can close quality deals faster.

Your deal flow doesn’t slow down, and neither should you. You can lean on Affinity to manage your data entry and create end-to-end visibility into your historical and active pipeline and see the full picture of every deal in your pipeline.

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