If you operate in the worlds of venture capital or private equity, or if you deal with mergers and acquisitions, deal sourcing is one of the most important skills you need to cultivate.
David Paul, CEO and a Managing Director at DWP Capital, says, “Anybody can write a check. Everyone wants to get that founder high. Where the rubber meets the road is sourcing.”
Deal sourcing is the process of finding companies to invest in. Traditional deal sourcing strategies involved referrals (word of mouth), networking, and attending conferences. However, increased competition has forced firms to evolve.
In this article, we demystify the world of deal sourcing, including what it means, why it’s important, and its various types and strategies.
Read on to discover how market data can help you develop a successful investment strategy, identify companies in your desired industry that are ready for funding or acquisition, and accurately assess a company's potential for growth.
Introduction to Deal Sourcing
What Is Deal Sourcing?
Deal sourcing refers to the process of identifying and analyzing potential business opportunities or transactions.
Private equity (PE) firms and corporate development teams need a constant stream of deals to achieve their goals. The goal of the deal sourcing process is to ensure that firms evaluate enough potential opportunities in a given time period to create a viable deal flow .
PE firms and corporate development teams both leverage various methods to source deals, including:
- Referrals that connect dealmakers with targets via personal or business contacts
- Databases that enable investors to store and track information about potential targets
- Tech platforms that equip dealmakers with dynamic data and workflow tools
Once a deal is sourced—meaning the target company is interested in making a deal—the firm will move on to the due diligence phase.
The Importance of Deal Sourcing in Private Equity
Private equity firms and corporate development teams need to find and transact with promising companies to stay competitive—especially with the current state of the market. That means efficient deal sourcing is more important than ever.
New businesses are increasingly able to start and grow successfully with less capital, making the deal sourcing process even more critical for private equity and venture capital companies.
The days when companies could rely solely on intermediaries to provide them with an adequate deal flow are gone.
Additionally, the COVID-19 pandemic and its aftermath of COVID-19 have underscored the importance of agility and adaptability in the deal sourcing process.
Private equity firms and corporate development teams have to take control of their own deal flow by building direct sourcing teams and processes. Firms must also identify and build relationships with the right targets earlier in their life cycle.
Types of Deal Sourcing
There are two main types of deal sourcing: traditional and technology-driven.
Traditional Deal Sourcing
Traditional deal sourcing is primarily powered by relationships, relying on networking, personal contacts, and reputation building.
Dealmakers rely on the following channels for traditional deal sourcing:
- Personal Connections: Dealmakers leverage their existing relationships to build target lists, create introductions, and identify new opportunities.
- Conferences and Events: Dealmakers go to events such as conferences and trade shows to meet potential partners in their industries.
- Intermediaries: Dealmakers interact with brokers, bankers, and advisors who specialize in deal origination.
Traditional methods of networking and relationship building are crucial for successful deal sourcing. However, in today’s extremely competitive market, dealmakers cannot only rely on traditional means. To stay ahead, they need to leverage technology.
Technology-Driven Deal Sourcing
Tech-driven deal sourcing involves utilizing digital platforms to streamline and enhance dealmaking workflows.
Grata, for example, is an end-to-end dealmaking platform that leverages investment-grade data and proprietary AI to help private market dealmakers source and win more deals.
Key deal sourcing tools from Grata’s platform include:
- Powerful AI search to help dealmakers find more companies similar to their targets
- Smart filtering to enable dealmakers to drill down into the employee headcount, revenue, growth, business models, ownership, and funding they’re looking for
- CRM Intel that integrates with Salesforce, Dealcloud, and Hubspot to help dealmakers streamline their relationship management workflows
- Conferences and attendee lists that allow dealmakers to find relevant industry events and make the most of their time there
- Verified live deals that enable buyers to connect with sell-side advisors directly
Using platforms like Grata, private market professionals can supercharge their deal sourcing efforts.
Process of Deal Sourcing
Here’s an overview of how the deal sourcing process typically works:
- Gather a deal sourcing team. Assemble a group of experts who will be in charge of identifying, assessing, and connecting with potential targets.
- Establish your deal sourcing strategy. Select the method or methods that best fit your firm’s strategic goals and investment criteria. Equip your teammates with the tools they need to execute the plan.
- Build a target list. Create a list of companies that align with your firm’s investment thesis and criteria. Review and update the list regularly.
- Do your research. Dig into the firms on your list to get a sense of their market position, competitive advantages, growth potential, cash flows, management team, etc.
- Now, let’s examine some specific deal sourcing strategies.
Deal Sourcing Strategies
Strategies for Private Equity Firms
The two main private equity deal sourcing strategies are:
- Traditional deal sourcing (also called network-based sourcing)
- Proprietary deal sourcing
Through traditional deal sourcing, or network-based sourcing, PE firms identify potential deals through personal connections, business networking, and attending industry events.
While traditional deal sourcing relies heavily on a professional’s personal network and reputation, proprietary deal sourcing incorporates technology and data analysis to identify potential deals.
Proprietary deal sourcing can involve using online databases, software platforms (like Grata), data analytics tools, and other digital resources to identify and evaluate potential deal targets.
Solutions that empower investors with unique data and AI-powered workflows provide visibility into historically opaque private markets. To stay competitive, private equity firms need to embrace these new technologies.
These deal sourcing tools allow private equity firms to reach a larger number of potential deals and analyze internal and third party data on a much larger scale. They also provide tracking tools to manage the deal pipeline and workflows that improve the probability of achieving the desired outcome.
Proprietary sourcing improves returns by 10-20% and yields $13M more carry per deal for the average middle market deal of $150M and 19% IRR.
1. Datafrom CEPRES.Sample includes 107,000 PE-backed companies and 11,000 funds
2.PitchbookData: Q32021 US PE Middle Market Report
Strategies for Corporate Development Teams
Deal sourcing is crucial for corporate development teams to drive business expansion and growth.
To be successful, corp dev professionals source opportunities through channels including:
- Conducting market research using end-to-end dealmaking platforms like Grata
- Tapping into their personal network of contacts
- Working with investment banks or brokers
- Attending industry events
Platforms and Tools for Deal Sourcing
Leading Platforms for Private Equity and Corporate Development
Many private equity firms rely on deal sourcing tech platforms to find and connect with investment targets.
For example, Grata’s AI-powered deal sourcing solution enables users to tailor their company search with purpose-built filters, including software classifications, revenue, ownership, funding, and more. The Similar Companies tool uses AI to identify themes and suggest other relevant companies, helping users find a broader pool of potential targets.
From there, Ana, Grata’s AI analyst, helps dealmakers perform desktop diligence to determine if a possible target should be contacted. If the answer is yes, Grata’s platform provides up-to-date, verified contact information for company executives.
Customer relationship management (CRM) platforms like HubSpot, Salesforce, and DealCloud supplement the deal sourcing workflow by housing proprietary data. They allow PE and VC companies to track their interactions with clients and prospects as they move down the funnel, and they may even integrate with deal sourcing tools to enable new workflows that generate deals.
The best deal sourcing platforms integrate with CRMs to make the process of finding and tracking deal targets as efficient as possible. Grata users can enhance their deal sourcing efforts by filtering searches and lists in the Grata platform with CRM data so that they can seamlessly pinpoint key relationships and top-scored deal targets.
To see firsthand how Grata can help you optimize the deal sourcing process, schedule a demo here.
Best Practices in Deal Sourcing
Private Equity Deal Sourcing Best Practices
To find the most promising investment and acquisition opportunities during deal sourcing, private equity firms should follow these steps:
- Invest in your sourcing strategy. A strong strategy incorporates both technology and internal employees. Assemble a team of individuals who will be responsible for identifying, evaluating, and engaging potential deals. These individuals should have expertise in market research, industry analysis, and networking to get the most out of a deal sourcing tech platform.
- Harness your proprietary data. Supercharge your CRM usage. With Grata’s CRM Intel, users can leverage their firm’s proprietary data from Salesforce, DealCloud, or HubSpot to uncover more deal targets. Users can access their CRM data directly in the Grata platform so they can identify top-scored deal targets and focus on cultivating the most promising opportunities.
- Nurture the dealmaking ecosystem. Find a way to be top of mind with bankers and service providers like consultants, lawyers, and accountants. With Grata’s platform, investors can search for and connect with intermediaries and advisory services. Grata’s CRM integration also makes it easy to build, track, and nurture new relationships.
Corporate Development Deal Sourcing Tactics
Corporate development teams can get the most out of their deal sourcing process by:
- Conducting thorough market research to identify high-potential acquisition targets. Platforms like Grata make market research simple. With Grata’s Market Intelligence tool, corp dev teams can generate snapshots of any market to quickly assess what transactions are happening, how companies are trading, and how their space is fragmented.
- Engaging with inquiries from other industry players. For example, the Grata Deal Network allows members to connect over exclusive access to live deals shared by sell-side advisors.
- Attending industry events and conferences to build out their networks. Grata’s Conferences & Events lets users find events in their industry and prioritize attendee lists so they can book more meetings and source better deals.
Case Studies and Examples
Successful Deal Sourcing in Private Equity
One example of a private equity firm successfully utilizing deal sourcing is LFM Capital, a PE firm focused on small North American manufacturing businesses. LFM Capital chose to partner with Grata because of Grata’s user-friendly interface and highly specified search capabilities.
Using Grata’s AI-powered search, LFM Capital was able to identify potential investment opportunities with unprecedented precision. Ryan Richardson, a Senior Associate at the firm, described the experience of using Grata to source deals in the defense electronics industry:
"We were able to narrow a pretty impressive list of add-ons of about 250 or so companies in the U.S. and Canada that met a lot of key investment criteria for us."
Richardson also praised Grata’s ability to parse companies’ information even from less up-to-date websites, appreciating the system's ability to "scan an entire website, every single page of it, and identify certain vocabulary, terminology, services, capabilities, and acronyms specific to this industry.”
LFM Capital’s portfolio companies also leveraged Grata’s data and search capabilities to bolster business development efforts.
See more case studies exemplifying how Grata has helped private equity firms optimize their deal sourcing process here.
Challenges in Deal Sourcing
Overcoming Common Challenges
Some of the deal sourcing challenges most frequently faced by private equity and venture capital firms include:
- Intense competition. In today’s challenging market, PE and VC companies are all vying for the most attractive investment and acquisition opportunities. Differentiating yourself is crucial for capitalizing on deal opportunities. You should know everything about the market and your competitors before reaching out to prospects. Platforms like Grata leverage advanced natural language processing (NLP) and machine learning (ML) to provide contextual insights about private companies so that investors can sharpen their competitive edge.
- Effective deal screening. The sheer volume of companies in a given space presents a huge challenge. Investors can’t waste time pursuing targets that aren’t a good fit. Advanced, tech-driven desktop diligence methods ensure that investors are only going after the right prospects. For example, Grata’s AI analyst, Ana, allows investors to screen deals with precision and gain a deeper understanding of the market landscape.
- Establishing consistent deal flow. Limited access to potential targets can hamstring the investment process and hinder growth. Investors need an efficient pipeline management tool to keep their teams aligned. With the My Pipeline feature on Grata’s platform, users can track their funnel, take notes on interactions, set custom labels for prospects, and more. Paired with CRM Intel, the Pipeline tool streamlines the deal sourcing workflow so that investor teams can efficiently find the best opportunities.
Strategic Approaches to Enhance Deal Flow
The best way for PE and VC companies to overcome these hurdles and get the most out of their deal sourcing process is to find and effectively utilize the right tech-based, data-driven solutions.
These tools provide investors with insights into specific companies as well as a broader understanding of market trends, which can improve strategic deal sourcing and deal flow.
The Future of Deal Sourcing
As technology continues to evolve, it creates new ways to source deals and streamline the vetting process for private equity and venture capital firms.
In the next several years, investors should watch for the future of deal sourcing to be shaped by AI and advanced data analytics. Advanced data analytics will help PE and corporate development companies identify industry trends as well as promising investment and acquisition opportunities. Additionally, AI-powered tools will increasingly assist with screening and evaluating potential deal targets.
Learn more about how Grata leverages quality data and AI to help investors optimize their deal sourcing methods here.
