Sourcing Deals: Finding Startups to Invest In
- surajit bhowmick
- Sep 20
- 4 min read
Hello reader, welcome to the second article in our series on discovering how venture capital works, from fundraising to investment and exit. We’re covering each step in detail with data validation, so you won't need to read other articles. Please subscribe to our newsletter for updates.
In this article, we’re unlocking “How VCs are Sourcing Deals: Finding Startups to Invest In,” and previously, we have covered how venture capital raises funds to invest in companies. If you miss out, you can read the article here. DON’T FORGET TO COME BACK TO THIS ARTICLE.
So let’s start,
Venture Capital Deal Sourcing represents an important phase in which VCs identify and evaluate possible investment opportunities. The process involves the construction of a strong pipeline of startups while maintaining strict screening criteria to filter rare gems through thousands of opportunities.
VC Deal Flow Pipeline
The venture capital industry works on a well-written funnel system, where a large number of startups are systematically filtered for some selected investments. According to Harvard Business Review Research, the average VC company assesses 101 opportunities before ending an investment. It creates a very selective process of conversion frequency, which shows how stiff the start-up assessment has become. Purchasing Strategies
Key Sourcing Strategies
Network-based purchasing
Professional network is still the most important source of quality agreements, and constitutes more than 30% of VC transactions. This approach benefits from the relationship with other investors, portfolio companies, accelerator, and industry connections. The most successful VCs cultivate conditions:
Other investors who invest sooner or later create natural referral opportunities
Founder of a Portfolio Company, which often provides a hot introduction to other start-ups in their network
Industry experts and advisors who see new trends and promising entrepreneurs
Inbound Deal Flow
Inbound sourcing occurs when startups proactively approach VCs, representing 28% of deals coming from referrals and direct applications. Successful inbound strategies include:
Dedicated application portals where startups can submit pitch decks directly.
Content marketing and thought leadership to attract quality founders who align with the firm’s investment thesis.
Speaking engagements and industry presence that increase visibility among entrepreneurs.
Proactive Outbound Sourcing
You may think that VCs rarely approach companies for investment, but that is a false perspective; data says that around 30% of actual investments begin with VCs reaching out to the founders. Here are tips on how you can make this happen. Modern outbound strategies involve:
Data-driven prospecting using platforms like Crunchbase, PitchBook, and specialized sourcing tools.
Market research and trend analysis to identify promising companies before they actively fundraise.
Direct engagement through social media and industry connections.
Screening and Evaluation Framework
The screening process focuses on fundamental fit factors that determine whether a startup warrants deeper investigation:
Investment Thesis Alignment: Does the startup operate in the VC's target sectors, stages, and geographic focus areas?
Market Opportunity: Is the total addressable market large enough to support significant returns, typically requiring billion-dollar+ market potential?
Team Quality: Does the founding team demonstrate relevant experience, complementary skills, and the ability to execute?
Traction and Validation: Has the startup achieved meaningful milestones that demonstrate product-market fit or early customer adoption?
Do you know that only 10-15% companies go through a partner meeting after initial screening, and those companies fulfill all the above criteria. During partner review, deals are evaluated on:
Competitive positioning and differentiation in the market
Business model scalability and unit economics potential
Management team capabilities and track record
Financial projections and growth trajectory assumptions
Time Investment and Resources
The typical deal cycle requires significant resource allocation, with firms spending 118+ hours on due diligence over 83 days for each completed investment. This substantial time commitment underscores why effective initial screening becomes crucial for operational efficiency.
The screening phase alone can consume 15-20% of a VC's time, making it essential to establish clear criteria and efficient processes that quickly identify the most promising opportunities while maintaining relationships with founders for future consideration.
Success Metrics and Benchmarks
Leading VC firms track several key performance indicators for their sourcing operations:
Deal flow volume: 50-100+ new opportunities per month
Conversion rates: 10% from initial screening to partner meeting, 3% from partner meeting to term sheet
Source diversity: Balanced mix across network referrals (30%), inbound applications (28%), and proactive outbound (30%)
Time efficiency: Average 30-45 days from first meeting to investment committee decision
The venture capital sourcing process ultimately serves as the foundation for all subsequent investment activity. By maintaining high-quality deal flow while implementing rigorous but efficient screening processes, VCs position themselves to identify and invest in the exceptional startups that drive portfolio returns and fund performance.
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