Experienced venture capital (VC) deal professionals know that their firms must closely manage all opportunities as they enter and exit the firm’s purview. However, without a VC deal flow management strategy in place, firms risk running a disorganized operation full of unmeasurable processes and crossed wires. Consequentially, their VC professionals waste precious time and energy trying to chase and execute potential opportunities that never come to fruition.
Thankfully, VC leaders and their deal teams can quickly get control of their deal flow and avoid frustrating outcomes by adopting a tried-and-true deal flow strategy. Discover how a reliable VC deal flow management system can help your firm implement a stronger deal flow strategy and improve your pipeline.
What is deal flow?
Deal flow is the speed and success rate at which firms collectively buy and sell capital market assets to generate returns and meet stakeholder expectations. In other words, it’s the lifeblood of the capital markets industry.
As a differentiator, capital markets firms create a unique deal flow they can offer to buyers, and buyers capture that same deal flow from the intermediaries who generate it. Although one might assume these private market transactions consist of a simple 1:1 ratio for buyers and sellers, experienced dealmakers know this is rarely the case. A single transaction — such as a successful consumer goods business owner looking to grow and seek investment from a VC firm with expertise in the industry — could have hundreds of potential buyers. The intermediary must then spend a lot of time and effort to successfully “flow” that deal to all the appropriate investors.
On the other hand, buyers and investors in the private equity, VC, and other sectors know that they’re not the only ones being approached with new deal opportunities. Therefore, these professionals work to improve their deal flow by introducing themselves to hundreds — if not thousands — of new businesses and transaction advisors each year.
Why does strong deal flow matter?
Private equity firms must develop their own active and agile pipelines to remain competitive. This winning type of deal flow involves two key ingredients.
1. Relationships
Strong deal flow requires and produces strong professional relationships. To keep a pipeline full of viable investment opportunities — and to keep potential deals moving toward transaction close — you need both new and ongoing industry relationships.
Once deals are closed, they can become rich sources of new transactions, strengthening your deal stream even more. Analysts at Harvard Business Review have found that 58% of successful VC deals originate from a combination of current relationships and referrals, and another 30% come from unsolicited introductions.
When discussing how relationship management directly impacts deal flow management, venture capitalist Charlie O’Donnell told listeners in a Full Ratchet podcast interview that backing a venture is only one of many ways that two parties can mutually benefit from a new professional relationship: “A lot of people [in my network] were founders themselves that I didn’t back, but I stayed in touch with,” O’Donnell said. “They went on to do other things besides their startup, and connecting with them turned out to be really important.”
Without dynamic and reciprocal relationships, your deal flow and investment decisions will lag and negatively affect your deal success rate.
2. Time
A strong deal flow lifecycle requires an ongoing time investment. If your pipeline is hot and your relationships are thriving, you can reclaim that time by enjoying higher-quality deals that breeze through transactions’ milestones.
The amount of time you must invest in your deal flow depends on your deal quality standards. O’Donnell explained that he averages 26 months from the first founder meeting to a successful transaction’s close, and his deals average 5 months from pitch to close.
O’Donnell also said his team can potentially close a deal within a week of meeting a founder. However, the team averages more than 2 years from pitch to close because the value and quality of resultant relationships or deal flow reap longer-term financial benefits.
“One of the most important assets you have is your network — but it’s not your network of founders,” O’Donnell said. “It’s the network of people who respect what you can do for a founder [and will] make an introduction. That’s what this multi-year relationship is all about.”
Firms must be able to nurture relationships, manage back-and-forth communications, and navigate outstanding market factors such as recessions, downturns, trade, disruption, and inflation. Organizing all current investing activities can help set firms up for success and ultimately strengthen their deal flow.
How do you organize deal flow to close more (and higher margin) deals?
By turning all your VC activities into one organized process, you can build a repeatable workflow that can be adjusted, built upon, and transferred to new team members. Follow these six steps to identify your strongest deal origination sources and invest time, energy, and money into them.
1. Pre-screen leads
Determine basic gating criteria that you and your associates can mentally run through within the first 10 seconds of learning about a new potential target. You don’t need to decide how viable the business is, or how likely it is that the founder’s idea will generate alpha. You just need to decide whether you should spend another valuable moment vetting this company as a prospect.
“I don’t need a lot of data to make a decision as to whether I want to spend time on something,” said venture capitalist Brad Feld. “[Although] I’m open to lots of new things, I only want to spend time on things that interest me or that I feel like I can add something to.”
2. Continually fill your pipeline with new leads to pre-screen
As you screen one potential target investment, scout other founders you haven’t yet met. Attend network events to build relationships with bankers, lawyers, advisors, and business incubators who can introduce you to leads. Or, publish an application on your website for founders to introduce their ideas to you. For inspiration, check out the application form provided by Rough Draft Ventures, a General Catalyst group.
You can also join or create investor syndicates like the National Venture Capital Association. Consider contributing to online forums like r/venturecapital and Wall Street Oasis for potential investing partners, sages, mentors, and friends. Pay attention to every conversation, and keep in mind that each participant is a potential member of a future syndicate or consortium. Answer questions in forums about the services, tools, processes, and shortcuts you use — or should use — to optimize your own deal flow.
Remember: To perfect your deal sourcing, you must constantly refill your pipeline with new faces and business ideas by adjusting and intensifying your lead sourcing tactics as needed. For example, during your first round of lead sourcing, you might post an entrepreneur’s application form to your site. But for the second round, you might spend $5 a day on targeted social media ads to advertise that form. You might also set up alerts for hashtags like #startuplife or #businessowner to monitor trending conversations.
3. Research screened leads
Once you’ve collected leads, take some time to understand each founder’s background so you can determine whether their business is a fruitful investment. Collect upfront information and present it to your shop’s investment committee; then, go beyond typical firmographics and market data to ask even more revealing questions. Experts at NfX recommend having founders answer these 12 questions to truly assess an idea’s viability.
Next, conduct business and legal due diligence. You or your team must deep dive into your target’s financial reports, business structure nuances, and corporate practices. Read the U.S. Chamber of Commerce article, “3 Examples of Venture Capital Due Diligence Checklists,” to learn more about preparing a proper due diligence checklist.
4. Put mismatches on standby
Based on your vetting process so far, graduate the business owners whose ventures have stood the test. But don’t make the mistake of severing ties with founders whose ideas aren’t a fit just yet. Put their businesses on the back burner for now, but keep that relationship alive. Set a reminder to follow up in 6 months and ask how their businesses are doing.
If a founder’s business has failed since the last time you spoke, ask what they plan to do next. These business leaders are often great sources for future unicorn opportunities: According to research conducted by the Baruch College Zicklin School of Business, “even previously unsuccessful serial entrepreneurs receive better deal terms than novice founders, consistent with entrepreneurial learning being an important factor in fostering future entrepreneurship.”
Record your investing successes and failures. Did you accidentally pass on a good opportunity, and if so, why? By tracking the deals that got away, you can help your firm learn from its mistakes. One firm even memorializes their missed opportunities with an anti-portfolio to solidify their lessons learned.
5. Thank and nurture your introducers
Who led you to the founders you’ve written checks to? Thank those people after you’ve finalized your deals, and credit them with the fruitful connections you’ve made. You can also send a gift card, or ask how you can return the favor. Are there any connections you have that could benefit them?
If your contacts don’t need your help right now, remind them of your sector and specialty. Fill them in on where you’ll be meeting founders, bankers, and venture lawyers in the coming months. This way, they can consider you a reciprocal future resource.
6. Optimize transactions with deal flow management software
Deal management is the practice of monitoring and administering your transactions in the capital markets. Deal managers evaluate new opportunities and deal flow to determine whether buying or selling certain assets would complement the existing portfolio, appropriately serve as a net new asset, or provide an opportunity to generate returns on the initial investment. This entire practice is not only complex, but it’s often a responsibility that’s shared across multiple team members.
If a VC firm doesn’t have a proper deal management CRM system, the firm can easily make mistakes and miss deadlines. Every time a component of pipeline management breaks down, it increases the likelihood that a deal won’t close as expected, if at all. This is particularly devastating for VC firms and their deal flow, as they could lose stature in the market and fail to deliver on the promises made to founders and owners.
A proper VC deal management solution like DealCloud can help firms close deals more reliably. The DealCloud platform captures and accounts for every deadline, task, data point, and opportunity, making it simpler than ever to keep records clean and up to date. Busy dealmakers can easily update details for the transactions they’re working on through DealCloud’s mobile app, or directly from their email inbox.
Should someone within your firm miss any part of the deal management process or a deadline, you can configure the system to send alerts to project owners so that they can rectify the error. Essentially, DealCloud creates a smooth and easy-to-navigate pathway so dealmakers can successfully close current deals and begin working on the next ones.
Of course, closing multi-million-dollar transactions doesn’t happen overnight. The typical deal requires more than 80 days of founder meetings, due diligence, negotiations, and post-term sheet validations before a successful close. Although firms can’t necessarily speed up this process, they can harness the power of a platform that was built specifically to manage public and private market transactions. DealCloud’s deal management software allows dealmakers — specifically those in the VC, private equity, and investment banking industries — to maximize the time they spend building and growing relationships.
Whether your firm is looking to streamline deal flow and open up the top of the funnel activity, or move transactions through the deal management process more quickly, it’s time to take action with a partner that knows the road ahead. DealCloud’s VC-specific technology takes into account all the unique elements of your firm and allows real-time data to easily flow through reports and metrics dashboards. With a single source of truth for all deals and deal management processes, DealCloud allows VC professionals to work more efficiently and close more deals.
Take control of your deal flow management
Today’s VC professionals are increasingly turning to purpose-built technology to help them develop and deliver a deal management strategy that every dealmaker can leverage.
Since every firm’s strategy is unique, firms need to select and adopt technology that’s flexible and customizable enough to help them truly achieve their goals. DealCloud’s platform — built by investors, advisors, and finance professionals — allows VC firms to both monitor deal flow and manage the entire deal process from start to finish. By investing in DealCloud, your firm can strengthen its pipeline and better execute deals.