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What is deal flow and why does it matter to venture capital?

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.

The world’s most successful venture capital firms then manage both 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 then 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. 

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

Deals in a Kanban style board view

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 deal flow.  Rosalie Seriese, an Investment Associate at AngelHubVentures, recalled that in 2015 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 funding 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. 

Leading deal sources in venture capital: 30% of deals come from former colleagues or acquaintances, 30% from entrepreneurs, 20% from other investors, 10% from cold email pitches, and 8% from existing portcos.

Finding introductions to companies that align with your investment thesis and, according to Hunter Walk of Homebrew, with founders that you can work well with both make a world of difference. Sourcing comes in many forms, but quality sourcing 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. So how can newer firms compete with industry juggernauts like Khosla Ventures and Sequoia Capital that already have vast networks?

Thankfully for smaller firms, these enormous funds are still selective when they’re sourcing their deals which leaves thousands upon thousands of companies still looking for investors. As you navigate the ocean of opportunities and narrow your potential investment pool, it’s best to start at the top of the funnel.

How to improve deal sourcing

Effective deal sourcing shapes your entire deal flow pipeline, so it’s vital to understand where your deals are coming from. Connecting with a new lead starts with finding new inroads in your network. As we mentioned above, referrals are a key piece of that puzzle, but if you’re starting small or trying to scale your individual network, there are a few other options to get you started. That will include branching out to new events and community groups and expanding your search to new geographic areas.

Referrals

Finding the right introductions to new connections is the obvious solution 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. 

A three step referral process: Ask Anne for an intro to Jason lead to a recommended introduction path and finally, a warm introduction making deal flow seamless.

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, 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.

Referrals from executives

Your current portcos can also 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 later. The company may refine its value proposition or scale and decrease your sense of risk in the investment.

By logging your touchpoints (emails, calls, meetings, and summary notes) and setting reminders in your CRM to follow up consistently, you may be able to revisit the deal in their next round of funding.

By logging your touchpoints (emails, calls, meetings, and summary notes) and setting reminders in your CRM to follow up consistently, you may be able to revisit the deal in their next round of funding. Beyond that, even if that deal never goes 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.

Affinity list view of an opportunities pipeline for managing deal flow

Additionally, GPs within your existing portfolio are constantly connecting and scaling their own businesses. Even though your role is to help them, it’s also likely they can lead you to other executives in need of funding. A great place to expand your reach to these connections is at relevant industry events.

Searching 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 VC funds are based in major technology centers–Silicon Valley, Boston, New York, and increasingly, Miami–the success of these 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. 

Intra-regional venture deal flow according to Crunchbase. Geographic hubs like San Francisco and New York are visualized and connected to major networking routes in other investment hubs.

By leveraging that deal data, firms are able to expand their geographic reach over time, and in a remote world, these distant connections can happen even faster. The sooner you open yourself up to opportunities elsewhere, the sooner you can carve out new deal sources and scale your deal flow pipeline. And when your team’s newly logged deal sources all live in one place, you can create consistent, repeatable successes based on clean data.

Deal flow best practices 

Now that your brand is out in the world and leads are pouring in, you’ll need to keep your 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 CRM, or other tools 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.

Let’s take a look at some key ways you can organize your deal flow to make that 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, they can set up systems like Affinity that automatically log emails and build new contact records for them. 

Even small businesses can lose up to 6% of annual revenue because of bad or missing data. (Ringlead, 2020)

The prospect of spending hours creating a slew of new accounts in a CRM or logging every single phone call you had with a promising lead feels more like a necessary evil than a need. But it is necessary. When that information isn’t tracked firms lose out on opportunities. Even small businesses can lose up to 6% of annual revenue because of bad or missing data. 

If building a strong deal flow pipeline requires both a consistent volume of prospects and a quality pool of opportunities within that group, automation ensures that the sourcing work is captured and logged, so your team can spend time doing what you do best—closing. You are a team though, after all, and having your newly automated records in a single system is the only way to effectively leverage those new connections. 

Centralizing valuable information

Centralizing opportunities—whether they are inbound or more 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 touchpoints 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 process 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. 

Affinity Activity Timeline with a reminder to follow up on a valuable relationship, the entire relationship history, and a calendar event record.

A single system allows you to create team-wide tags like identifying specific deals by sector or company size allowing you to focus on deals within a defined scope. 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 keep other investors aware of updates in real-time. Even if meetings and contacts are automated, leaving quick, clear notes around the reason you passed on a deal or that specific contact is an important relationship to nurture provides an additional layer of depth to your relationship data. It also makes it so everyone on your team can model successful deals, consistently evaluate their processes, and optimize your pipeline.

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 are an important data point 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 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.

Affinity-Analytics-dashboards-3

Armed with your new 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 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. 

Going out to the newest industry event, carving out a clear brand for yourself 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. Moving quickly 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.