If you want access to the next best investment, you need to know where to find it. For many VCs, their best opportunities are hidden in their existing network.
At Affinity, we have worked with thousands of venture capital firms—from pre-seed to seed stage to growth equity spanning 6 out of 7 continents (we don’t have a firm on Antarctica yet). We get to collaborate with venture capitalists investing in every sector imaginable, and even though these firms might be different in many ways, they face similar problems.
One common issue we see in firms of all sizes trying to address 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.
Effective venture capital deal sourcing is a prerequisite for success. Deal sourcing is also an art, and the most successful venture capitalists rely on a combination of sourcing methods.
Often, how VCs conduct due diligence comes down to who they already know — not who they should know. Read on for a guide to deal sourcing for VCs.
What is VC deal sourcing?
VC deal sourcing is the process firms use to find those potential investment opportunities for their VC funds, so 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 onward from there to a potential investment. At various stages of the deal pipeline, investors, managing partners, and LPs have opportunities to review deal flow and build relationships with new, valuable connections.How do VCs source new companies and connections?
Building and nurturing relationships throughout a professional network is the first step to sourcing quality deals. If you’re looking to optimize your VC sourcing methods, first identify the key contributors to your current deal flow and diligence process. A survey conducted by Harvard Business Review of 900 VCs found that nearly 70% of deals come from connections in their network. With that in mind, you can monitor these connections, make a plan to keep in contact, and maintain the potential for an investment or partnership in the future.
In this post, we will walk through how the world’s best VC firms source deals. Specifically, we'll outline the five primary ways in which many of our venture capital customers think about organizing their sourcing efforts and how relationship intelligence—insights into your network, business relationships, and customer interactions that help your team track, manage, and close deals—supports that organization.
1. Stay in touch with top introducers
You already have individuals in your network who are regularly sending you deals. These critical individuals include other investors, startup founders, investment bankers, and more.
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 not only keep track of all of these contacts in a single place, they can also easily set reminders to guarantee an important follow-up doesn't slip through the cracks.
Staying in touch via email, phone, virtual meetings, conferences, or even via social media platforms like LinkedIn or Twitter will ensure that you build strong relationships with high-quality connections. Deeper relationships also increase the likelihood that they remember you when they see a great investment opportunity in the future.
2. Build relationships with co-investors
Another great 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. Build this list of investors, get an introduction from someone on your team to relevant individuals, and start building relationships!
Collaborating with other investors—from angel investors to late-stage (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 relationship intelligence platform 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 gain a more 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; the best deal sourcers reach out early. You'll turn down many potentially promising investments simply because the timing is not right, and 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.
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 exclude companies that you know you don’t plan to revisit.
Periodically revisiting 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). Making sure you’re keeping in touch with these teams means that your team can fast-track deal origination, and avoid missing the next important investment opportunity.
4. Keep track of strategic advisors
How many times have you looked at a compelling opportunity and wondered, “Who can I reference check this against? Do we have contact information for anyone in this space?”
The answers to these questions lie buried in your and your colleagues’ inboxes. Work with your colleagues 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 as any member of your team can quickly filter for a specific type of person, even if they aren’t directly connected.
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. They have never contacted this person directly before, but this advisor knows your firm well. After a brief search in your CRM, this new team member can find this contact, learn who at your firm can introduce the two of them, and continue the conversation.
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, and bringing in a steady stream of opportunities takes time and energy. 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 depend on relationship intelligence CRM solutions because they’re purpose-built for deal teams in relationship-driven industries like venture capital, private equity, investment banking, commercial real estate, and consulting.
These sourcing tips can help any deal team looking to source better quality deals. But if your team is looking for ways to source better quality deals and get—and stay—ahead of the competition, incorporating the right technology into your deal sourcing, deal management, and relationship management processes can make all the difference.
Learn how else a relationship intelligence CRM platform like Affinity can help your firm find, manage, and close more deals faster today.