Deal Flow

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21 Aug, 2024

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Deal Flow Meaning

The deal flow definition explains the inflow of investment pitches, business plans, and ideas for investment bankers, venture capitalists, and other corporates to invest in. A deal flow allows investors and businesses to choose the most profitable deals and business proposals, amongst others. Simultaneously, such deals help them earn higher profits.

Deal flow reflects the health of an economy and its research and development capabilities in many ways. As a result, overall good economic conditions or technological advancements will lead to more deals for businesses to invest in. On the contrary, recessionary situations or stagnant growth patterns disincentivizes investors and financial professionals.

Deal Flow Meaning

Deal flow means the inflow of qualitative and not quantitative deals that include potential and high-yielding investments from an investor's point of view.
Deal flow management thus requires considerable focus from sourcing to finalizing, wherein the expertise of stakeholders such as investment bankers, venture capitalists, or private equity holders shines bright.
Various mechanisms, such as networking events, founder meet-ups, or referrals from portfolio companies, assist an investor in optimizing investment opportunities.
Although the state of the economy or economic cycles greatly influence the inflow of deals and merger and acquisition (M&A) transactions.

Deal Flow Explained

Deal flow explains the flow of investment pitches and business opportunities that demand investments in return for profits for investors. It is not a quantitative measure but rather a qualitative measure of economic conditions. The quality of deals that flow from entrepreneurs and businesses towards investors such as venture capitalists, seed, or angel investors reflects good or bad investments.

Qualitative deals' inflow indicates how successful earlier ventures and investments were for its stakeholder and older investors. Thus, it helps new or potential investors to estimate their future return on investments (ROI).

For instance, a firm of venture capitalists will have a separate team to source and gather deals and another team that chooses the most profitable deals for investment purposes. However, the first step is deal origination or deal sourcing. For this, dealmakers or venture capitalists use their networks and referrals. Subsequently, they network through deal flow events or outsource profitable leads from agencies or online platforms to bid for deals with the highest returns.

Similarly, relationship management and regular communication with brokers and sales professionals help a real estate investor to get insights about projects or proposals and lead to high-quality deal flow. Although, while investing in real estate, an investor should know that it is not a get-quick-rich scheme. The accumulation of wealth and profits from real-estate ventures and holdings take years.

For investment bankers, deal flow management requires the facilitation of corporate takeovers and big-ticket deals amongst businesses and companies for mergers and acquisitions (M&A). Therefore, investment bankers have a comparatively high degree and in-depth knowledge of various business domains and markets to wisely make investment and divestment decisions.

Thus, businesses tend to source, evaluate and close investment deals through private equity to allow firms and companies to maintain their deal flow pipeline.

How To Increase?

A greater inflow of qualitative deals reflects a good increase in the deal flow pipeline. Thus, successfully closing deals in a new field requires investors to gain knowledge about the markets and expect realistic returns. Additionally, they strive to make connections and manage relationships with investment bankers and brokers.

However, a few significant steps can ensure the inflow of qualitative and high-yielding deals for venture capitalists, private equity investors, and investment bankers. These include,

Sourcing referrals and pitches from other investors,
A referral from portfolio companies results in higher chances of closing profitable deals. Portfolio companies understand what investors are looking for and watch the markets closely to bag investments.
Service providers such as accountants, lawyers, brokers, and banking institutions are closely associated with the industry and its insights, providing investors with useful information.
Pitching and networking events shall significantly increase the chances of meeting industry experts, thriving start-ups, founders, and early-stage ventures. Thereby, an investor can gain a significant amount of knowledge parallels.
Acting as mentors or judges to pitch events can assist a potential investor in sourcing leads. Thus, having a few deals in the pipeline helps an investor to select ones with extremely high business potential. Additionally, such events help investors to know their niche and area of expertise.
For deal flow management, investors can build a small internal team for reviewing and market research purposes. Additionally, investment banking firms and venture capitalists can use CRM platforms for better relationship management with leads and for visualization and customization purposes to manage the deal flow pipeline and keep it running.
Maintaining an online presence is essential, too, with online events and meet-ups blurring geographical boundaries and barriers.

Example

Let us look at an example to establish the deal flow meaning by understanding a practical situation,

For instance, the onset of the pandemic in 2020 and its spiraling effects on the economy were visible through stock markets plunging and investors turning away from acquisitions. Consequently, an event like the COVID-19 pandemic led investors to focus and shore up their existing investments to increase their returns on investment.

Thus, the developing economic scenario led to the drying up deal flow pipeline as investors stayed away from new investments.

However, as Forbes reported in May 2021, it soon mitigated this industry-wide danger of withering of deal flows. Globally in 2021, a record $1.77 trillion worth of merger and acquisition (M&A) transactions took place in the first four months. According to reports, it was a whopping 124% rise compared to a low-lying pandemic year and 10% higher than any first four months of any other year.

According to analysts, this increased search for yields and returns by investors resulted from extremely low-interest rates and comparatively large capital holding with investors. Additionally, low interest, increased government stimulus, and the excessive liquidity in the hands of investors led to further propping up of the public equity markets. Thus, a surging stock market led to an increase in people's confidence.

Such a cyclical scenario was more profound in the American economy, wherein the initial four months of 2021, M&A transactions worth $1 trillion had already occurred.

Frequently Asked Questions (FAQs)

How do you create a deal flow?

There are a few steps that venture capitalists and investment bankers shall follow to create deal flow,
#1 - Networking events and founder meet-ups
#2 - Sourcing referrals from portfolio companies
#3 - Using CRM platforms for deals and relationship management
#4 - Increasing online presence and engagement through virtual events, meet-ups, etc.

What is deal flow in private equity?

It refers to the rate at which private equity investors receive business proposals and investment offers from investment bankers. It takes at least three to six months to close a deal, and initially, the investor does not transfer the full amount to the investee. Additionally, a private equity investor works closely with the management to increase the EBITDA of the firm.

How do angel investors get deal flow?

Angel investors represent wealthy private investors who focus on financing small business ventures or proposals in exchange for equity. Although, the product an angel investor invests in might still be in a developing stage. Thus, they build efficient deal-sourcing processes to screen and differentiate between poor and high-quality deals at earlier stages. As a result, it helps them avoid risky investments or losing their real money.