When it comes to making investments, there is no standard formula for success. All an investor or firm can do is gauge the potential of a deal to the best of their abilities and take a call on whether to invest in it.
Deal sourcing can be tricky! But when the success of your venture capital firm depends on the quality of deals you source, how do you go about finding the next big investment opportunity?
Venture capital firms invested a record $329 billion in US companies in 2021. Despite the economic slowdown caused by the Covid-19 pandemic, VCs worldwide continued to invest liberally in emerging sectors like fintech, health tech, and web3.
Approximately 80% of all VC returns come from 20% of the deals. This underscores the importance of separating the wheat from the chaff; it’s essential for VCs to quickly identify superior deals that can contribute significantly to their bottom line. This begs the question - what’s the most efficient way for a VC firm to find excellent investment opportunities? That’s where referral networks come in.
Mono channel VC deal flows often become stagnant and ineffective after a point. Only acquiring certain types of deals restricts investment portfolios to narrow market niches, which makes it more difficult for VCs to scale up when necessary and mitigate market risks effectively.
Venture capital success is directly correlated to the quality of deal flow that the firm is exposed to. So to ultimately close only those deals that align with your vision and goals, the pool of deals that you are choosing from must be vast and of good quality. Deal sourcing, then, becomes a crucial step in the process.
Almost all venture capital firms strive to serve one broad purpose - bridging the gap between funding sources and promising entrepreneurs who can use this funding to build large-scale startups. However, each VC might have its own motivations and end goals for managing its portfolios.
In the venture capital industry, deals are made after embarking on comprehensive sourcing, screening, and diligence processes that inform the investment decision. Bottlenecks and poor decision-making can hold up any of these processes, resulting in inefficient or misaligned deal flow.
Venture capital deal flow is the sum of several moving parts, all of which work in tandem to create one smooth deal pipeline. Deal sourcing, deal screening, due diligence, and negotiations form a sequence of processes to be executed before a VC deal is finalized. Since these processes are often interdependent, inefficiencies or bottlenecks in any of them can render the entire deal flow ineffective.
“I'll say this: I can't think of one instance in my 20 years in venture capital in which I have wanted to sell a company before the entrepreneur.”
