Private capital deal success depends on increasing the velocity and volume of deal flow, so it’s critical that every venture capitalist (VC) has a solid deal sourcing process in place to discover high-value, high-potential companies and startups.
To close a single deal, the average firm often looks at dozens—if not more—of new opportunities. Efficient, streamlined deal sourcing is a must.
When you can increase the number and quality of deals in your pipeline, you’re able to evaluate more opportunities, uncover deal referrers, and increase the chance of finding potential investments that fit your fund’s thesis and focus.
To find the most promising deals faster, private equity firms, venture capital teams, and investment banks need to follow a structured, predictable approach to deal origination and due diligence.
Let’s examine some deal sourcing best practices, and look at the ways you can improve your deal sourcing process.
1. Overestimate the amount of time you'll need to spend and focus on high-quality leads
Deal origination is a top priority for firms and it’s not something you can just focus on periodically. Be prepared to put continuous effort into your deal sourcing strategy, week after week, month after month, and year after year.
Putting regular time and effort into deal sourcing and monitoring companies or founders of interest can elevate your dealmaking. “For 88% of our deals, we either get tipped off to the deal or directly referred by our network,” says Sergio Monsalve, Founding Partner of Roble Ventures. Build the top of your pipeline by developing relationships with a wider network of startups, co-investors, and deal referrers.
You never know where or who your next deal will come from, so your best strategy is to focus on many possibilities to find the opportunities that are highly actionable—either now, or down the road.
2. Analyze and review deal sourcing strategies regularly to improve consistently
It’s important to know where your best deals are coming from. Are your best referrals coming from co-investors? Limited partners (LPs)? Contacts within your existing portfolio companies?
Take the time to track, report, and visualize which sources are sending the highest-quality deals to fill your pipeline. While it’s normal for the majority of opportunities to not make it past the origination phase, it doesn’t mean sourcing deals is a complete guessing game.
Then use that information to figure out the best places to invest your time. For example, you might get more leads from LinkedIn or events, but fewer of those leads might end up being shortlisted prospects, which means it might not be the most valuable deal sourcing channel.
Identify the channels you should put more time into, and which ones you can de-prioritize, so you can create a more effective investment strategy.
3. Use varied methods of communication to test which are most successful
When possible, use multiple modes of communication when you’re connecting with prospects and deal sources. You’ll get maximum coverage if you combine email, phone calls, trade shows, industry events, and even social media.
It also helps you meet potential contacts where they’re at. Of course, if you know a potential investor or founder prefers email or the phone, it’s best to use their preferred method of communication.
Finding email addresses can be challenging, but there are tools that can help. Some private equity firms, for example, use online databases like Hunter.io or Rocket Reach to get addresses. Additionally, you can test out a number of simple formulas like {first initial} + {last name} @ {company name} to see if your message bounces back.
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Remember that the people you’re trying to reach likely receive a lot of cold calls and emails, so be patient. It may take some time to secure that initial contact at your target companies.
Continue reaching out regularly—some say it takes three calls and three emails to get a response. A relationship intelligence CRM platform can also be helpful to identify the best contact. It’s not just who you know but the people your team knows. Tools like Affinity can identify paths of warm introduction to help you connect with founders, investors, or other key contacts at your target companies.
Numbers are everything when it comes to improving deal sourcing, so expect to reach out to a large pool of potential targets before you land on a small number of promising investment opportunities.
4. Establish a consistent follow-up cadence so you never forget a potential relationship
Today’s private capital deals are competitive. If you lose sight of an opportunity, you’ll miss out. Don’t let conversations with great companies die—stay in touch. Even a passed lead may become an invaluable partner or referral source. And a leader not ready to make a change today may change their mind months or years down the road.
Consistent communication like this is important in all your relationships, but it’s particularly crucial with your top-priority opportunities. Once you’ve spotted a great deal, stay in touch as much as possible. Regular, thoughtful follow-up makes private companies and referrers feel valued because they know they are at the top of your mind.
Excellent communication can be a big differentiator for your firm. Companies and sources will take notice of the way you interact, and better proprietary deals will flow your way, giving you a competitive edge.
But it’s important to find a balance between consistent communication and too much. Technology platforms and intelligent CRMs like Affinity can help you set reminders for yourself to follow up at the optimal cadence, so you never let a qualified opportunity fall through the cracks.
Find out how Affinity can help you keep track of conversations and remind you when it’s time to reach out to a prospect, investor, or referral source again.
5. Gather data from multiple sources to make more informed decisions
Company valuations can fluctuate, and a VC or PE firm that’s investing today with one strategy may not be using the same strategy tomorrow, so you need real-time metrics and insights you can count on.
As you’re sourcing deals, data can be a significant asset. Gather and analyze data from different sources to monitor—or source new—startups that fit your thesis. Enriching existing data also makes it possible to stay on top of recent activity for specific contacts, so you never miss a potential deal opportunity.
Relationship intelligence platforms like Affinity simplify this information-gathering process by providing proprietary, first-party data enrichment as well as additional details from external data partners like Pitchbook and Crunchbase in a single platform.
Combined with powerful machine learning and AI tools that optimize efficiency, a data-driven approach to deal sourcing can generate critical insights that ensure you’re sourcing the best possible deals.
6. Build a tech stack with tools purpose-built for dealmaking
Having the right tools in your VC tech stack, private equity tech stack, or M&A tech stack helps you better evaluate the opportunities you’re pursuing so you can identify the most impactful relationships in your business network and the most lucrative deals available for your team.
You need tools that can keep track of all the data relating to your key relationships and deal activity in an easy-to-access centralized format, without the hassle of manual entry or having to track down your team members for the intelligence you need at any given time.
Even if you have an existing platform you love, dealmaking tools like Affinity for Salesforce can layer on top of your existing tech stack, like Salesforce CRM. Investing in the right tools helps eliminate the guesswork and streamline your entire deal origination strategy so you can build and manage your pipeline in one place.
7. Automate deal sourcing workflows
Every closed deal is the result of a lot of moving parts and interactions. This can leave room for error and for details to slip through the cracks. Automating required but repetitive actions in the dealmaking process can help firms close deals faster and more efficiently.
Common places where automation can help streamline deal flow management:
- Deal evaluation and prioritization: Automatically segment out the deals most likely to close based on deal data such as valuation, stage, and industry. Then automatically assign deals to the right team.
- Deal origination: Boost your deal sourcing efforts by automatically tracking the deal origination details that can improve your team’s deal sourcing decisions.
- Data enrichment: Reduce the back and forth that can come with deal research by automatically pulling deal-relevant data and contact information into one centralized database. Data enrichment tools can help you source higher-quality deals by delivering hard-to-find data points based on existing datasets.
- Activity capture: Take the manual data entry out of record creation, and save your deal team over 200 hours a year, by automatically creating and updating contacts right from your team’s email and browser.
- Outreach and communication: Stay top-of-mind with key contacts by automatically sending personalized outreach or setting reminders to check in on prospects at the right time.
- Tech stack integrations: Instead of spending valuable time toggling between apps and different software, find a deal sourcing platform that ties together all the tools in your tech stack. For example, automatically send deal notifications to Slack to keep your team on top of new deals in the pipeline.
8. Measure and analyze deal performance and results
When it comes to deal sourcing, it’s not just about conversion rate and the number of closed deals. Go beyond the number of leads you get and drill down into the quality of the deals that make it into your pipeline.
Firms are increasingly taking advantage of data analytics in the deal sourcing process. This allows investors to make decisions based on concrete, quantifiable data. It also makes it easier to narrow down the trends and strategies that are most likely to generate lucrative closed-won deals.
Not only does this increase efficiency and create a more predictable and repeatable deal sourcing process, it helps you build a portfolio that performs.
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Why do private capital firms choose Affinity over other CRMs?
Sourcing high-quality deals can be a complex and lengthy process. Which means to optimize your firm’s deal sourcing, you have to rely on your network, and that means monitoring and maintaining strong relationships.
While Excel spreadsheets and transactional-based CRM are enough for simple deals, Affinity is tailor-made for complex, long-term dealmaking.
From relationship intelligence to pipeline management, Affinity helps you stay on top of every deal from origination to close. Whether a deal presents itself right away or 5 years down the road, Affinity captures all relevant contact and deal data automatically, so you’re ready to make the most of every opportunity.
Affinity’s AI-driven algorithms also calculate and quantify relationship strength, helping you prioritize where you spend your limited deal sourcing time and keep your most important relationships active.
For firms already managing deals and relationships in a CRM, Affinity for Salesforce, helps dealmakers go beyond just contact information and static company data. Affinity makes sure you have everything you need to build relationships and drive deals in one centralized location.
Talk to an Affinity expert today to find out why more than 50% of the top private capital firms are finding, managing, and closing more deals with an automated relationship intelligence CRM.
Deal sourcing FAQs
What is a deal sourcing platform?
Deal sourcing platforms are software or tools designed to help venture capital and private equity firms find and close potential investment opportunities. The right platform doesn’t just help identify the right deals, it streamlines the process to accelerate deal flow.
How do private equity firms perform research?
There are many ways that private equity firms perform research when sourcing and evaluating potential investment opportunities. The type of research will often vary depending on the stage of the deal, typically becoming more extensive and robust as a prospect moves through the deal pipeline. The goal is to help investors make informed decisions before closing a deal.
Private equity firms often have internal or external analysts and experts to provide insight into the potential success of a prospective company. They’ll do market research to understand industry trends and the competitive landscape. Firms will also conduct a high level of due diligence around legal, financial, and operational risks to understand the true value of the opportunity.
How does private equity deal sourcing work?
Private equity deal sourcing is the process of finding and uncovering potential investment opportunities that can be turned into lucrative deals.
Deal sourcing starts with a strategy to help identify potential deals that align with a PE firm’s investment criteria. Then firms create a target list of prospects and research them to determine if they’re a fit for their investment thesis. Once a prospective company is qualified, firms will connect with key contacts within these companies to move them through the deal pipeline.
Unlike venture capital firms (VC firms) that target early-stage, high-risk-high-reward startups, PE firms tend to focus more on sustainable and scalable growth which impacts how firms evaluate their targets when sourcing deals.
What is the difference between deal sourcing and deal origination?
Deal sourcing and deal origination are two terms in private equity, venture capital, and investment banking that are often used interchangeably. But there are slight nuances that differentiate the two.
Deal sourcing is the process of researching, prospecting, and evaluating potential opportunities. Meanwhile, deal origination generally refers to the first step in the process, which is finding the investment opportunities to pitch potential buyers.
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