Basics of Deal Flow

Key Definitions

But that is still not clear enough. What is a deal? Don’t all businesses involve dealing of some kind? And what is this flow? Does “flowing” imply that the deals will consistently go from one place (or phase) to the next?

Deal making

You can see part of the definition dilemma here. Since investing in a company is by itself already a fluid activity that morphs throughout the evaluation and negotiation process, and that adapts to the type of activities the firms cover, there is no one single way to tell when the interests (whether mutual or not) in a company start and end.

Even though there is somewhat of a consensus on utilizing the term deal flow there is much less agreement on whether the deal flow consists of deals, opportunities, cases or investment opportunities, which all are terms referring to the target company that has a potential to be invested in by the investor.

Getting to the flow

The problem is not only the amount of investment opportunities, but also the natural complexity of the deal-making process. Depending on the investment opportunity at hand the companies can go through multiple different phases in the investment process and the negotiations can pause at any time, and very often for indefinite time. So we are optimistically aiming to steady deal flow, but in reality it’s more a long and winding road with occasional pit stops and u-turns.

Companies who are in the business of selling have a big variety of CRM-systems to choose from, but investing is not selling. And what can be a great system to support selling is most likely less so for running investments. That’s probably one of the main reasons many investors still rely on spreadsheets to keep track of their deal opportunities.

Managing the Deal Flow

Importance of Deal Flow Management

Bartosz Jakubowski — a VC in Paris, in one very well-written piece, agrees that although the concept of “deal flow” is sometimes too flexible to be useful, the more deals one VC can source and the higher quality these deals are, the higher returns the firm can drive for their LPs. Jakubowski also takes an interesting view on deal flow, thinking it as a funnel of leads, which is visualized in the pic below.

This sentiment is further confirmed by Dave McClure from 500 Startups, in “99 VC Problems” and Hunter Walk, in “You Lose 100% of the Deals You Don’t See”. Simply put, the more exposure, the better and quicker capital utilization, less costs and more returns.

The concept of “proprietary deal flow” is given fair treatment by Gil Dibner and Mark Suster, both important figures in the VC scene. The common perception is that some high-quality deals are made in exclusivity, and the more access to these deals the investors have, the better investments they will have in their portfolio. This, in turn, will generate higher returns to LPs, build firms’ reputation, and expand the proprietary deal flow, going full circle and creating a positive feedback loop.

Conclusion

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