ny layman to the VC world knows that quality of deal flow can be the single most important indicator of a fund's performance. Obvious, right?
So it’s also no secret why sourcing those deals is one of the most important and time-consuming activities performed by venture capital firms. It involves identifying and pursuing potential investments in companies. It’s the heart of most VC activity. It’s what leads to the checks getting signed and deals getting done.
Given its significance in the flow of activities of the average VC firm, it stands to reason that it’s one of the major focuses of network development efforts for many firms.
So it should come as no surprise that while VCs get tons of cold emails and pitches from startup founders daily, they are significantly more likely to invest in companies that were referred to them by someone they trust compared to companies found through outbound or cold contacts.
In fact, it’s estimated that VCs source up to 80% of their deal flow through referrals from their networks.
After all, what can they really learn from one cold email? There is no tone, no body language, and it makes it very difficult for VCs to get a sense of whether or not the founders are the real deal.
Let’s say the calendar year just ended and you’re looking to hire an accountant to help you file your taxes. Would you rather use a random accountant that you found online? Or one that your parents or friends have been using for decades?
While there’s some subjectivity here, most would choose the one that has a track record with friends and family. After all, if you trust your friend and they trust their accountant, there’s a good chance for a successful match.
A similar concept applies in the world of venture capital. If people know and trust you, there’s also a good chance that the startups they come across (and possibly send your way) will also trust you.
As such, a good VC firm will invest the bulk of its relationship-building efforts into establishing a network of professionals to refer deals to them. This network might consist of other venture capitalists, angel investors, accelerators, entrepreneurs, lawyers, and various other members of the technology ecosystem.
The goal is to be top of mind for professionals who are close to these startups and form relationships with anyone whom they believe is most likely to be exposed to high-quality startups before knowledge of them becomes widespread.
A venture capital firm’s primary resource (other than their dry capital) is the time of their investment professionals; time saved in finding deals means more thorough diligence and higher quality assistance to portfolio companies.
Additionally, looking for leads is always easier if you know the people sending them to you. These people likely do some of their own screening before sending them your way because their own reputation is on the line. This pre-screening makes referral deal flow better in quality than other sources.
This means that as a VC you should be hosting and attending events, and having regular catch-ups with key connections. Some even have structured programs for specific groups (for angels, for example), and many VCs spend time doing ecosystem work with no immediate payback.
Any seasoned investor will tell you that if you are spending all of your time at your desk you’re doing something wrong. That’s why you often see VCs at pitch events and lunch and learns, or grabbing cocktails at the bar after work. They aren’t just out for a drink or in the mood to socialize. There is a method to the deal flow madness.
While there are thousands of startups out there, very few have what it takes to be the winner in your portfolio. Most of them will fail. The job of a VC is to sift through the hundreds of startups and elevator pitches to find that diamond in the rough.
So if you want to build a quality deal flow pipeline, get out in the community, be personable, listen to founders, and truly try to help founders. If startups and other VCs see you out there offering your support, you will likely develop a strong reputation among your peers, who will remember you the next time they meet a startup in need.
If enough people know and trust you, the startups will follow suit because there’s a good chance they have some kind of connection with the person that connected you. That immediately gives you a leg up.
Let’s use a recent example from the GoingVC community to illustrate the importance of networking for deal flow.
GoingVC member Agni has been active in the community since going through the flagship program in 2021. He joined the investor program to help refine that VC muscle through repetition and practice.
Like any good VC, Agni knows how important it is to consistently network and remain active in ecosystems like GoingVC where he might come across some quality startups.
And that consistency recently paid off when another GoingVC member presented him with a deal he couldn’t pass up.
He heard about Truework through GoingVC’s investment channel from another alumnus of the program, Eliza. Eliza posted about the investment opportunity in GVC’s Slack community.
Agni was impressed by their revenue-building abilities and low churn rate. And once he expressed interest, she connected him with the right people and it took off from there.
Would Agni have been given this investment opportunity had he not done the networking legwork and used his networking chops? Likely not.
By now hopefully you understand that your network can be your biggest asset. Especially if you’re in the VC world. A strong reputation, coupled with a robust network will lead to higher-quality deal flow and ultimately make your job as a VC a whole lot easier.
If you take networking seriously and put in the effort, you’ll build a strong reputation and network. This will lead to higher-quality deal flow, which will ultimately make your job a whole as a VC a whole lot easier!
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