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A VCs four most valuable connections for sourcing deals and conducting diligence
If you want access to the next best investment, you need to know where to find it. Hint: It is already in your network.
At Affinity, we have worked with venture capital firms of all kinds: small and large partnerships, West Coast-based and European-based firms, and firms investing in various different markets. Time and again, we find that VCs face a similar problem. They don't have organized deal sourcing methods and effective ways of conducting due diligence. Consequently, they lose out on key opportunities which they should have captured and waste tons of time searching for intel they could have had at their fingertips. Often, how VCs conduct due diligence comes down to who they already know - not who they should know.
Effective VC deal sourcing is a pre-requisite to success. Deal sourcing is an art. The most successful VCs rely on a combination of sourcing methods. At the heart of effective deal sourcing is a strong reliance on one's network. If you’re looking to optimize your VC sourcing methods, you must first identify the key contributors to your current deal flow and diligence process. Only then can you monitor these connections, make a plan to keep in contact, and eventually make that golden investment.
In this post, we will walk you through how to source VC deals effectively. Specifically, we'll outline the four primary ways in which many of our VC customers think about organizing their future sourcing efforts:
1. Stay in touch with top introducers
You already have individuals in your network who are sending you deals. These critical individuals include other investors, startup founders, investment bankers, and others. But do you actually know who they are? Who are the people who are impacting your deal sourcing effectiveness the most?
By cultivating a list of your top referrers, you can choose to contact and follow up with them at a regular cadence. Staying in touch will ensure that you build strong relationships and they remember you when they see a great investment opportunity in the future.
Affinity helps you identify this list of people automatically, and with Smart Reminders, you will easily remember to keep in touch.
2. Build relationships with co-investors
Another great way to increase VC deal sourcing effectiveness is building 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 the relationship!
You can also use Affinity's Alliances List Maker to expand the reach of your network even further. After you decide on your target demographic, Alliance will display every relevant prospect who you can get connected to via your allies’ real-time networks. Want to know every CIO who your network can pave a warm introduction path to? It's all at your fingertips.
3. Create watchlists of companies in your current network
Any successful deal sourcing method requires early outreach. You'll turn down many potential and promising investments simply because the timing is not right. You'll want to keep these investments warm in case they turn into investment-ready opportunities down the road. Take some time to list and label these companies. Were they seed stage companies in Healthcare? AI companies post Series A? In this way, your team can quickly develop a go-to watchlist based on your investment thesis. By periodically revisiting this watchlist during your Monday Meetings and making sure you’re keeping in touch with them, your team can avoid missing the next important investment opportunity.
Here’s a quick demonstration of how you can accomplish this with Affinity’s Saved Filters.
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 know anyone in this space?”
The answers to these questions lie buried in your and your colleagues’ inboxes. Work with your colleagues to align on a set of labels to categorize your potential advisors (e.g., individuals working in Healthcare, located in New York, or even CEOs). Once you sort your advisors into these categories, you will know who to turn to when vetting deals. This can be an immense help when conducting due diligence, as you'll have a trusted opinion at your fingertips. Affinity can thoroughly assist with this process by automatically categorizing your advisors using public data integrations. See here for an example.
There are countless strategies for VC deal sourcing. This post illuminated four effective sourcing methods that you can leverage to attain new opportunities. It provided some action items you can start on today. If you’d like to see how Affinity can becoming your new deal sourcing superpower, learn more. Stay tuned for more ways to boost your success, including how to boost your deal flow!