Deal Flow (Finance) - Explained
What is a Deal Flow?
Written by Jason Gordon
Updated at July 8th, 2021
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What is Deal Flow?
Deal flow is a qualitative measure of the rate of receiving business proposals and investments pitches by the financiers. The term is commonly used by the venture capitalist, angel investors and equity investors and not by the banks.
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How does Deal Flow Work?
A deal flow almost always gets affected by the market condition. A healthy economic condition generates a good deal flow for all the players in the market while in a poor market condition only the top players receive some amount of deal flow. The proposals received may be of different natures including venture funding, syndication, initial public offerings, mergers and acquisitions, private placement etc. Big investment banks deal with all types of proposals while venture capitalists and angel investors receive proposals generated in their own fields of expertise. Large and well-established venture capital firms receive hundreds of proposals each month and their selection rate is typically 0.25% to 0.5%. Active angel investment groups receive around dozens a month and select 0.5% to 1% among them. A good deal flow allows the financier to choose from a pool and select the best-suited proposal for them. The companies and entrepreneurs with a proven track record are more likely to secure an investment than the newbies. Although new players often get investment from the established financiers with a strong plan, outstanding skill, and innovative ideas.
Academic Research on Deal Flow
- The impact of all-star analyst job changes on their coverage choices and investment bankingdeal flow, Clarke, J., Khorana, A., Patel, A., & Rau, P. R. (2007)..Journal of Financial Economics,84(3), 713-737. This study examines what happens when a financial analyst with a strong reputation changes investment banks. The authors find that analysts may cover different stocks when they change banks, but they do not change their general outlook. The rate at which analysts receive proposals and deals (deal flow) stays constant for all investment types except for equity investments.
- Venture capitalist certification in initial public offerings, Megginson, W. L., & Weiss, K. A. (1991). The Journal of Finance,46(3), 879-903. This paper looks at the impact of venture capitalists on initial public offerings (IPOs). It finds that the involvement of venture capitalists in IPO companies lowers the costs and increases the revenues of the IPO for those companies.
- 'Deal-makers': Reputation attracts quality, Kelly, P., & Hay, M. (2000). Venture Capital: An International Journal of Entrepreneurial Finance,2(3), 183-202. This study looks at how investor reputation operates within the UK venture capital market. By examining wealthy, experienced investors, the study finds that these deal-makers rely more on privileged information from their extensive network of contacts than on publicly available information.
- Network, network position and thedeal flowof venture capital firms, Bhner, I., & Brettel, M. (2007). Lehrstuhl fr Wirtschaftswissenschaften fr Ingenieure und Naturwissenschaftler.This paper looks at venture capital firms as parts of German syndication networks (groups of companies that work together on transactions). The authors find that firms in more open networks see more investment opportunities of higher quality.
- Deal-flowportfolios in innovation collaborationsRevisiting the rationale of innovation networks, Katzy, B., Sailer, K., Holzmann, T., & Turgut, E. (2011, June). InConcurrent Enterprising (ICE), 2011 17th International Conference on(pp. 1-8). IEEE. This paper looks at regional systems designed to spur innovation. It finds that systems that focus on facilitating deals are more successful than those that focus on facilitating innovation.
- The practice of the life science venture capital industry: compensation,deal flow, and contracts, Fujiwara, H., & Kimura, H. (2011). The Journal of Private Equity, 56-66. This study looks at the roll of incentives used by venture capitalist firms when investing in life science companies. The study shows that most firms use carried interest (additional shares of profits) as incentives for fund managers, and that this use of incentives promotes more active investing.
- United States mergers & acquisitions market dynamics: What drivesdeal flowin each industry, Corrao, M. (2012).Evanston, IL: Northwestern University. This paper seeks to answer two questions: What drives mergers and acquisitions in different industries? and How do those drivers vary across industries?
- In pursuit of the real deal: A longitudinal study of VC decision making, Petty, J. S., & Gruber, M. (2011). Journal of Business Venturing,26(2), 172-188. This paper uses 11 years of data from a European venture capital (VC) firm to analyze the VC decision-making process.
- A model of venture capitalist investment activity, Tyebjee, T. T., & Bruno, A. V. (1984). Management science,30(9), 1051-1066. This study uses survey data from 41 venture capitalist (VC) firms to create a model of the VC investment process. It outlines a five-step process. The study also identifies a five-dimension framework that VC firms can use to evaluate deals.