Every PE/VC return ultimately comes from one of two places: a deal won at a price the seller didn't realise was low, or a deal won at a normal price where the buyer's operating thesis was right. Sourcing — how the deal got onto your desk — determines which kind of deal you have before any model is built.
The intermediated auction
An investment bank runs a process. CIM goes to 50+ buyers under NDA. First-round bids in 4 weeks; selected buyers proceed to management presentations and data room access; second-round bids in 4–6 more weeks; signing on the highest credible bid. The seller's goal is to maximise price under disciplined process; the buyers' goal is to win without overpaying. Auctions tend to clear at a price that reflects what the marginal buyer will pay, not what the deal is structurally worth.
Auctions have a known cost structure to PE buyers: 2–4% of EV in advisor fees per side, plus the indirect cost of multiple expansion. Some firms deliberately avoid auctions; others compete in them but only at sectors and sizes where they have an informational edge.
Proprietary sourcing
Proprietary deals arrive without an advisor — direct from a CEO who knows the GP from prior diligence, a board member at a portfolio company, a lender flagging a balance-sheet stress, or a sector-specific search. Proprietary flow is the holy grail because it tends to clear at lower entry multiples and at terms closer to what the GP wants. The cost is patience and relationship investment.
Modern PE firms increasingly maintain dedicated sourcing teams — partners or principals whose only job is to map a sector, build relationships with every CEO and operator, and sit at the table when an opportunity arises. The premier case studies (Vista Equity in software, Thoma Bravo in cybersecurity) have built billion-dollar sourcing edges this way.
Hybrid sourcing models
Limited-process deals invite 5–8 strategic buyers and skip the broader auction. Negotiated deals start as proprietary and add a single competing buyer late, to validate price. Sponsor-to-sponsor deals (Chapter 30) are PE-to-PE transactions, usually advisor-led but with deeply prepared buy-side teams who know the asset from the prior fund's reporting.
Platform sourcing — WeFunder, AngelList, BizBuySell, and the SPV-syndicated round
Equity crowdfunding platforms — WeFunder, Republic, StartEngine — operate under Reg CF and Reg A+ exemptions that allow non-accredited investors to participate in private financings. These platforms rarely originate institutional-quality deal flow, but they are a live signal layer. A company raising $500K on WeFunder has disclosed a valuation, a business summary, and a funding target that any analyst can study without signing an NDA. Watching what surfaces on these platforms tells you about market demand at the earliest stage, and sometimes flags a company that will grow into a fundable deal years later.
AngelList syndicates have largely replaced the informal angel networks of the 2000s. A syndicate lead — typically a domain-expert operator or early-stage investor — invests directly and invites co-investors to participate in the same economics via an SPV. The economics are transparent: the lead carries the SPV at 15–20% carry, and each backer gets pro-rata exposure with no management fee. The important sourcing implication is that AngelList deal pages aggregate information — round size, round composition, and the identity of the lead — that is useful for building a map of who is active in a sector before the company ever runs an institutional process.
BizBuySell is the dominant US marketplace for small-business listings. For search-fund principals and lower-middle-market PE associates, BizBuySell is a practical sourcing starting point: thousands of businesses listed with asking prices, revenue, and cash-flow figures, many of them owner-operated businesses where the seller has no investment-bank advisor and no competing buyers. The entry multiples on BizBuySell listings are far below what a banker-run process clears — the trade-off is deal quality, business model, and management dependency. A sharp associate uses BizBuySell and AngelList together as a watchlist, not a deal pipeline: patterns in what gets listed — seller age, sector clusters, pricing behaviour — are proprietary data on what is for sale in a given market. The live deal evaluation tool in this report's lab can be applied to any listing to run a fast first-pass screen.