As a venture capitalist, you know that finding and closing the best deals is crucial for your success. But how do you measure and improve your deal sourcing process? In this article, we will explain why you should track deal sourcing metrics and what are some of the key indicators to monitor.
Deal sourcing metrics are the data points that help you evaluate the quality and quantity of your deal flow. They can help you answer questions such as: How many deals do you see per month? What are the sources of your deals? How diverse are your deals in terms of stage, sector, geography, and founder background? How long does it take you to evaluate and invest in a deal? How do your deals perform compared to your peers and benchmarks?
Understanding the importance of tracking deal sourcing metrics lies in the ability to uncover valuable insights that drive strategic decision-making. By diligently monitoring these metrics, one can gain a comprehensive understanding of where opportunities are originating from, enabling us to refine our approach and optimize resource allocation effectively. Moreover, it facilitates the identification of key trends and patterns, empowering us to adapt our strategies in real-time to capitalize on emerging market dynamics. Ultimately, the meticulous tracking of deal sourcing metrics not only enhances operational efficiency but also serves as a catalyst for sustained business growth and success.
In VC, rigorously analyzing deal sourcing metrics—like conversion rates and time-to-close—sharpens the investment thesis. By benchmarking against industry standards, we can spotlight inefficiencies, revealing both underexplored markets and overvalued sectors. For instance, a low conversion rate from initial screening to deal closure might signal a need to recalibrate our sourcing channels or criteria, potentially unlocking untapped opportunities in sectors like AI or biotech, where early entry can yield outsized returns.
Deal sourcing metrics refer to the key performance indicators (KPIs) and data points that venture capital (VC) firms, angel investors, and other investment entities use to evaluate and track the effectiveness of their deal sourcing efforts. These metrics help investors understand where their deal flow is coming from, how efficient their sourcing strategies are, and where they might need to make adjustments to improve the quality and quantity of potential investment opportunities. Some common deal sourcing metrics include: 1-Number of Deal sourced 2-Deal conversion rate 3-Cost of Deal 4-Time to close
Without deal sourcing metrics, you are literally “flying blind”. It is of utmost importance to understand how you source good and not-so-good companies. Some basic metrics are: - Channel (e.g., LinkedIn, Crunchbase, cold email, etc.) - Campaign - Keyword (for paid ads), email ID (which email converted), etc. In addition, you need to collect demographics about your investment opportunity, such as stage, vertical, development stage, geographic focus, business model, etc. The more you know about the deals you source, the better you can reverse engineer the acquisition and source more companies you want to see.
The post is incomplete. Key deal sourcing metrics you must track are: 1. Comprehensive Sample (CS) - all that fit your criteria 2. Relevant Sample (RS) - all that fit your criteria and invested into by comp VCs 3. Assessed Sample (AS) - all that you assessed AS then can go granular to cover 1st Meeting Sample (1MS), 1st Deal Flow Call Sample (1DS), 2nd Deal Flow Call Sample (2DS), Investment Committee Sample (ICS) Based on these descriptions, we calculate coverage, conversion, and performance. a) Relevant Coverage (RC) = AS / RS b) 1st Meeting Conversion Rate (1MCR) = 1MS / AS Term Sheet Conversion Rate (TSCR) = TSS / AS Win Rate (WR) = IS / TSS c) Performance measured at individual or firm level (MOIC, IRR etc)
Tracking deal sourcing metrics can help you optimize your deal sourcing strategy, improve your decision making, enhance your reputation and brand, and learn and iterate. Data can be used to identify the most effective channels and methods to find and attract high-potential startups, support your investment thesis, reduce bias, showcase your expertise, track record, and value proposition to entrepreneurs and co-investors, monitor your progress, spot gaps and weaknesses, and adjust your approach as needed. All of these benefits can help you build trust and credibility with stakeholders.
Deal sourcing metrics are vital in venture capital because they're like a GPS for finding great investment opportunities. These metrics help VCs understand what's working and what's not in their hunt for promising startups. By tracking things like the number of deals looked at, where those deals come from, and how many actually turn into investments, firms can figure out the best strategies to find winners. It's all about making smarter choices, not just more choices. In short, these metrics guide VCs to invest wisely, save time, and increase their chances of hitting the jackpot with a successful startup.
By dissecting deal sourcing metrics, such as the effectiveness of referral networks versus cold outreach, VCs can refine strategies to unearth high-growth prospects in overlooked areas, like fintech in emerging markets. This precision fosters stronger, data-backed narratives when engaging with stakeholders, enhancing a firm's standing. Moreover, it enables quick pivots to capitalize on emerging trends, like blockchain's rise in finance, ensuring a VC firm remains at the forefront of innovation and investment success.
Deal Sourcing metrics provides a consistent way to track, recognize a startup worthy of investment. It provides a snapshot of metrics from which deal memo can be recreated. It also is a way to suppress any bias in deal making. It can be shared with co-investors for refinement or augmenting with relevant data for informed decision to invest. Deal sourcing can be both pre-investment and post-investment. Later can be used to build compelling story around patterns of startups(founders) that succeed in a given market. LPs love such narrative and reinforces thesis build-up.
To track deal sourcing metrics, you need to have a system and a tool that can capture, store, and analyze your deal flow data. You can use a spreadsheet, a CRM, or a dedicated software solution, depending on your preferences and needs. The important thing is to have a consistent and standardized way of collecting and reporting your data, and to review it regularly.
Adopting advanced analytics platforms empowers VCs to delve deeper than traditional spreadsheets or CRMs. These tools offer AI-driven insights, predicting deal success rates and identifying patterns in successful investments. Integrating these platforms enables automatic tracking of nuanced metrics such as engagement levels with founders and speed of due diligence processes.
Deal volume does matter but except for quantity, the quality of deals is more important to me. Assess potential ROI, risk levels, and alignment with the firm's investment thesis for each deal. Implement scoring systems within CRM to rank deals based on predefined quality criteria.
In the best case, in your database, and in the worst case, by connecting different tools and analytics code that share cookie data. In general, the more automated and integrated you can track your sourcing efforts, the better. Any human intervention (e.g., in an Excel sheet) is prone to errors and doesn’t scale. You could also consider tools such as Segment to combine data sources.
Deal sourcing metrics should be standardized through the firm and the responsibility to collate this assigned duly so there is no bickering for credit. A CRM + self service helps in this effort, or an executive assistant could fill the role with an excel sheet. In any case, metrics should come with target. For the savvier investor, a simple GPT tool with access to you CRM exports could generate nice visualizations on how things are going at firm, team and individual level.
There is no single set of deal sourcing metrics that works for everyone, as investors may have different goals and criteria. However, some common metrics you may want to track include deal volume, source, diversity, velocity, and quality. Deal volume refers to the number of deals seen, reviewed, and invested in over a given period of time. Deal source is the origin of the deals, such as referrals or events. Deal diversity is the distribution of the deals across various dimensions like stage or sector. Deal velocity is the speed and efficiency of the deal sourcing process from first contact to closing. Lastly, deal quality is the performance and potential of the deals in terms of valuation, traction, growth, exit, and return.
What matters most in being data-driven in deal sourcing is the actual source and less the KPIs on deal performance. Those tend to be outside of a founders' control, so they matter very little in guiding you to better understand where the best deals come from. I used two dimension: Source - which hub, university, city, conference does this case come from Quality - calculated, break this down to a simple set of 3 or 4 variables (f.ex Team, Tech, Execution) Napkin math is more than enough
Tracking deal sourcing metrics is essential for venture capitalists to excel in their field. You need to use these metrics to inform and improve your deal sourcing process. Setting goals and benchmarks, identifying patterns and trends, testing and experimenting, and sharing and communicating are all important steps. Define success for yourself, compare your metrics to targets and industry standards, analyze metrics over time and across segments, try new or different ways of sourcing deals, and measure the impact on your metrics. Additionally, communicate your metrics to your team, partners, and stakeholders to get feedback and insights. By measuring and improving your deal sourcing process, you can increase your chances of finding and closing the best deals for your portfolio.
Leveraging machine learning algorithms can significantly enhance the utility of deal-sourcing metrics, allowing VCs to forecast industry trends and identify outlier startups before they hit mainstream radars. Also, integrating these insights with collaborative tools can streamline the dissemination of key findings, fostering a culture of continuous improvement and strategic alignment across the firm. This proactive, data-driven methodology not only refines deal selection criteria but also fosters a competitive edge in securing high-potential investments.
After you have a holistic set of metrics, you can use your data to “reverse engineer” your deal-sourcing efforts. You need to understand where you got your best investment opportunities and focus on this channel, keyword set, email copy, etc. Without having a holistic overview of your sourcing, you will never know how to get more high-potential opportunities and which marketing effort worked.
In my personal opinion, the most important thing to remember about deal sourcing is how to uplift the frontiers of partnerships with founders. If in general your metrics included things like how many founders you helped. How many problems did you solve for founders? How many issues did you resolve for founders? Then some metrics on the deal sourcing side that would compliment these metrics would be like how many founders did you talk to? How many founders talked to you? How many founders reached out to you and how many did you respond to? How many deals did you pass on? How many high-quality feedback responses did you give to founders?
The feedback loop, as measured by returns, is extremely long - 10 to 15 years at a minimum. This means it is important to identify both short and medium-term milestones or metrics for success that you can hold yourself to and align your LPs against. Tracking your funnel and demonstrating your ability to see and pick from a great set of prospective companies goes a long way towards staying in the VC business for the long term.
For investors who rely on referrals from existing portfolio companies, entrepreneurs, or industry experts, the deal referral conversion rate measures the percentage of referred deals that progress through the investment pipeline. A high referral conversion rate indicates strong relationships and credibility within the ecosystem