Most of your deal flow is not going to make the cut. The numbers speak for themselves: VCs tend to invest in only 1% of the deals that come their way. Investing demands hours of discussion and careful contemplation, in addition to trust and the willingness to take a risk. You want to be sure that you are building a strong portfolio and investing in people and companies that you believe in.
For this reason, venture capital firms must stress quality when it comes to deal flow. Not only does deal flow of a certain caliber increase your chances of success, but it is also a marker of the firm's legitimacy and reputation in the larger VC sphere.
A high-quality deal flow is characterized by deals that are close to or align with your thesis and have the potential to scale. Deal flow is hard to come by as is, so expecting quality may seem like a stretch. However, there are ways to cast a wide net and simultaneously ensure that you are not bombarded with deals that show no promise from day one. Let's look at a few strategies you should use to emphasize and ensure quality deal flow.
1: Strike a balance between quantity and quality
There is no denying that quantity does not equal quality. Although the aim is to win quality deals, the volume of deals that you initially see is a strong predictor of future success. In the beginning, stages, don't shy from scouring the ecosystem for the best deals by speaking with any founders that you see potential in. Otherwise, you risk limiting your prospects and decreasing your odds of coming across potential winners from the get-go.
Have multiple inbound and outbound channels running during the deal sourcing phase, whether this is active scouting or referrals from within your network. Quality is not always identified with one glance, and networks can be fairly limited in their reach. Newcomers to the scene, especially, receive the short end of the stick and are guaranteed to be missed if VCs are not open to expanding their search beyond their usual sources.
That being said, the further into the deal flow process you get, the more important it is to know where to draw the line. It can be easy to continue to devote time and energy to numerous founders, but a narrow funnel, especially after a certain point in the investment phase, is essential to ensure that you are investing your resources in the founders worth talking to. To this end, filter out the companies that do not align with your mission or work for you at the moment. You can, however, keep an eye on the founders or startups that piqued your curiosity in case you have an opportunity to work together in the future. While the funnel will inevitably be narrower in the later stages, making a conscious effort to comb through the potential will set you up for a more efficient workflow. Maintain a broad top of the funnel, but don't be afraid of narrowing it down actively as you move from one stage to the next.
2: Diversify and maintain a balanced portfolio
One way to ensure that you are covering as much ground as possible is to venture out of your comfort zone. Most VC firms will build a strong brand around the sectors and ideas that they are already on the lookout for and are committed to investing in. What this also means is that the same founders that already have their foot in the network are likely to receive funding, leaving many companies that are presently at a distance (either geographically or socially) out of the game. Pushing diversity, both in terms of the sectors you invest in and funding underrepresented minorities, can be instrumental in improving your deal flow.
While a strong identity is important for a firm to have in this regard, it can often be fruitful to go beyond your traditional routes and be open to discovering potential sitting outside your current field of vision. This means pushing resources into your outbound research strategy. Many firms are using scouting programs to diversify their portfolios while maintaining quality deal flow. By hiring trustworthy scouts, you can leverage their networks and skills to find talent that you would otherwise not have crossed paths with. It is equally important to make your interests visible and let the larger circles know that you are looking to diversify your portfolio, whether this is in terms of the verticals or the people you wish to invest in. Often, a strong brand identity will not signal to others that you are interested in a more balanced portfolio, so it is worth making that extra effort to do so.
3: Network, network, network
All said and done, networking will always be the backbone of the venture capital world. This is because most deals are born out of warm introductions, and they come with a certain guarantee of quality and trustworthiness that is not immediately apparent when you meet founders through other means.
Networking doesn't mean only relying on your connections to get you solid deals, but sharing deals with them and introducing them to other investors or founders they would benefit from knowing. This goes without saying, but your strategy should emphasize networking for the long term and not from a place of scarcity and superficiality. The latter isn't too difficult to spot and results in equally superficial connections. Instead, focus on building trust and respect so that the connections you make are in it for the long haul. This is more effective in ensuring quality when it comes to deal sharing.
Your networks are a surefire way of keeping up with what is going on in the investment space. In addition to maintaining strong relationships with other investors, it is worth putting in the effort to maintain relationships with founders, whether you decide to work with them or not. Only by cultivating such relationships are you more likely to get into business again with a founder or have a pre-existing relationship with an entrepreneur who you may be interested in. It is equally worthwhile to network with others in the space, such as lawyers and consultants, as their involvement with entrepreneurs and VC firms means that they can contribute quality referrals to your deal flow.
The goal is not to be limited to your network but to leverage it for high-quality deals and expand it so that your firm can build a more diverse and balanced portfolio in the long run.
4: Don’t underestimate the power of Twitter
If you are not using Twitter to actively connect with other investors and entrepreneurs, you are missing out. Twitter, and to some extent LinkedIn, is fertile ground for stakeholders in the VC space to share insights and get to know each other. Although lurking is sufficient if you are interested in keeping track of what is going on, you need to go a step further and foray into the Twitterverse if you want to see some actual progress when it comes to growing your network and discovering startups to invest in.
Because any connection is a two-way street, you also need to demonstrate what you are bringing to the table. One easy way to do this is by tweeting updates to your followers or by sharing learnings from previous negotiations. Only when the people around you see what you are up to and how you are contributing to the shared pool of knowledge will they be willing to form deeper connections that could result in deal referrals and other warm introductions.
Your firm’s reputation is a direct contributor to its success because it distinguishes you from other investors. Just as VCs do their due diligence when it comes to entrepreneurs, startup founders also do their research on investors. There are no reasons not to have a strong, well-curated social media presence that helps others learn about you or your firm, as it only makes it more likely for them to contact you. An online presence also works towards building your reputation, so steer clear of inauthenticity and opaqueness in what you choose to publish online. Participate in relevant conversations and demonstrate how you can provide value so that you are on the radars of founders and investors alike.
While Twitter is an easy yet effective medium for leveraging your online presence to increase quality deal flow, writing well-researched and engaging blog posts or newsletters are solid alternate strategies.
5: Automate your processes
Keeping track of all your potential deals is a complex task. It is certainly not meant to be done manually. Invest in a tool that automates as much of the deal flow management process as possible so that you can dedicate your time and energy to making the decisions that will determine your firm's plan of action and, ultimately, its success.
Zapflow is an excellent tool that, among other functionality, is designed to simplify and streamline your deal flow. For instance, interested startups can directly contact you via a form that automatically transfers their details to your dashboard. You can also apply filters and view deals by industry or the investment round they are currently in. Zapflow also has an integration with Ocean.io for scanning relevant business websites to identify any deals your firm may be interested in. Zapflow is guaranteed to make your processes more efficient so that you can focus on building strong connections and carrying out quality deals.