To succeed in today's fast-paced and increasingly digital investment environment, investment teams have to be on top of their deal sourcing game. Building a proprietary funnel of potential deals is a key success factor for any investor. Relying on inbound deal flow and manually searching the web for opportunities is not a differentiating strategy.
Deal sourcing requires sound strategy and tools that allow for comprehensive, up-to-date and data-driven insight into emerging technologies and markets, in order to identify the most promising companies active in them. Without, investment teams will find themselves outpaced by their competition and miss out on good opportunities.
In this blog post, we will be discussing the most effective strategies for deal sourcing, including how to find and screen more new opportunities, how to build consistent deal flow, and more.
What is Deal Sourcing and Why Does it Matter?
Deal sourcing, or deal origination, is the process of finding suitable investment opportunities and generating deal flow for venture capital, private equity, corporate venture and mergers & acquisitions teams (basically any investment team).
The goal of deal sourcing is to generate a steady stream of potential investment opportunities. Investment teams look to evaluate a wide range of potential investments, to find those with the highest potential returns and increase their success rate. A Harvard Business Review survey showed that, on average, US investors will look at 101 opportunities for every deal they do.
This means that to build a successful portfolio, VC and PE teams need a proper strategy to be able to generate and screen proprietary deal flow at scale.
Who Utilises Deal Origination?
Deal origination is an essential part of any venture capital, private equity, and corporate venture teams’ process. It involves the process of discovering, evaluating, and securing attractive deals or opportunities to invest in a company.
VC and PE firms
Venture Capital and Private Equity firms use deal origination to find new potential investments and increase their deal flow. VC firms will be looking for startups with unique, scalable value propositions and good traction. Proactive startup scouting is essential to identify innovative companies at an early stage. On the flip side, being able to quickly check a hypothesis or find competitors of an identified or incoming lead saves VCs wasting time on non-interesting sectors and players. PE firms will often have to systematically scout for more established companies in fragmented markets or new geographies as part of a buy-and-build strategy.
Corporate Venture and M&A Teams
Deal origination is also employed by corporate venture funds and M&A teams to evaluate potential investments or acquisitions. These teams rely heavily on the data-driven deal sourcing strategies provided by software and other tools to maximise their potential returns. his is especially important for roll-up or partnering strategies in fragmented markets where you are looking for specific technical capabilities or business model characteristics
Additionally, deal sourcing can be used by individuals and angel investors to identify deals outside of the traditional venture capital and private equity landscape.
Ultimately, deal origination is a crucial step for anyone looking to make successful investments. By leveraging technology, data, and industry expertise, investment teams can ensure that they are targeting the most interesting companies. With the right deal sourcing strategies in place, investment teams can create a competitive edge in the market and maximise their potential returns.
Common Deal Sourcing Strategies
Let's take a look at 4 common deal sourcing strategies that most investment teams will apply.
Inbound Deal Flow
If your firm's team has a strong track record, they are likely getting bombarded with introductions and one-pagers on companies that are seeking investors. However, it's extremely time-consuming to sift through the pitch decks of fortune seekers and hit rates are low. From an efficiency and reputation point of view you’ll need to process leads and reject quickly if you want time to look beyond your inbox. As the best deals don’t magically land on your doorstep, the reality for most investment teams is that they’ll have to chase promising opportunities if they want to get a foot in the door.
Networking & Events
Similar to the first strategy, your team can benefit from reputation and industry network to get access to deal flow. However, while it is an important strategy to get a way in on certain deals it does not replace the need for proper benchmarking of potential targets. Visiting tech events or being part of the jury of pitching competitions can be a great way to build a network and meet early-stage companies.
For many people on your investment team, most time will be spent on doing desk research. Your team needs to stay up to date on technology trends to identify investment themes and potential targets. This technology scouting process can be very time intensive and probably includes some, if not most, of the following activities:
- Reading up on all the tech news to see if any interesting companies are mentioned
- Manually creating long Excel lists of potential targets
- Looking up and manually enriching these lists with data from a variety of sources
- Sifting through countless company websites to understand their value proposition
- Going back and forth with team members to collect everyone's input on the companies
While the groundwork for any investment team's success is based on solid research, this deal sourcing strategy is definitely the most demanding.
Company databases could probably be considered part of the desk research. However, they are so commonly used in the deal sourcing process that we wanted to mention them separately. There are many databases with company data. Some focus on startups or funding data and others on financial data.
Crunchbase and Pitchbook are probably the most well known data providers and are often used by investment teams to analyze markets and look up companies. In fact, we also love them and often use them ourselves to find certain data points. However, there are limitations to company databases, for example:
- Not Complete: You are limited to the companies in the database, the ones that everyone else can also easily find
- Generic Data: They have a generic taxonomy of industries and verticals making it hard to search for specific technologies.
- Outdated Data: While some databases are more rigorously monitored than others you need to be mindful of outdated data
- Not Customisable: Lacking options to add or customise data based on your own insights
That is why we only use company databases as part of a range of alternative data sources when helping our clients with their deal sourcing.
All in all, these are some of the most common deal sourcing strategies. If you are still with us, you probably know that generating proper deal flow is hard work.
How to Source More Deals
As investment teams look to identify, evaluate, and close on the best deals, deal sourcing is both about quantity and quality. As an investment team it’s important that you can efficiently process large volumes of deal flow. This will help you to identify quality investment opportunities early and to have access to exclusive deals and market insights that are not available through the public domain. But how exactly do you source more deals?
While Google and a company database can get you started, you can get a lot smarter with the right tech stack and process.
Companies that specialise in deal sourcing like Venture IQ, deal sourcing software and deal flow management tools, provide access to a large number of potential companies as well as company data to facilitate the deal origination process.
Let's look at two specific ways industry leaders are using deal sourcing software and services like Venture IQs to identify more targets.
Automate Manual Tasks
Deal Sourcing Software can automate many of the manual tasks associated with deal sourcing, such as scraping and analysing large numbers of websites, enriching company profiles, and building proprietary datasets to track market trends. This can help streamline the process and make it easier to access large pools of data and insights into opportunities that match specific criteria.
With a software platform built for deal sourcing, you can:
- Save time on desk research, and focus on the deals that matter
- Get a more complete overview of companies active in any market or industry
- Keep track of many different investment themes in parallel and proactively search for new companies
Deal sourcing companies can help you out even more by providing specialised knowledge on the deal sourcing process
Centralise Deal Sourcing and Keep Track of Opportunities
By bringing your deal flow management to one centralised platform your team can easily collaborate across investment themes and avoid double work. For example, our platform Catalist allows your team to add proprietary data or files to company profiles and will automatically update essential data points such as FTE and funding data on a recurring basis. This means that you can:
- Make company data searchable on custom keywords and filters, so you can easily screen companies and find the ones that match your criteria.
- Keep track of all interactions with companies
- Identify fast growing companies in your investment universe
- Easily revisit previous investment themes
Why leading VC, PE and Corporate Venturing teams trust Venture IQ to support their deal sourcing
Venture IQ deal sourcing software, Catalist, is purpose-built for investment teams. Unlike company databases such as Pitchbook and Crunchbase, Catalist's core features support proactive deal sourcing, collaboration and building proprietary and tailored company datasets.
Venture IQ can work with your investment or innovation teams to free them of hundreds of hours of desk research and manual data entry. The time they save with Venture IQs' automation features can then be spent on due diligence, building and nurturing relationships, and actively managing their portfolio. Venture IQ's experienced team of data scientists, technology consultants and analysts have worked for 100+ renowned investment teams. Among Venture IQs clients are Shell, Orbia, Waterland, Eneco and Nutreco.
Catalist can also be used as a stand-alone power tool to build proprietary company datasets and identify under-the-radar opportunities by making unsearchable data searchable. Catalist can help you stay updated on your investment themes by continuously scraping the web for specific topics and company websites on relevant keywords.
Talk to our team today to learn more about how our deal sourcing software and services can help your team to optimise their deal flow generation process.