Scouting Process: From Days to Hours
Supercharge Your Investment Process with AI
The world of investment is hard and fiercely competitive. To stand a chance at getting those big returns, finding your edge is essential. This holds even truer for institutions tasked with providing the best investment opportunities for their LPs while having to meet stringent performance targets.
Traditionally, one of the most significant moats in the investing business has been the quality of an investor's NETWORK.
Who you know matters a lot… many founders of venture & private equity funds have established strong networks over their successful careers, giving them a valuable source of potential investments.
But is that all there is to it?
Not quite. This market is exceptionally competitive. Swiftly identifying promising companies for investment ahead of your competitors is a must. Moreover, not every investor can participate in every company. Therefore, especially for large pools of institutional capital, it's vital to adopt a fast and proactive process that positions you ahead of other investors and in front of the best founders before your competition does.
Origination, a big pain point for investors
In this game, speed in finding and engaging with the best management teams is absolutely key.
This idea is backed up by a study from the University of Chicago, done by Morten Sorensen, which shows that investors generate a whopping 60% of their value right at first steps of the investment funnel, specifically when they're sourcing and originating deals.
Take a look at the typical venture capital and private equity investment process below:
Given this stat, you might think that investors would be all about improving their process for finding and evaluating investment prospects… right ?
Well… NOT REALLY.
Aside from a handful of venture capitalists who've upped their game with web crawling technology, the methods for finding and vetting investments haven't changed much since the venture capital industry started around 1940.
Isn’t that crazy ?
The process of finding deals has more or less always been the same:
Assign some analysts to the scouting process which have to sift through databases like Pitchbook (that everyone else has access to) to find potential leads, go through the avalanche of 10,000 emails they receive (most of which are way off target), meticulously study thousands of pitch decks, do initial calls with founders, set up investment committees, draft exhaustive reports for partners, and finally, they get to the big meeting on whether or not to invest in the company.
How long does this process take ?
In 2021, Harvard researcher Paul Gompers revealed that investors spend an average of 118 hours on screening and due diligence for each startup.
That’s a TON OF TIME wasted if you consider that other sources reveal that the average venture capital firm looks over a whopping 1,200 deals each year, only investing in around 10 !
But how much does this part of the funnel cost investors ?
To take a look at over 1,200 deals per year, the average fund has to hire at least 3 or 4 junior analysts. These young talents aren't’ cheap, the average annual salary in Europe is €53,000 and for our richer neighbors in the US is higher with an average salary of between $86,000 and $151,000 per year.
Multiply that by three and you get a range between $150,000 and $260,000 every year. That’s quite the sum, but it is seen as a necessary investment to get to those two or three companies in a fund vintage that can actually return the fund.
This scouting process is very expensive and time consuming…
Our firm has developed a solution that can reduce your costs from hundreds of thousands of dollars to just a few thousands…
Find out more by booking a call with our team
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Another study highlights that out of the 100 million startups launched annually, a staggering 11 out of 12 fail. Conversely, the total value of funds raised by venture capital firms for example, surged from $3.5 billion in 2009 to $14.8 billion in 2019.
These facts underscore the growing pressure on investors to allocate more capital to their limited pool of investment opportunities, primarily focusing on deals already within their network — 58% of investment opportunities originate from an investor's existing connections.
Building a network this way requires time… and investors may not have much of it left…
How Algo Capital solved the Origination problem
With the launch of ChatGPT by OpenAI in 2020 everything changed. Suddenly the world woke up to a different reality where AI was not only a buzzword heard on the tech scene in Silicon Valley but an incredibly powerful tool that was easy to use by the average user.
The most excited segment of society with this technology was certainly the investors …they have literally gone crazy about AI this year, as shown by the chart below:
Source: CBInsights
In 2023 alone over $14 billion has poured into AI companies. It's a clear signal that investment firms are fully aware of how much potential this technology holds.
Certainly most of them agree that AI is the investment opportunity of a generation…
But is investing really the best opportunity in AI ?
As counterintuitive as it may be, the most lucrative opportunity in AI doesn’t seem to be allocating money to it, but actually integrating it into your own business to streamline your operations.
Most investors don’t seem to have fully caught up to this fact yet, even though they are often the first to be on the bleeding edge of technology and having invested billions into the industry already.
We’ve read many articles and headlines about venture funds and other investment firms talking about integrating AI into their business for helping with back-office tasks, improving reporting, tracking performance…
But are they actually using AI to solve their biggest bottleneck ?
As we’ve seen in the paragraphs above, speed in scouting is key, and it’s undeniably a very expensive activity for investors. Nevertheless, they have been very slow or oblivious to the idea of leveraging this technology to dramatically reduce their scouting time and cost.
The speed, productivity boost and cost effectiveness of using AI tools to supercharge the scouting process can’t be overstated. It’s a fact that a large part of the scouting process is repetitive and that can be easily automated through the use of algorithms.
Over time, investors will naturally catch on and begin leveraging this technology to be ahead of the curve in finding the best market opportunities. With the increasing digitization of data, early adopters of this game-changing technology will build a stronger competitive advantage, creating a substantial barrier for their competitors.
And here's the stark reality… those who choose to NOT embrace this technology are going to FALL BEHIND.
At Algo Capital, we've been riding this trend since our founder, @molto_social, founded our firm in 2018. Our entire business model revolves around using artificial intelligence and other technologies to bring up our efficiency, cut down on costs, and crack the code on sourcing the best investments and opportunities.
Like most ideas, everything started with our founder looking to solve his own set of problems. As an angel investor he was spending a considerable amount of time going over the same repetitive tasks over and over:
Get intros to founders from his networks…
Pay for access to a database…
Go through the 1,000 of emails and pitches received…
Throw out 95% of them because they were off target…
Take calls with selected founders…
Go over investor material…
Make a yes/no decision…
As a one man show at the time, this was just KILLING HIS TIME…
That’s when the idea struck him…
Why am I wasting all this time on these processes, can’t I just put into code my selection process and let a machine do the heavy lifting ?
That’s how the ALGORITHM at the basis of Algo Capital was born.
As our company's name implies, we've constructed our entire firm around this technology to enhance every aspect of our operations.
Our founder has always found it strange that we could create a marketplace with a matching algorithm for dates but we couldn’t do it for investments… in the end, investing is like dating:
You have to FIND THE ONE YOU LIKE
As Tinder has created a space for itself to help match people that want to date each other based on their preferences, our goal at Algo Capital is to do the same for investors and companies.
Half the Time, Half the Cost
The algorithm that underpins Algo Capital functions by feeding multiple parameters like revenues, stage, geography, capital raised, previous investors, industry, vertical, etc… and obtain as an output a SHORTLIST of the most suitable targets with the highest match with the parameters we have set.
This process doesn’t take us weeks…. but HOURS.
And the beauty of it, is that is super VERSATILE. We have been using this technology to locate investment targets for ourselves and investors in our network, we’ve used it to help founders we’ve advised to find a matching investor and we’ve also leveraged this tool in an M&A dealmaking setting.
Another key element to make this work is DATA.
If everyone uses the same data, everyone will make the same decisions… so we’ve been focusing on making sure our data is DIFFERENT.
We extract data from Pitchbook and other professional platforms like everyone else , but we also take semantic data from LinkedIn, Twitter (X), publications, and any other data source you can think of. We have also developed a confidence analysis that can give us metrics on how hot an industry is or a specific vertical and keep track of the “buzz” around a specific company.
Every time we use our algorithm, we also expand our own dataset which becomes a repertoire of every scouting process we’ve ever engaged in. This DATABASE has therefore become another key resource for our firm, making us even more effective at matching companies and investors.
Our Algorithm is also COST EFFECTIVE.
Instead of hiring 3 or 4 associates to do all these repetitive tasks, our matching algorithm allows us to better allocate human and financial resources. It makes our business more lean by reducing overhead, and improves our margin profile exponentially.
Our team is active only on the second part of the scouting process: talking with management teams and gathering other data to help us make the best investment decision for us and give the best recommendations to our clients.
Using a machine is great, but at the end of the day you still need to talk to a human being, and there are certain data points that can only be captured by a keen human eye… for NOW at least.
That’s why our own process is hybrid: a combination of HUMAN & MACHINE that can be just as effective as three junior associates but with the speed of a computer.
Our AI POWERED scouting process has enabled us and our clients to FIND OPPORTUNITIES that aren’t on the radar of most of our competitors.
With the launch of ChatGPT, our technological stack has also received a big boost, as much more computing power and new capabilities are available to us for free. As we all know, the growth trajectory of this technology is exponential, meaning that what we can actually do today is just the beginning.
We’ve decided to make this technology available to investors in our network through a format we call: ORIGINATION as a SERVICE.
This is how it works:
We gather information form the investor on its filtering parameters
We feed it to our Matching Algorithm
It does its magic and we get a shortlist of names
Then we can do two things:
Our team of financial professionals can handle the entire origination process and provide the investors with warm leads at target
We share the names with the investor and then they can proceed to contact them directly
For the investors out there, would you rather spend $260,000 per year or waste 118 hours of your associates’ time per deal or would you rather work with us ?
Reduce your scouting process from days to hours while reducing your cost structure and improving returns for yourself and your LPs.
Book a call with us by clicking down below.