We have all heard the expression “We have proprietary deal flow” a million times. As a former LP who led 100+ fund due diligence, there has always been one consistent analysis in my work: GP’s deal sourcing analysis. While they are several reasons why a specific fund manager is different from all others, deal sourcing is a major one. LPs spend a good proportion of their due diligence effort analysing data around the GP’s sourcing capabilities - and GP should nail that exercise flawlessly if they expect to close their fund on target.
To help fund managers achieve this during their fundraising, I have put together a non-exhaustive list of different sourcing categories I have seen over the years.
1. General Partners' network: deal emerging from an existing relationship with an entrepreneur
This is perhaps the most credible deal source there is. When a GP has been around for a while and did the work in building the right relationships, this deal source will differentiate a GP the most.
2. Inbound: entrepreneurs directly reaching out to the firm or one of its partners
Depending on the quality of the inbound, this deal source is common and well accepted at the seed stage.
3. Outbound: the firm has a team mapping specific markets and proactively reaching out to relevant companies in those markets
While this deal source is common practice with buyout and growth funds, only a few venture firms have started sourcing opportunities with an outbound strategy. If done well, it can lead to great deals, but could also make founders feel that investors are just “picking their brains” to invest in a competitor.
4. Events: e.g. Web Summit, Slush etc..
Not really a differentiator since all it takes is buying an event ticket...
5. Intermediaries: placement agents, investment bankers, advisors
Depending on the GP’s investment strategy, this deal source is more or less accepted by LPs (i.e. okay for buyout and growth equity, less so for early-stage ventures).
6. Accelerators & incubators: e.g. YC, Seedcamp, TechStars, etc..
Those are not proprietary deal sources - yes, even if you have “a look” before everybody else.
7. Co-investors: other investment firms inviting you to co-invest in a deal
Strong sourcing because it shows that you are valued by your peers so much that they are ready to make space in competitive rounds for you.
8. Angel investors & scouting programs: e.g. Sequoia's famous scout program who source and refers deals to the team
As scouting programs have increased in popularity over the years, investors are very likely to make reference calls on the major scouts to verify how likely they are to send you deals vs. another firm.
9. LPs: LP sending you deals
This one is rare, but I have seen LPs spotting great deals.
10. Data: in-house built sourcing engine, scraping data for signals on promising companies in order to reach out to them
Similar to outbound, but instead of MBA analysts mapping markets, the GPs use data science to find signals on companies to reach out to.
11. Firm-specific sources: e.g. unique network which gives a GP access to unique opportunities
For instance, access to relevant talent emerging from large tech companies or spin-out opportunities (e.g. PayPal mafia, etc...), a high-profile GP with a truly unique background (imagine if Elon Musk had a VC fund..), or a fund attached to an event (e.g. Amaranthine VC from Web Summit).
So what should fund managers present to investors? Ideally, there is a balance of 3-5 deal sources with 1 source being strong and well differentiated. Betterfront customers can use our deal source analytic to slice-and-dice their data and present a well-defined sourcing strategy which LPs can directly include in their due diligence.
