Where Are the Deals? Private Equity and Venture CapitalFunds’ Best Practices in Sourcing New Investments

Abstract

The authors find that private equity and venture capital funds that employ a proactive origination strategy have consistently higher returns, driven by both greater quantity and higher relevance of incoming investment opportunities. These proactive investors are using both traditional tools (cold calling) and more innovative tools (internet research, Web scraping, social media, and expert networks). The authors expect use of social media in particular to increase as more millennials reach decision-making roles in the investment industry. The Web and social media might seem to threaten the discretion and exclusivity that private equity and venture firms traditionally prize by increasing information leakage. However, the authors’data show that increased deal flow and brand recognition offsets any loss of confidentiality. This research study draws on a wide range of data: the authors’ in-depth interviews with over 150 private equity and venture investors; their proprietary dataset of information regarding these funds’ origination processes; and their experience working with a range of institutional investors. <b>TOPICS:</b>Private equity, portfolio construction, quantitative methods, in portfolio management