As subcategories of the financial industry, venture capital (VC), private equity (PE), and mergers and acquisitions (M&A) have all received a lot of attention. Despite its widespread coverage, the idea of deal flow (also known as deal flow or deal-flow) remains hazily structured – partly due to a lack of coverage, and partly due to the concept’s inherent fluidity. So, what is a “transaction flow” exactly? Why is it vital to investors, including general partners, family offices, and business angels?
Important Definitions
A deal flow, as described by Wikipedia, Investopedia, and NASDAQ, is simply the entire number of investment opportunities available to a firm. Some pages don’t even define the phrase, despite the fact that they are aware of its use. As may be seen in the image below, Google Search’s smart definition follows the same path.
However, this is insufficiently evident. What exactly is the deal? Isn’t it true that every business involves some sort of transaction? What is this flow, exactly? Does “flowing” suggest that the agreements will go from one place (or phase) to the next in a predictable manner?
Making a deal
A “deal” might mean different things depending on the sector. For early-stage venture capitalists, a transaction might represent a possible new business that has shown an interest in being supported by investment companies, at the very least. It might refer to a company that has the potential to be bought or taken over by a private equity group. Finally, for M & A teams, this may simply indicate possible acquisition or merger targets.
Part of the defining conundrum may be seen here. There is no one way to determine when the interests (whether mutual or not) in a company begin and stop since investing in a company is already a fluid activity that morphs during the appraisal and negotiating process and adjusts to the types of activities the firms cover.
Even if there is considerable agreement on the use of the phrase “deal flow”, there is less agreement on whether the deal flow consists of deals, opportunities, cases, or investment opportunities, all of which are terms referring to a target firm that has the potential to be invested in by an investor.
Getting to the floor is the first step
The phrase “flow” complicates the defining conundrum even further. Unlike other businesses where the flow of opportunities (leads, sales leads, opportunities, etc.) is scarcer, a typical investor faces a flow, and quite often an overflow, of investment opportunities, resulting in a paradox: on the one hand, each investor wants to see as many deals as possible (for classic FOMO or to gain sector insight); on the other hand, the vast majority of deals are clear “no-go”s, causing extra clutter, headache, and work that adds up
The issue isn’t just the sheer number of investment options available; it’s also the inherent complexity of the deal-making process. Companies can go through numerous phases in the investment process depending on the investment opportunity at hand, and talks might halt at any point, and frequently for an indeterminate period of time. So we’re striving for a continuous deal flow, but it’s more of a lengthy and twisting route with periodic pit breaks and u-turns in reality.
Companies in the sales industry have a wide range of CRM systems to select from, but investing is not the same as selling.