Investment Deal Flow Defined for Beginners
There have already been lots of things written on private equity, venture capital, and mergers and acquisitions as subsets of financial industry. In spite of the wide coverage of the concept of investment deal flow, it stays vaguely formalized, partly due to the concept’s fluidity and partly because of lack of coverage.
Key Definitions of Investment Deal Flow
Deal flow is simply defied as the overall amount of investment opportunities of a company. Some don’t define this term yet its usage is recognized. However, this still remains a bit unclear. What is really a deal? Isn’t it true that all businesses involve some sort of dealing in one form or another? And what is a flow? Does flowing means that deals will consistently go from one phase to another?
Depending on the specific industry, a deal could mean various things. In the case of early stage venture capitalists, deals could signify a possible startup company, which, at the very least, has expressed interests getting funded by the investment firms. For the private equity firms, this could refer to a company with a potential of being acquired or taken over. Lastly, for the M and A teams, it may only mean potential companies to merge with or acquire.
Although there is somewhat a consensus on using the word deal flow, there is even lesser agreement on whether deal flow is composed of opportunities, deals, investment opportunities, or cases, which are all terms which refer to the target company with the potential of being invested in by investors.
Getting to the Flow
This dilemma in definition is made even more complicated by the word flow. Not like other businesses wherein there is a scarcer flow of opportunities, a typical investor encounters a flow, and most of the time, an overflow of the investment opportunities which cause a paradox.
The issue is not just the number of investment opportunities but even the natural complexity of the process of deal making. Depending on the concerned investment opportunity, the companies can undergo numerous different phases in the process of investment, and the negotiations can stop at any time, and very often, it could happen for an indefinite time. This means that while there is an optimistic goal to aim for a steady deal flow, the truth is that there is a more winding and long road with occasional u-turns and pit stops.
Companies that are in the business of selling have extensive variety of CRM systems they can choose from yet investing is not a form of selling. Something that could be a good system for support selling is most likely less so to run investments. This is probably among the main reasons why a lot of investors still rely on the use of spreadsheets for keeping track of their deal opportunities.
The Bottom Line
All in all, investment deal flow can be summarized as the funnel of all the investment opportunities. The bigger the funnel, more will also be coming out at the end, which means more profitable investments that will be made in this case.