Mastering the Art of Deal Sourcing: A 5-Step Framework for Investors
Deal sourcing is a critical part of the deal making process, it has the potential to drive exponential outcomes by unearthing promising opportunities. However, for most investment firms it is still a highly subjective, manual and time-consuming process- driven by networking and word of mouth.
In fact, research by Data-driven VC shows that only 1% of venture capital firms are data-driven in their investment decisions.
Source: DDVC; Total number of active VC funds EOP 2022 according to Crunchbase, Dealroom & Pitchbook
Drawing on our experience working with top investors and interviewing data-driven experts, we've developed a strategic and proven deal sourcing framework to empower investors. In this article, we will deep-dive into the five critical concerns that investors should evaluate for effective deal sourcing.
Consideration 1: Company Fit with Investment Criteria
(Geography, Deal Size, Investors, Stage, Industry, Business Model)
Investors often exhibit specific interests tied to certain criteria while sourcing their deals. Having clarity on geography, industry and business models can help in staying focussed and maximize the deal sourcing outcomes.
Investors often exhibit specific interests tied to certain criteria while sourcing their deals. Having clarity on geography, industry and business models can help in staying focused and maximize outcomes. For example, an investor firm focusing on emerging markets may target companies operating in Southeast Asia, driven by the region's tremendous growth potential. Similarly, investors interested in clean energy and sustainability might be particularly interested in companies in Northern Europe, given the region's strong commitment to renewable energy initiatives.
Further, an investor might want to narrow opportunities based on the industry and business models. Some investors might look at Fintech and Healthtech verticals while some want to focus on specific business models like Payments within the Fintech vertical and so on. Similarly, few investors might want to back up prominent investors in their funding decisions.
Another consideration is the current funding stage of the business.
For instance, VCs entering deals at Series A would want to source seed funded companies. On the other hand, PEs might wish to screen companies beyond series D with proven business models and outcomes. Below is an example of quick filtering on energy companies in Europe
Figure 1: Sourcing Energy companies in Europe with YoY growth % in employee size > 50% using the Synaptic platform
Consideration 2: Assessment of the Management Team and Company Culture
(Leadership Experience, Education Background, Track Record, Employee Feedback)
The expertise, experience, and leadership qualities of the founders and management team can significantly impact a company's success and the RoI.
Here’s how you can further finetune the deal sourcing process by assessing the management team at a company:
- Analyzing individual LinkedIn profiles of the leadership team members can provide quick insights into their work history, education background and qualifications, as well as their professional achievements. Past achievements/ consistent track records of the management team can be taken as a signals for future success. Research shows that 84% of entrepreneurs running more than one company continue to operate their first business successfully after opening their second. Additionally, peer recommendations on LinkedIn profiles can be leveraged for a better understanding of the individual’s skills and behavior.
- Employee feedback and reviews on Glassdoor can help understand quality of the top brass. Metrics like CEO Approval Rating and Senior Management Ratings are particularly useful in this regard. Qualitative reviews can be analyzed further to get a deeper understanding on what’s working well and what needs improvement.
- Monitoring movement of key hires on LinkedIn can also help understand the direction of the company and flag issues. For instance, if the company’s senior leadership has recent hires from high-growth startups/MNCs with proven performance backgrounds, it shows confidence in future growth of the company. On the other hand, if high performers from the company’s leadership exit, it can signal some unusual internal situations. News articles, interviews, and speeches by the management team can also offer insights into company growth and future vision.
Culture is equally important to understand company’s long term sustainability. Here’s how you can assess the company culture:
- Glassdoor reviews and ratings: Glassdoor provides an overall rating as well as individual ratings for culture and values, diversity and inclusion, compensation and benefits, work-life balance, career opportunities as well as the willingness to recommend to a friend. These ratings help investors understand the employees’ perspective on the company and its leadership.
Figure 2.1 : Glassdoor summary for Kayak.com on the Synaptic platform
Investors can also improve deal sourcing by leveraging Glassdoor ratings to benchmark against similar/competitive companies for attributing reasoning to industry vs company level changes.
Figure 2.2: Comparing Glassdoor ratings across factors for Kayak and its competitor, Skyscanner on the Synaptic platform
Consideration 3: Product-Market Fit, Customer and PR Traction
Analyzing product reviews and ratings provides valuable insights into customer satisfaction and signals potential success in future. Customer traction helps gauge the company’s competitive advantage, demand and product adoption rate, which are all helpful in identifying companies with a strong growth trajectory. The Product NPS is one good metric to evaluate product market fit. All these factors together help filter promising companies through the deal sourcing process.
For tech companies, product ratings and reviews are available on platforms such as G2 and Capterra. For D2C companies, platforms like Amazon offer a glimpse into customer sentiment and product popularity.
For service-based companies, company ratings are also available on Capterra and Google. Qualitative feedback and comments available on these platforms can further provide insights into product strengths and areas of improvement, customer servicing, pricing and value addition.
Figure 3.1: Overall product ratings and NPS comparison for Lyft Business and Uber Freight on the Synaptic platform (June 2022-June 2023)
Figure 3.2: Subjective reviews for Uber Freight on the Synaptic platform
To assess the customer and PR traction, social listening tools such as Meltwater or leverage Google search trends can be leveraged.
Figure 3.3: Google search trends for two popular goods and transport companies, Uber and Lyft on the Synaptic platform
Mobile app popularity and adoption can also be checked on app stores by looking at the app ratings.
Figure 3.4: Active Users and Download trends for Uber and Lyft on the Synaptic platform (May ‘21-May ‘23)
By leveraging all the above sources of alternative data, one can gain a comprehensive understanding of a company's product-market fit, customer satisfaction, and overall market potential; all of which are significant filters in the deal sourcing process.
Consideration 4: Company Growth Signals
(Hiring Trends, Sales and Marketing Spends, Raising Subsequent Funding, Usage Trends with Active Users, App Downloads, Total Website Visits)
With private companies, getting access to traditional data is a challenge. Alternative datasets can help measure company growth across multiple performance metrics calculated using digital footprints left behind by these companies.
- Hiring trends: Growing employee size signals company expansion, a continued growth momentum or rapid growth can signal potential to scale. Datasets like LinkUp provide data on job openings and new hires for a company, while the current employee count can be tracked via LinkedIn. For example, the new job count for SirionLabs, a SaaS enterprise contract management (CLM) platform increased by 96% from May 2023 to June 2023, indicating growth potential as they scale up employee counts.
- Observed sales and transaction data: Online transactions are direct reflections of a company’s revenue and can signal growth directly. Platforms such as Second Measure, Consumer Edge and Earnest Analytics provide data on the credit and debit card transactions to reflect on the observed sales of a company.
- Web traffic, App downloads and Marketing spends: These metrics help investors understand the company’s commitment to customer acquisition. Providers like Semrush and Similarweb supply useful information about marketing spends on paid advertising and organic growth, among other marketing channels. For the same company Harry’s, let’s look at the organic and the paid traffic from September 2022 to July 2023.
- In addition to the above, product development, developer activity and developer community engagement for the open source projects can also help identify promising opportunities. Github forks and stars can be used to keep on top of the latest innovations and popular tech projects amongst developers. For example, let’s look at the popular repositories ranked by the number of GPT-based projects listed on Github:
Figure 4.1: New job count trend for SirionLabs on the Synaptic platform (Sep 2022-June 2023)
One can also analyze changing employee count in companies using LinkedIn to gauge growth signals based on company size. Department-wise growth can offer additional insights on the company’s focus on product development, marketing or sales. For instance, looking at American Giant, a menswear brand that focuses on manufacturing and retailing apparel, we see that despite overall reduction in employee count, sales and marketing jobs increased in the company- signaling increased focus on revenue and business growth.
Figure 4.2: Employee count trends for American Giant on the Synaptic platform (May 2022-May 2023)
Figure 4.2: Employee count trends for American Giant on the Synaptic platform (May 2022-May 2023)
Figure 4.3: Employee distribution for all functions at American Giant on the Synaptic platform (April 2021-April 2023)
For instance, let’s consider a leading private D2C company, Harry's (sold to Big Razor for $1.37 billion in 2019). The Observed Sales has been consistently reducing over the past 2 years signaling reduced online sales or a total drop in revenues, raising red flags and calling for a further deep dive.
Figure 4.5: Observed sales trends for Harry’s on the Synaptic platform (July 2021-May 2023)
Some of the key transaction data metrics that can help in effective investment research includes count of observed customers, average transaction value, sales per customer, transactions per customer, cohort customer retention and new customers attained by a company.
Figure 4.6: Organic & paid traffic/adwords (left) and costs (right) for Harry’s on the Semrush and Synaptic platform (September 2022-May 2023)
Growth in web traffic can also be leveraged to assess company popularity, level of user interest and demand. Active website user growth and app downloads can be monitored from web analytics platforms and app stores.
As an example, let’s look at the total website visits comparison between two professional research networks- it is evident that ResearchGate is more popular compared to its peer Academia.edu.
Figure 4.7: Total Website Visits trends for ResearchGate & Academia on the Synaptic platform (Jun ‘21-Apr23)
Similarly for popular streaming platforms, Netflix and Hulu, it is evident that Netflix has higher user base and popularity.
Figure 4.8: App Downloads for Netflix and Hulu on the Synaptic platform
Figure 4.9: Growth in popularity for Jarvis and DeepSpeed from Microsoft in Apr 2023
From the above example, it is evident that Jarvis and Deep Speed from Microsoft are gaining popularity quickly as of Apr '23.
While these disparate datasets are highly useful in the deal sourcing process, deciphering the different narratives from this abundant data presents a challenge! To empower investors with a comprehensive measure of a company's performance, Synaptic has created a proprietary metric known as the Synaptic Growth Index, which combines the growth momentum of companies across multiple alternative data metrics like website visits, employee count, product ratings, app downloads and active job count into one single metric!
Consideration 5: Financial Performance & Valuation
(Financial Ratios, Cap Tables, Valuations, Exit Probability)
Assessing the financial performance of a company is the most crucial part of the deal sourcing process. Access to financials is very difficult while sourcing private companies. However, for public markets, this step is a must! One needs to carefully scrutinize factors such as revenue growth, profit margins, cash flow, and return on investment to gauge the company's financial health and potential for future returns. Furthermore, the current valuation of the company plays a vital role in determining the investors' exit strategy.
A favorable valuation allows investors to maximize their returns when they eventually exit the investment through IPOs, acquisitions, or secondary market transactions. Below is a snapshot of exhaustive financials preview on the Synaptic platform.
Figure 5.1 : Financials snapshot for Uber on the Synaptic platform
Figure 5.2: Transcripts sentiment score up to Q1 2023 for Uber on the Synaptic platform
Data-driven deal sourcing can be understood as a series of filters that go from industry and segment towards finer growth signals. Based on market-wide comparison and quality alternative data based metrics, investors can identify and push promising deals to their pipeline.
To learn more on how alternative data platform can supercharge your investment game, visit synaptic.com