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  1. 006You want to close 2 investments a year. Of the companies you source, 20% get a first meeting, 25% of those reach a partner meeting, 15% of those get a term sheet, and 70% of term sheets close. How many companies must you source each year?Market sizing and estimationWarm upSeed and early-stage VCMulti-stage VC

    Try it first

    Roughly how many companies do you need to look at for two closed deals?

    Show the worked solution

    About 381 companies a year. The four pass rates multiply to 0.525%, so only one sourced company in about 190 becomes a closed deal. Working backwards: 2 deals need 2.86 term sheets, 19 partner meetings and 76 first meetings, which need 381 companies in the top of the funnel. That is seven or eight new companies every week of the year.

    Why do the pass rates multiply?

    Think of a college admission that needs you to clear a written test, then an interview, then a document check. If one applicant in five clears the test and one in four of those clears the interview, only one in twenty of the original applicants is still standing before the document check even starts. Each stage of a funnel acts only on what survived the stage before it, so the overall rate is the product of the stage rates, not their sum or average. Here that product is 0.20 x 0.25 x 0.15 x 0.70, which is 0.00525, or about one company in 190.

    The relationship
    N=20.20×0.25×0.15×0.70=20.00525≈381N = \frac{2}{0.20 \times 0.25 \times 0.15 \times 0.70} = \frac{2}{0.00525} \approx 381
    2closed deals wanted in the year
    0.20, 0.25, 0.15, 0.70the pass rate at each stage of the funnel
    Ncompanies that must enter the top of the funnel
    What it says in wordsDivide the deals you want by the share of sourced companies that survive every stage.
    Two deals a year start as about 381 companies, drawn to scaleSourced381 companiesFirst meeting20% of the stage above76.2Partner meeting25% of the stage above19.0Term sheet15% of the stage above2.86Closed70% of the stage above2.00Work backwards from the deals2 / 0.70 = 2.86 term sheets2.86 / 0.15 = 19.0 partner meetings19.0 / 0.25 = 76.2 first meetings76.2 / 0.20 = 381 companies sourcedOverall conversion 0.20 x 0.25 x 0.15 x 0.70 = 0.525%, about 1 company in 190~7.3 a week
    Drawn to scale, 381 sourced companies shrink to 76 first meetings, 19 partner meetings, 2.86 term sheets and 2 closed deals, because only about one company in 190 survives all four stages.

    How do you say it out loud without losing the room?

    Work backwards from the answer the interviewer cares about, one stage at a time, and say each number as you go. Two closed deals at a 70% close rate need 2.86 term sheets; at 15% that is 19 partner meetings; at 25% that is 76 first meetings; at 20% that is 381 companies. Then translate it into a working week: 381 over 52 is about 7.3 new companies a week and about one and a half first meetings a week, which is a concrete picture of the job.

    Keep the fractions until the end. If you round up at every stage instead, you get 3 term sheets, 20 partner meetings, 80 first meetings and 400 companies, a 5% overshoot from rounding alone. It is not a disaster, but it shows the interviewer you carry precision until the last step.

    What would you add after the number?

    Point at the stage with the most leverage. Every rate matters equally in the product, but they are not equally easy to move. Lifting the partner-meeting rate from 25% to 35%, by screening harder before first meetings, cuts the sourcing need to about 272 companies. The limitation is worth a sentence too: real funnels are lumpy, and a fund that closes two deals a year will see years with one and years with four.

    Where candidates lose it

    The common slip is adding or averaging the rates, or stopping halfway at the 2.86 term sheets. The interviewer wants to hear that a funnel multiplies, and then wants the arithmetic done backwards from the deals.

    The second loss is giving a bare number. Turning 381 a year into seven or eight companies a week shows you understand what the number means for the analyst's diary, which is why the question is asked.

    What the interviewer asks next

    • Your partner meeting rate rises from 25% to 35%. How many companies do you now need to source?
    • Which stage of this funnel would you try to improve first, and how?
    • How does the funnel change for a seed fund that wants to write 15 cheques a year?