- February 13, 2023
Investing funds in startups and founders is a long game for VC firms. From finding and finalizing deals to actively managing portfolios, there is a lot of careful work that needs to be done and multiple relationships that need to be maintained. Making the right investments and managing them may not be easy, but it is a process that can be simplified with the help of a focused strategy and the use of a purpose-built CRM.
In this guide, we explain the steps you need to take if you want to nail your investments and establish your firm as a reputed company in venture capital investments.
Deal sourcing and management
As a VC firm, you need to first get your hands on a few quality deals. The importance of putting effort into deal origination should not be discounted. It is a continuous process by which you generate a pool of potential investment opportunities from which you can then choose the ones you would like to fund. Only 1-2% of deals that are sourced by a VC get funded. As a result, deal sourcing is a determining factor in the success of your firm.
There are multiple channels through which you can begin to source quality deals. Having a strong network of contacts in the space, whether these are founders or other investors, is an asset. Your network will often be the source of most deals that come your way. Platforms and apps built for networking and sourcing deals are also popular options to source deals. For instance, many VCs and founders are now using social media platforms such as Twitter and Wellfound to make and deepen connections with like-minded people in the field.
Deal sourcing can become increasingly tedious and complex if you have no way to streamline the process from start to finish and organize your leads for easy access and reference. A CRM tool is particularly useful in this regard. Zapflow has the functionality to centralize any inbound communications about new deals from a wide variety of sources, including emails and web forms. Having all potential deals in one place helps you keep track of them without having to keep an eye on a range of different channels, as well as derive meaningful insights about them.
A CRM allows you to manage the contact details of the various people in your networks so that you can easily look somebody up and reach out to them. This is crucial in managing relationships. If you’re in touch with hundreds or thousands of startups, it might be difficult to maintain context about them. However, using a CRM also lets you store notes about these companies, allowing you to pick up the conversation where you left off. Lastly, a purpose built tool like Zapflow also allows you to search the web to identify startups that your firm might be interested in investing in.
Once you have a steady inflow of potential deals, it is crucial to keep them organized. Every new deal constitutes a complex set of considerations, so your team needs to be aware of the status of each one. CRMs enable you to track and manage your leads at both individual and aggregate levels. You can delve into the details surrounding a particular deal as well as opt for a bird’s-eye view of all of your existing leads. You can also organize them based on certain criteria, such as the market each startup belongs to, so that you can query the database quickly and efficiently. Another advantage of CRMs is their capacity for automation, which reduces the amount of drudge work you need to do so that you can instead invest that time and energy in following up on deals and making decisions.
There are times when a deal may not be ready for investment but shows potential in the long run. It is wise to continue keeping an eye on such startups as these could turn into viable opportunities for investment in the future. You need to keep information about such deals on file and reach out when the need arises.
Deal flow management goes beyond storing the contact details of founders and others in your network. CRM software also enables you to organize related documents such as pitch decks or copies of any communication you have had with prospective startups. Consolidating your data in one place significantly reduces the time that is spent searching for the right document at the last minute. When going over a deal, you can access all the relevant information and data, enabling you to make informed decisions regarding your investments.
Collaboration is also more streamlined when those in the firm who need to have access to certain information know where to look for it. Because everyone will be on the same page, it is easier to communicate internally and work more efficiently. Multiple employees of the firm can put their heads together and reflect on the deals to determine which ones can turn into investments and which ones need to be placed on the back burner or discarded. In the latter case, deals can be referred to other firms that are likely to pick them up based on their investment philosophy.
Sourcing deals is only the first part of the puzzle. When you finalize a deal and choose to fund a startup, it becomes part of your firm’s portfolio. You want to stay on top of the activities of each of your investments and the progress they are making. Doing so enables you to help the companies succeed. However, you need to put in consistent effort and devise a management strategy through which you can streamline the process.
Portfolio management is composed of a few different tasks, including staying up-to-date with market trends, risk assessment, and putting together exit strategies. Firms need to carry out market research frequently and consistently so that their investment management strategies can be informed by how the market is shifting and growing. They can use these insights to calculate risks and other important metrics such as return timelines. Finally, firms also need to strategize and come up with appropriate exit plans that will reduce risk and benefit both parties.
To execute your portfolio management strategy, you will need to keep an eye on a few different metrics for each startup that you are funding. Some metrics to consider tracking include:
- Financial metrics: Revenue is a key metric that reflects a startup’s performance in the market. The revenue that a portfolio company is generating is an important indicator of what is working and what needs to be changed to improve performance. Cash balance and burn rate are also worth tracking as they indicate the company’s expenditure, as well as to what extent the company is stable and for how long. To understand a company’s profitability, keeping an eye on its net income is crucial.
- KPIs: In addition to revenue, each startup will have its own set of KPIs that directly reflect whether and to what extent the company is meeting its primary performance goals. These vary by sector and company but can include metrics such as active customers, customer acquisition costs, website traffic, and customer churn.
In addition to these metrics, VC firms must also have regular conversations with founders for updates on various aspects of the company’s operations and performance, including any wins. Asking founders where they need support and finding out how the VC firm can add value to a portfolio company is crucial. These are important insights for the firm to receive regularly so that they can continue to update their plans as well as offer relevant support to the companies they are investing in.
VC firms also need to track performance metrics as it enables them to be constantly in the loop and take appropriate and timely action. A VC firm’s experience with other companies is useful as it helps it support its existing investments by making relevant recommendations. Firms can also assist by way of leveraging VC networks to recommend hires to a startup’s team, as well as support additional fundraising endeavors.
Zapflow allows you to track various performance metrics for each of your investments in one place. You can also keep track of other aspects of the investments such as the funds allocated to each company or the exit status.
Using a CRM is paramount if you wish to adopt a streamlined approach to sourcing your deals and subsequently managing your portfolio companies. Zapflow offers you all the features of a top-class capital markets CRM and much more.
Get started with Zapflow today to ensure your firm and its investments work at the highest efficiency.