Deal flow is a term used by finance professionals such as venture capitalists, angel investors, private equity investors and investment bankers to refer to the rate at which they receive business proposals/investment offers.[1] The term is also used not as a measure of rate, but simply to refer to the stream of offers or opportunities as a collective whole. An organization's deal flow is considered "good" if it results in enough revenue- or equity-generating opportunities to keep the organization functioning at peak capacity. For private consultants to high and ultra high net worth individuals, deal flow is called deal generation, which is the process of making deals with a business as the result of lead generation.[2]

In venture capital

The most famous and successful venture capital firms regularly receive hundreds of business plans each month. From among these, it is not unusual for a VC firm to actually fund only 0.25%–0.5%. Firms will typically institute a unique approach to determining the startups they choose to fund.[3] Active angel investment groups will typically receive dozens of plans monthly, but because of the much smaller number of plans compared to VCs they tend to fund a somewhat higher percentage (0.5%–1.0%). Once a company passes the group's screening process and is invited to present to the group's full membership, its chances of getting funded rise to about 18%, according to the University of New Hampshire's Center for Venture Research.

Sources of deal flow

A fund's or group's deal flow is generated from many sources. The most valuable referrals often come from entrepreneurs or companies in which the fund has previously invested; from other funds looking to syndicate a deal; and from professionals (such as attorneys and accountants) who are familiar with the fund's investment criteria. Other sources of deal flow are investment bankers and "finders", who expect to receive a fee (from either the company or the investor) for making the introduction.

Many funds and groups (but not all) will also accept business plans "over the transom", that is, as an unreferred submission from a company with no previous relationship with the funding organization. In practice such unreferred plans are usually much less likely to receive funding.

To create and maintain sufficient deal flow, venture capitalists and angels spend much of their time doing business development, raising their profiles by giving speeches, writing blogs, and networking with others who also work with early-stage companies. VCs and angels regularly attend conferences and "venture fairs" where multiple companies pitch their businesses to investors.

Impact of the JOBS Act on deal flow

Deal flow on the Internet is currently undergoing a fundamental transformation due to the JOBS Acts passage in the United States. Soon, equity based deals and funds will be able to be marketed to the public through equity crowdfunding. This is normally referred to as general solicitation. General solicitation of these equity deals will increase the deal flow on the Internet.

See also

References

  1. ↑ "Definition of deal flow". Venture Capital Glossary. Funding Post. Archived from the original on 26 March 2012. Retrieved 11 June 2012.
  2. ↑ "Definition of deal generation". Deal Generation. Adrayay Group. Retrieved 22 June 2020.
  3. ↑ Kronenberger, Craig (2021-04-15). "The Top 8 Qualities of a Startup Founder". Medium. Retrieved 2021-08-20.
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