Deal sourcing

The main deal sourcing channels

Every investment starts as a name on a list. Where that name came from shapes the price, the competition, and how much the investor knows before the first meeting. The channels group into two families.

Channels the investor controls

• Proactive outbound. The investor picks a sector, builds a list, and contacts companies that are not for sale or not raising. In private equity this usually starts from a market map, which yields a longlist of companies that meet the basic mandate before anyone makes contact.
• Executive and founder networks. Operating partners, former portfolio CEOs, and founders the firm backed pass on introductions. A fund that tracks its portfolio talent as one shared pool keeps these people, and their introductions, within reach.
• Management approaches. A founder or CEO contacts the firm directly. In venture this is the inbound queue covered by inbound deal scoring.

Intermediated channels

• Investment banks. A sell-side banker runs a process and invites several buyers.
• Deal brokers and advisers. Smaller transactions, often with a fee to the buyer.
• Other investors. Co-investment offers, syndicate invitations, and secondary sales.

Deals from the first family can be proprietary, meaning the firm talks to the company before or instead of competitors. Deals from the second family usually arrive as auctions, where price is set by competition.

Deal sourcing in private equity vs venture capital

Survey research shows where venture deals come from. The survey by Gompers, Gornall, Kaplan and Strebulaev covered 885 VCs at 681 firms and asked where their closed deals originated.

Venture runs on people: networks, co-investors, and the founders a fund already backed. Only about one deal in ten arrives inbound from the company. Private equity adds the intermediated channels, banks and brokers, that venture rarely uses, and it spends heavily on finding deals. A 2020 survey of more than 200 PE managers by Gompers, Kaplan and Mukharlyamov found investing partners spending 17.7 hours a week identifying new deals and another 6.1 hours networking, 23.8 hours in all, even while the pandemic pulled their attention toward existing portfolio companies. The venture-specific mechanics, scouts, accelerators, and founder signals, are covered in VC deal sourcing.

Why deal sourcing matters

A firm can only pick from what it sees. The PE survey found that for every 100 opportunities considered, the average firm deeply investigated fewer than 24, signed an agreement with fewer than 14, and closed about 6. At those rates, a weak top of funnel means too few companies reach diligence at all.

Channel also sets the terms of competition. A banked auction gives every bidder the same information memorandum and the same deadline. A company met two years earlier through outbound comes with history: past conversations, past financials, a view of the management team. That history is what relationship intelligence is meant to keep. The VC survey adds a caution. Investors rated deal selection as more important to returns than sourcing, so more names only help if the firm can rank them, which is where deal flow scoring comes in.

Worked example: measuring channel yield

Harbor Lane Partners is a fictional lower mid-market PE firm that buys industrial services businesses. Over three years it logs every opportunity by channel and divides closes by opportunities to get a yield per channel.

• Banker processes: 120 teasers received, 4 deals closed. Yield 3.3%. Average entry multiple 9.4x EBITDA.
• Proactive outbound: 600 companies contacted, 55 real conversations, 5 deals closed. Yield 0.8% of contacts, 9.1% of conversations. Average entry multiple 7.4x.
• Executive network: 30 introductions, 2 deals closed. Yield 6.7%.

The outbound channel has the lowest yield per contact and the highest associate time per deal. It also closed the most deals at the lowest prices. The executive network has the best yield on tiny volume. Harbor Lane decides to keep bidding in banked processes for its biggest platforms, fund one more associate for outbound, and give operating partners an explicit target for introductions. Without the log, the firm would have judged each channel by memory of its last deal.

Common deal sourcing mistakes

• Counting volume, not yield. A channel that sends 500 teasers and closes nothing is a cost, not a pipeline.
• Calling a deal proprietary because you met the company first. If a banker runs a process six months later, it is an auction with a head start.
• Losing the history. Notes from a 2023 coffee with a founder sit in one partner's inbox and never reach the deal team in 2026.
• Sourcing without a thesis. Outbound that is not tied to a thesis produces lists, not deals.
• Ignoring timing. The right company at the wrong moment is a no. Track the signals that show a company is getting ready to raise or sell.

How ScoringFactory approaches deal sourcing

ScoringFactory learns a firm's bar from the deals it did and the ones it passed on, ranks a target market or pipeline against that bar, and keeps every meeting, score, and note with the company. That gives a team a ranked view of who to meet next and a record that survives staff changes. Your team still decides which deals to pursue. See the use cases for venture and private equity.