Venture Debt: Mastering the Art of Sourcing High-Quality Deals

In part 13 of his series on venture debt, Zack Ellison from Applied Real Intelligence shares fundamental principles for sourcing high-potential venture debt deals.

One of the first questions I’m asked by prospective investors is, “How do you source deals?” Many believe that effective deal sourcing is the single most important factor in running a successful private market investment fund.

In the competitive and often opaque world of private investments, consistently finding the next great opportunity requires more than just luck – it demands mastering the art of sourcing. Whether it’s venture debt, venture capital or private equity, a highly effective deal-sourcing strategy is a cornerstone of all successful alternative investment programs.

While dealmaking is often described as an art, sourcing the right venture debt opportunities requires a systematic approach. The edge comes from developing a strategy that not only identifies great companies, but also taps into under-the-radar opportunities others might miss.

While deal sourcing is crucial, it should be considered as part of a larger framework that includes investment diligence, deal structuring and portfolio management, as I have covered in previous columns. Your overall investment strategy should dictate your sourcing efforts, not the other way around. Your strategy should guide where to source deals, which sectors to target and the types of founders to back. Effective sourcing means knowing where to look and proactively aligning sourcing efforts with portfolio goals.

Know Where to Look

The first step in building a strong deal pipeline is knowing where to source opportunities. In venture debt, this can range from leveraging relationships with VCs and other lenders to building a proprietary network of founders, advisors and service providers.

Sourcing through venture capitalists gives venture lenders access to vetted deals. However, over-reliance on a few concentrated VC firms carries risks. If too many deals come from a small group of large funds, concentration risk looms, and poor VC performance can spill over into the debt portfolio. Additionally, leaning too much on VC underwriting may lead to overlooking key risks for the lender.

Many firms take a targeted approach, focusing on criteria such as sector, business model, stage of growth, or geography, with less emphasis on the equity sponsor. Some lenders specialize in late-stage, sponsor-backed companies with strong revenue, while others target earlier-stage startups with greater equity upside. Specialization in sectors such as SaaS or life sciences helps spot promising companies, but limits diversification. I favor a “selective generalist” approach, investing across low-correlation sectors but only in opportunities the lender understands and diligences deeply.

Develop a Systematic Process

Once you’ve identified where to look, develop a systematic process for evaluating deals. Begin by casting a wide net to capture a broad range of opportunities at the top of the funnel. This “low touch” phase can be automated using CRM systems, data analysis tools and AI to identify, filter and engage companies based on criteria such as sector, stage, business model, equity sponsors, capital raised, estimated enterprise value, revenue and location.

As deals progress, human interaction becomes increasingly important. Both parties are evaluating each other – with the borrower deciding if the lender is the right financial partner. Beyond numbers, it’s about building trust and understanding goals and incentives to ensure a mutual fit.

Based on two decades of venture transaction data and insights from top lenders, I estimate that only 3 to 5 percent of evaluated deals are typically underwritten. Therefore, it’s crucial to get as many quality companies as possible into the middle of the funnel. Efficient screening saves time and ensures that only the strongest opportunities move forward.

Create a Sourcing Advantage

In competitive markets, a sourcing advantage sets you apart. The best venture debt deals often arise when demand for capital exceeds supply in specific market segments. Lenders who position themselves as a solution in these underserved niches achieve unique access to top deals while structuring favorable, low-risk terms.

Focus on what is being overlooked by other lenders. While many concentrate on tech hubs, great opportunities exist in emerging regions with less competition, such as the Midwest or Southeast. Sectors that fall out of favor with equity investors often offer rock solid credit opportunities. Underserved founders, including women, people of color and veterans, also represent high-potential markets. Adopting a “go where others aren’t” strategy opens up less crowded, big-upside opportunities.

Build a Strong Brand

Reputation is a magnet for deals. Building a strong brand takes time but rewards you with exceptional opportunities. Much like the line from Field of Dreams, “If you build it, they will come,” creating a brand based on trust and credibility ensures that deals will find their way to you. Integrity – through fairness, alignment and transparency – solidifies your reputation, while thought leadership in publications, podcasts and industry events enhances it.

There’s a unique paradox in venture debt: even a deal that doesn’t work out financially can still create long-term value for a lender. Treating founders fairly during challenging situations can earn significant goodwill and loyalty in the founder community. On the flip side, reacting harshly or unpredictably in tough times can tarnish a lender’s reputation, making it harder to attract top-tier deals in the future.

Founders want to work with lenders who will help them reach their goals with minimal friction. It’s that simple. A lender must meet the company’s needs, provide flexible and fast financing solutions, and offer insights and strategic value beyond just capital.

Develop a Diverse Network

Sourcing deals goes beyond VC relationships. It requires the cultivation of a diverse network that includes other lenders, service providers (such as lawyers, CFOs and tax accountants), founders, universities, accelerators and funders such as institutions, family offices and ultra-high-net-worth individuals.

While VCs remain a key source of deal flow, tapping into other channels will uncover off-market opportunities that aren’t widely available. A broader, more diverse network leads to differentiated, high-quality deals. For instance, other lenders, particularly those that don’t directly compete with you, can refer deals that don’t fit their mandate, such as deals that are too small or in a sector they don’t invest in. The right service provider relationships are invaluable, as they frequently work with start-ups and have early insight when companies seek financing.

Sourcing high-quality venture debt deals is both an art and a science. The best deals don’t always come from the most obvious sources, and the most successful venture debt providers are those who combine data analytics and technology with human intuition and relationship building.

Coming Next

Next month, we’ll dive into advanced strategies that separate the top lenders from the rest. We’ll cover how to avoid adverse selection, why chasing hot deals can be a mistake and how getting to “no” quickly can save valuable time. Plus, we’ll explore the art of building rapport with founders and their boards – an underrated skill that can be the difference between a good deal and a great one. These insights will give you a competitive edge in sourcing the best opportunities in venture debt.

Zack Ellison is the founder and managing partner of Applied Real Intelligence and CIO of the A.R.I. Senior Secured Growth Credit Fund. Send comments or questions to zellison@arivc.com and visit A.R.I.’s website at www.arivc.com.