This Untapped Investment Method Is Ready for a Breakout in 2023. Here's How to Use It. Few investment products have performed as well as venture capital has in the last few decades. However, with growing fund sizes comes a growing pressure to return greater multiples in profit.
By Karl Eshwer Edited by Micah Zimmerman
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Venture investing has come a long way since being pioneered by Karl Compton, then president of MIT, almost 80 years ago in 1946. For early investors like Karl, acquiring a stake in a young business with immense growth potential looked very different than it does today. The capital wasn't as available as it is today, and investors weren't as creative as they are today — this made for an environment ripe for disruption for investors who saw the future and, with it, significant financial return.
Fast forward to 2022, venture capital as an asset class has ballooned to over 1,000 funds and over $130 billion in assets under management. So how can an edge be achieved? Technology.
1. Sourcing opportunities before they become available more broadly to venture capitalists
With technology comes automation and an opportunity to streamline previously time-consuming backend processes. Top of this funnel is a sourcing engine to help find the next big idea, ideally before it is more easily accessible in a formal fundraising process. The two tools that are rapidly growing in popularity are Grata and SourceScrub.
Essentially, these platforms help unearth contextual company insights using advanced natural language processing (NLP) and machine learning (ML) algorithms that read and structure business information from private company websites at scale. So what does this mean for investors? It opens the door to an extensive list of proprietarily sourced businesses based on keywords and trends that resonate with an investor's market thesis and outlook.
For those who go into the process with a targeted industry or geographic thesis, these sourcing engines can help exponentiate efforts by granulating the search for a list of potential investments by filtering across business models, sectors, target verticals, size, growth, hiring dynamics, ownership structure, funding elements or geographies.
2. Managing a large pipeline of opportunities efficiently
CRM (customer relationship management) software is a crucial component that ties an automated approach to investing together. Having visibility over hundreds or even thousands of opportunities at different stages in the investing process is critical to successfully managing relationships across all stakeholders (investment team, entrepreneurs, legal, etc.). There is a multitude of solutions, with many of the well-known systems usually being too advanced for the process outlined here. A platform that balances out functionality and ease of use is Pipedrive.
Pipedrive's solution is ideal for managing the entire value chain of the venture investing process and acts as a one-stop shop to handle every potential acquisition target. It logs every email interaction (when in sync with the fund's email platform). It manages calendar interaction while giving a transparent view of the deal flow pipeline to those with access.
Related: The 7 Stages Of Customer Relationship Management
3. Kickstarting relationships with Entrepreneurs
The next component of this system brings the most significant value in terms of hours saved — the email automation platform. Like the CRM, many options work well. However, Klenty has an edge in seamlessly integrating with the CRM system with little to no manual work required beyond setup. Klenty runs on a plan dubbed "cadences." Cadences are a chain of automated emails simulating manual outreach and follow-ups. It works on a set timeline, i.e., email one is set to go out on Sunday evening, email two (follow up + more context) on Wednesday afternoon, and so on until the prospect responds. At this point, they are automatically moved to the next step in the CRM pipeline and stop receiving the automated emails.
This exercise hopes to engage management at the potential target for introductory communication before moving forward. For context, at scale, if there's an assumed conversion rate of 5%, and the initial list imported from the sourcing engine is 10,000 — that's effectively 500 potential targets to speak with resulting from a weekend's worth of work. Comparing this with making 50 cold calls daily, that's five potential leads every two days compared to 500.
4. An opportunity ripe for disruption
With most VCs looking for startups with the highest potential to hit it big, and founders looking for the best chance of raising capital, there is a gaping hole today of companies that aren't swinging for the fences in terms of billion-dollar IPOs but are driving immense value. An automated process of finding these companies presents an opportunity for investors to create lasting value and social impact by investing in businesses and entrepreneurs who would've previously flown under the radar.
Technology is giving back hundreds of hours to investors and, with it, the opportunity to strategize towards adding valuable companies to their portfolios and, in turn, being useful to the entrepreneurs they invest in beyond just capital!
Related: 8 Things You Need to Know About Raising Venture Capital
