Deal flow has become a buzzword for investors, brokers, and other finance professionals. Steady deal flow is integral to sustaining venture capital firms and other types of investors. Here we give you a comprehensive look on what deal flow is, the mergers & acquisitions process, and recommendations to generate it.
Deal flow is the quantity and quality of potential investment opportunities available to an investor, firm, or funding institution. Finance professionals use it to refer to the spectrum of deals, offers, and opportunities presented to them at a given time.
The term does not define a specific rate or ratio. Rather, it is a qualitative measure of a firm’s cumulative stream of opportunities. Deal flow is often utilized to signify the health of a business.
Often times, individuals succumb to the notion of “more is better.” However, regarding deal flow, this is not always the case. Unfortunately, there is no universal standard or golden rule for how much deal flow a firm should have. It is entirely contingent upon a business’s needs and strategy. Ideally, you want to have enough M&A deal flow to sustain business needs while also generating equity and revenue.
The aim here is to look at a combination of quantity and quality. In the beginning, meeting with multiple opportunities may be beneficial to gain experience and learn what makes a deal attractive. However, it may become unwise to focus solely on sourcing a plethora of deals for merely numbers sake. This will not pay off in the long run if they are all a bust. You want to meet with enough people to find a handful of worthy opportunities to investigate further while remaining attentive to value.
There are multiple sources that firms utilize to generate deal flow.
You may engage with anywhere from dozens to hundreds of opportunities in a month. But the reality is, you may only actually invest in one or two of them. Some angel investors or venture capitals will refer to a 100:1 ratio for deals that actually get funded. That is because, in deal flow, M&A deals are pushed through a funnel process. This helps weed out unfavorable investments so you are left with something of value and that you fully believe in.
The phases of the deal flow process are as follows:
There are several strategies that investors utilize to generate deal flow. They all fall under a general umbrella: networking. Building a large, sturdy network is paramount in achieving a steady deal flow.
Investors can get their name out there by giving speeches at events or conferences and writing blogs. Venture capitalists and angel investors can meet early-stage companies at special “venture fairs” and conferences. Attending pitch nights or demo days at a local or global accelerator is another avenue to engage with the newest ideas.
With the emergence of online technologies, there are several virtual platforms that list new companies, products and ideas. These can be used to connect thousands of investors and investees. Some examples include AngelList, Kickstarter, Product Hunt, and even LinkedIn.
It is also helpful to build a solid network of other individuals who also work with these companies. Knowing someone else with a pre-established network is key in growing your own.
Like all areas of business, deal flow does not occur in a bubble. There are many external factors that may affect whether it is good or bad.
Deal flow is an important consideration for several different types of finance professionals on the buy and sell side.
In order to have an efficient deal flow process, teams need to have the proper software. Whether you are an investor or startup, you will likely need a secure, efficient way to collaborate and share files with the other party.
Luckily, DealRoom has created a dynamic online virtual data room to help streamline communication and ultimately close deals faster. With DealRoom, teams can safely share, store, and transfer files and documents. They can also utilize additional project management and deal management features to streamline workflows. For more details and pricing, please visit us here.