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The Ultimate Guide to Investment Banking Deal Flow

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.

What is Deal Flow in Business?

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.

What is the right amount of deal flow?

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.

Sources of Deal Flow

There are multiple sources that firms utilize to generate deal flow.

  • Referrals. Jeffrey Glass, a partner at Bain Capital Ventures, described investing as a “referral business.” Instead of sorting through hundreds of pitches, referrals can instantly highlight valuable and trustworthy investments. These may come from other investors, portfolio companies, and service providers such as bankers or lawyers. Referrals especially come in handy when you are just starting out and do not know what exactly to look for.
  • Staying up-to-date. Do your research on trends, new technologies, and products. If you see something that is of interest, reach out. It requires a little more work than referrals, but it’s a great way to get your foot in the door. You may even catch a new product or idea before they’re looking for funding.
  • Events. There are plenty of different events that showcase startups and other investment opportunities. These include pitch nights or demo days at startup accelerators, venture fairs, or conferences. Here, you are able to not only directly meet and engage with individuals and their ideas, but also witness demonstrations.

The Deal Flow Process

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:

  • Sourcing. This is the broadest scope. Here, you may need to take an active role in uncovering potential opportunities. Leverage your network and get busy on platforms such as AngelList, Kickstarter, or Product Hunt. You can also utilize marketing techniques so deals come to you.
  • Screening. Create some criteria to begin preliminary eliminations. At this stage, it doesn’t have to be as in-depth as due diligence -- we’ll get to that later. You’ll just need some measures to start manoeuvring through potentially hundreds of investments. This could be simple valuation analyses, customer engagement assessments, or determining what ideas you actually support.
  • Probing. Establish more in-depth examination measures to sift through opportunities that survived that screening phase. You can look at industry outlooks, conduct a SWOT analysis, and apply more particular assessments. From those that still look promising, you should make contact at this point if they haven’t reached out first.
  • Auditing. Of those that reciprocate interest, begin conducting due diligence. Due diligence is a comprehensive audit of a business. It can be a weighty task. Fortunately, DealRoom has plenty of downloadable due diligence task list templates and dynamic software to help simplify your process.
  • Showcasing. Meet with the investments that came out clean after due diligence. Often times founders create final pitches and presentations. If you have partners, connect with them and decide on a select few that seem the most attractive.
  • Closing. Begin negotiating and ironing out a contract for the deal(s) you have chosen. Here you make the final decision on whether or not to invest.
deal flow process

How to Generate a Deal Flow Pipeline

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.

What Factors Influence Deal Flow?

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.

  • Economic conditions. Deal flow typically mirrors economic conditions. Periods of economic growth and expansion usually equate to a healthy deal flow for investors and financiers. On the other hand, recessions may lead to more perverse outcomes.
  • Societal trends. Deal flow often follows the greatest opportunities for growth and “the next big thing.” Historical examples include digitalization and the Internet of Things. Going forward, deal flow may be roaring for smart-tech startups, software as a service, and artificial intelligence.
  • JOBS Act. Effective May 2016, the Jumpstart Our Business Startups (JOBS) Act allowed businesses to crowdfund to issue securities in the United States. This legislation eased previously held securities regulations to encourage the funding of small business and startups.

What Professions Involve Deal Flow

Deal flow is an important consideration for several different types of finance professionals on the buy and sell side.

These include:

  • Venture capitalists
  • Angel investors
  • Investment bankers
  • Private equity investors
  • Commercial real estate investors
  • M&A advisory firms
professions involve in a deal

Deal Flow Management Software

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.


Get your M&A process in order. Use DealRoom as a single source of truth and align your team.

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