Deal Origination

A process used by finance professionals to identify investment opportunities in the market

Written by CFI Team

What is Deal Origination?

Deal origination, also referred to as deal sourcing, is a process used by finance professionals such as investment bankers, venture capitalists, and corporate development professionals to identify investment opportunities in the market. The goal of deal origination is to ensure a large volume of deals is obtained in a given period to maintain a viable deal flow.

Deal Origination theme

Strategies in Deal Origination

Deal origination involves pitching buyers, generating leads, and managing relationships with intermediaries. For an investment firm to succeed in identifying investment opportunities, it must possess a wide network of contacts and a good reputation, and establish itself as a credible investment partner.

Investment firms use different strategies to source new deals. One strategy is to work with a team of deal sourcing specialists with vast experience in managing the deal origination process. The specialists work on a contract basis and are compensated based on their success in generating new leads.

Alternatively, investment firms may establish an in-house deal sourcing team to oversee the deal process. The in-house team comprises experienced finance professionals who have previously achieved success in the field, and who are hired on a full-time basis to generate new leads for the company.

Traditional vs. Online Deal Origination

There are two main approaches to deal origination, i.e., the traditional approach and online deal sourcing.

Traditional Approach

The traditional approach started a long time ago. It is the method that most investment firms rely on to source new investment opportunities. The success of such an approach depends on the firm’s broad network of contacts, referrals, and a good reputation among investors. Firms compete against each other in a bidding process, and their success depends on gaining access to industry-specific knowledge in specific deals.

Online Deal Origination

Online deal origination is the latest method of deal sourcing, which is slowly phasing out the traditional deal sourcing techniques. Although several firms still use the traditional approach, online deal sourcing is becoming more popular among mergers and acquisitions firms scouting for buy-side and sell-side opportunities.

Various financial technology companies provide deal sourcing platforms, which investment firms and finance professionals can use to generate new leads and reach a broad audience. Some of the existing deal origination platforms include Navatar, Dealnexus, SourceScrub, and Dealsuite.

Deal Origination Using Technology and Media

With the growth of online deal sourcing, deal origination has become a lot easier and more efficient for middle market companies. The platforms provide online tools that connect buyers and sellers virtually, resulting in reduced overhead and an increased number of leads. The online platforms also offer deal listing research and due diligence to the registered users. They maintain a record of all transactions between the participants, which enables users to view the transaction history of the other parties before closing a deal. In exchange for the tools and customized service, the users are charged a fee periodically, depending on how long they use the platform. In some cases, the platforms may provide free subscriptions but with limited access to certain tools.

An example of a deal-sourcing method is crowdfunding. The method involves raising capital to finance a particular project or business. Crowdfunding helps people who have been unable to raise capital for a business or project to raise the needed capital by allowing small financial donations from a large number of people on the internet. Investors also use this method to own stock in startups by contributing a large sum of money either toward projects they believe in or smart entrepreneurs who come up with innovative solutions for everyday problems.

Advantages of Online Deal Sourcing Platforms

Online deal sourcing platforms provide investment firms and finance professionals several benefits, including:

Broader Reach

Unlike the traditional deal origination methods, online deal sourcing allows both the seller and the buyer to reach a wider focused audience, which spans across geographical locations. The platforms bring together investors and finance professionals who share the same principles, objectives, and goals, and they are not limited to their geographic locations. This means that when a user makes public their intention to buy or sell a business, the message only reaches an audience that shares the same objectives. It also allows professional interactions between the users, which helps close deals within a shorter period.

Process Automation

Deal sourcing platforms allow users to automate some processes such as deal tracking that would be tedious to execute manually. Sellers can use the built-in software that deal sourcing platforms provide to manage the deal sourcing process from the origination stage to deal closing. Automating the process makes it more efficient and quicker since it would take weeks or even months for a deal to complete in a traditional deal origination approach. Process automation also allows users to collect important data that can be evaluated to determine areas that need to be improved to make the process even more efficient.

Matching Algorithms

Deal-sourcing platforms employ algorithms to match users’ requirements to what they are looking for. For example, an investment bank looking to complete a buy-side transaction may specify their target industry, transaction size, and geographical location preferences of the acquisition target. With the information, the process algorithms generate deals that match the investment bank’s criteria for acquisition. It reduces the time spent by the bank sifting through dozens of deals to determine if they meet their criteria. The process also increases the conversion rate since the message is targeted to the right audience.

Measurable KPIs

Traditional deal sourcing methods are often impossible to track since they lack quantifiable performance indicators. The lack of reliable indicators makes it complex to determine the conversion rates and compare the firm’s performance against other comparable companies in the market.

However, it is different with online deal sourcing platforms that track the emails sent, phone calls made, NDA’s signed, LOI sent, etc. The data is captured with time stamps, which helps in measuring conversion rates and performance management at any given time during the deal sourcing process.

CFI offers the Financial Modeling & Valuation Analyst (FMVA)™ certification program for those looking to take their careers to the next level. To keep learning and advancing your career, the following CFI resources will be helpful: