5 Reasons Your VC Fund Needs A Deal Flow Management System in 2021
The rise of the internet has brought us many valuable innovations. The ability to create a business and begin marketing a product within a few hours of inception has empowered thousands of ambitious individuals to try their hand at entrepreneurship. After all, various software tools make it incredibly easy to create your own website, incorporate your company, and even learn the fundamentals of sales and marketing.
Overall, lowering the barrier of entry for starting your own company is good. It ensures that no good idea will die out due to lack of resources or ability to share it with a target audience. However, this also means that business can appear stronger than they actually are. A company that lacks true vision or strategic planning can mask their shortcomings with an engaging website made on WordPress or a beautifully designed pitch deck created on Prezi or Canva.
Mostly, we should not worry too much about these companies and their ability to sustain long-term growth. The market does a pretty good job of weeding them out before they can make any actual noise. However, we see companies who are able to obtain a moderate level of success and create a brand presence that makes them look even more successful and refined than they really are.
This is a concern for today’s Venture Capitalists for several reasons. The last thing any fund manager wants to do is invest capital into a company only to find out it was only smoke and mirrors. Not only do you have to explain this poor investment to your investors, you may then lack the cash to invest in a true winner instead. Furthermore, you may miss out on that true winner because you had no concrete way of knowing if they are for real or not.
#1 — The EyeSight Test No Longer Works
When analyzing an opportunity of any size, we first conduct something called the eye sight test. Basically, we review the way something looks and determine if we can uncover any reasons not to move forward with it. For example, if a marketing agency is considering taking on a client that will require significant resource allocation, they may first examine whether that company has a product and presence they can work with.
There may have been a time where this could work for fund managers when deciding whether to invest in a startup. However, thanks to the rise of the plug and play tools mentioned above, this test no longer works. Almost anyone can create a digital presence that makes a company look legitimate. It is no longer that impressive if a company has a website, collateral, and is incorporated.
Yes, you can still use this eyesight test to weed out the obvious pretenders. However, if they pass this test, there should still be another round of vetting before you give them serious consideration. A deal flow management tool will gather information that can’t be found on a website or social media page. This forces the serious candidates for your cash to prove themselves early on of being worthy of your time and attention.
#2 — Not Every Startup Fits Your Model
As anyone with a wallet full of cash will tell you, it is easy and enticing to spend money when you have it. This can be the case when you are a new fund and flush with capital that you can invest at your discretion. You may come across a startup with an exciting product and feel compelled to jump in with two feet before someone else does. Once again, we are allowing someone a type of entry they have not earned yet.
While you may find several enticing startups, not everyone will fit your model. It is important to understand what industry and niche you best serve. Where you can leverage your contacts and experience to provide the highest value of support after your initial investment. The right deal flow management tool offers filtering functions for you to find the right fit for your fund. This way, you can call on your network to provide the support needed to achieve your desired return on investment.
#3 — Investment Is A Group Effort
Investing in a company is a complex and drawn-out process. It is not a decision that one should make on their own, no matter how exciting the opportunity may be. Once you select a startup that fits your business model and it passes your initial vetting, it is time to share it with the rest of your team. This includes anyone who analyzes the various parts of the company, and any key stakeholders who should have a say in your investment choices.
The right management tool will allow you to share all relevant information with everyone that is involved. This will ensure that everyone is making a fully informed decision based on the facts, and not emotion. It also allows other team members to understand how you arrived at your decision. This type of tool allows for complete transparency at all times for all key stakeholders involved.
#4 — Searching For The Diamond
Finding the right deal for your fund is a time-consuming process. A wise and skilled fund manager knows not to jump at the first opportunity that presents itself. They should care deeply about what the rest of the industry is saying about the company you are looking at. If a startup is receiving rave reviews, you can bump them up to the top of your list. On the other hand, your system may be able to point out red flags and companies to stay away from.
Of course, it is not always about looking at a brand and deciding if they are a good investment or a bad one. It is possible you will find several companies that are a promising investment, but not right for you. Therefore, you need a tool that will filter out anything that is not the best deal for your fund. When you find that diamond, you can point to this stringent filtering system when explaining to the rest of your fund why this brand is worth investing in.
#5 — Let The Winners Find You
While it is key to always be proactive about finding startups, you should also put yourself out there to be found by them. This allows a company that is brand new but has potential to reach out directly to you before the rest of the industry is aware of them. This type of early interaction can allow you to be one of the first funds to offer an investment and allow you to get in on the ground floor.
The ability to promote your fund is not found in every single type of deal management tool. However, the ones who do offer this function do so because they understand its power and value. A company that offers this feature is telling you that they understand what you want and need to become a viable option in your industry. It is a feature that should not be compromised or forfeited when selecting your next deal flow management platform.
About PitchBox
The PitchBox tool, powered by StartupFuel, is deal flow management software built specifically for startup investors and funds globally. Using our easy-to-use solution, firms can run intake, collaborate & review startup pitches all in one place. The front end simplifies the process for startup founders to apply to your PitchBox, while ensuring that analysts can be equally efficient in managing and reviewing applications, truly a win-win for both sides.
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