Optimizing Venture Capital Deal Sourcing

Deal flow and deal sourcing is the first stage of the VC funnel. Your success as a VC depends entirely on the kind of deals you can bring in. As a number of new investors have entered the fray in recent years, it has become increasingly challenging to come across high-quality deals. The increased competition in a crowded market has put pressure on VC firms to maintain their edge. In this scenario, having a robust deal sourcing process is a prerequisite for success as it determines the direction in which companies your portfolio will contain. It is only through consistent and high-quality deal sourcing that you can ensure your portfolio is achieving maximum returns for your LPs.

The conversion rate - the number of new deals sourced that get funded - has traditionally been low in the VC industry. It is typically less than a percent for the most coveted firms. As demonstrated in the graph below, the prestigious VC firm Andreessen Horowitz only funds 0.7% of the total deals that they see. This statistic is even lower for boutique firms such as GREE Ventures, at 0.5%. Therefore, having a consistent and large deal inflow is the most effective method of ensuring that you have quality companies in your portfolio. 

Image data source. The graph is not to scale. 

VC firms must focus on two critical parameters while streamlining the deal sourcing process - volume and velocity. The quantity of deals the firm sources and the speed with which the investment team can review them will determine your fund’s performance. A high volume of deals offers more options to choose from. Consequently, the firm has more agency and won’t be compelled to select deals that are not aligned with its thesis. 

The most successful firms rely on a combination of deal sourcing methods, as detailed below. 

Take a Data-Driven Approach

The increasing competition is forcing VC firms to look beyond traditional deal sourcing methods toward a more data-intensive approach.

Which industry does your portfolio lack? Which sector is booming? Which sector is resistant to current events and macroeconomic volatility? 

Having access to financial and macroeconomic data will help answer these questions and drive efficiency. A strong in-house research team can use this data to generate focused research and insights. This will facilitate streamlined deal sourcing relevant to your firm’s context and free up time for senior management to focus on founder conversations and deal closing. 

VC firms are in the business of predicting the future. You invest today for returns that may take a few years or even decades to play out. Forecasting market trends is both a technical and intuitive process - a science and an art. While VCs develop their investor intuition with experience, the scientific aspect of the process can definitely be optimized.

When you have robust technology and data-driven models to predict macroeconomic trends at your disposal, you can justify your decisions for capital allocation to LPs. With such data, you are also better geared to anticipate market fluctuations and respond accordingly, allowing you to stay ahead of the competition. 

The ever-evolving venture capital industry needs consistently updated metrics to derive reliable insights. When your intuition is backed by data, you know which industries are likely to see a large boom. And when you can anticipate change faster than your competition, you have already streamlined the most important aspect of deal sourcing, that is, simply knowing where to look. 

Marketing and Visibility

The best way to respond to competition is by representing yourself as a thought leader and an expert in the industries where your fund invests. Visibility is a form of marketing and will help you attract deals organically instead of constantly chasing after them.

As imperative as it is to generate data-driven insights that can guide your firm’s internal decision-making, it is also important to translate your technical findings into accessible articles and blog posts that add value to the startup ecosystem. Startups need to know about your firm's values, culture, market outlook, and expertise. Positioning yourself as a leader in the industry and generating discourse that pushes the envelope will transform your firm's image from a passive supplier of capital to an active player in the VC industry. This will automatically drive the most high-potential startups into your fold, positively impacting deal sourcing. 

While having an in-house marketing team can give you an added advantage, it can also be a costly affair. However, given the evolution of marketing tactics, especially through social media, there are multiple other ways to stand out.

In addition to more common marketing methods such as op-eds and social media content, a few venture capital companies have found other creative ways to source deals. For example, Saison Capital, an arm of Credit Saison based in Singapore, hosts a 12-month scout program targeted at young working professionals and mature students interested in VC. These scouts primarily aid with deal sourcing and finding attractive investment opportunities in return for Saison Capital providing them mentorship and valuable work experience. This innovative approach has allowed Saison to market itself effectively and attract talented individuals to optimize its deal sourcing. 

Build and Maintain Your Network

Deal sourcing relies on your soft skills - your ability to build your network and maintain communication with it. A strong and expansive network comprising of co-investors, entrepreneurs, and investment bankers, for instance, is a pool of potential opportunities. Using your network well can help increase the velocity of new deal generation. 

If you already have a readily available network, you should look to sustain it and then build further. Every deal that closes in your network is a potential investment opportunity for you in the future. Maintaining a strong relationship with your co-investors in the companies you have already funded or with investors in startups where your firm wishes to deploy funds can be a viable method of improving your deal sourcing efforts.

However, if your firm is in a nascent stage, you might not have a readily available network. In this case, it is vital to start building your network through as many channels as possible - connecting with people on LinkedIn, attending events that can give you access to relevant industry insiders, and proactively reaching out to interesting ventures on your radar, before they get into fundraising mode. 

VC firms in large tech hubs usually cluster in the same geographical area, such as Sand Hill Road in Silicon Valley, attend the same events, and interact with the same pools of startup founders. Information flows freely in this close-knit community, and a bad reputation, while easy to get, is difficult to eliminate. Therefore, giving sufficient attention to your existing portfolio and maintaining a healthy relationship with your current investees is crucial. 

Finally, any VC firm can provide capital; the differentiating factor is the additional value-add you can provide for your portfolio companies. Often, startups lack organizational structure, efficient leadership, and market insights. To counteract their weaknesses, they seek not only capital but also mentorship. Using your data-driven research insights, superior network, and industry expertise to drive value for your investees will help you attract solid deal flow. 

Use a Strong CRM Platform

It’s difficult to harness the full potential of a strong external network without internal tools to aggregate information and stay organized. A customer relationship management (CRM) platform allows your firm to organize data, track metrics, and stay updated on your network’s activities. 

A front-to-back office CRM can also support your firm’s efforts to track potential and completed investments in real-time. If a young startup you have your eye on seeks investment from you too early in its journey, following that company’s trajectory and keeping track of its growth milestones will help you identify the opportune time to invest in it in a future round. Staying updated on your internal ‘track list’ is a relatively simple way to increase your deal flow. 

Zapflow is a venture capital CRM platform that can help your firm with managing deal flow, fundraising, and portfolio monitoring. To learn more, book a demo today.