Deal flow

Deal flow (or dealflow) 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.

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%. 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 makes it through the group's screening process, however 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, however, such unreferred plans are usually much less likely to receive funding.

In order to create and maintain a 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 also regularly attend conferences and "venture fairs"" where multiple companies pitch their businesses to investors.

Criticism

In a 2005 blog posting,^[2] Bill Burnham criticized the "deal flow-centric view of venture world [...] premised on a passive approach to venture investing that essentially subscribes to a 'build it and they will come' theory of venture investing". Burnham cites statistics showing that in the 1980s, high rates of deal flow were easy to achieve because of the relatively high numbers of entrepreneurs and low numbers of venture capitalists. Now, he argues, venture capitalists have increased in numbers, such that, except for the very top firms, most VCs cannot rely on passive deal flow to sustain operations. Burnham advocates what he calls "Thesis Driven Investing," whereby a VC firm decides upon one or more investment theses, then "they go and out and 'turn over rocks' actively looking for deals that fit their investment thesis in a particular space."

See also

• Venture capital
• History of private equity and venture capital

References

1. ^ "Funding Post". http://www.fundingpost.com/glossary/deal-flow.asp. 
2. ^ "Burnham's beat". http://billburnham.blogs.com/burnhamsbeat/2005/05/deal_flow_is_de.html.