What it means
Deal flow describes both quantity and quality, and the second matters more. A venture fund that sees 1,000 companies a year has strong flow only if the right sort of company is among that thousand, which is why firms invest in reputation, sector focus and founder referrals rather than simply advertising for submissions.
Sources are usually split into two kinds. Proprietary flow comes from an investor's own network, portfolio founders and outbound research, while intermediated flow arrives through bankers, brokers and platforms and is normally competitive, which means higher prices and less time to decide.
Firms track deal flow as a funnel with defined stages: sourced, screened, first meeting, diligence, investment committee, closed. The conversion rates between stages are the diagnostic, because a firm converting a high share of what it sees may not be selective enough, while one converting almost nothing may be pointing its sourcing at the wrong market.
Corporate development teams inside operating companies use the same language for acquisitions. A head of corporate development who cannot show a pipeline of credible targets will struggle to win board support for a buy-and-build strategy, however good the strategic logic looks on a slide.
Deal flow is seasonal and cyclical as well. Volumes typically thin out around year end and holiday periods, and swell when valuations look attractive, when credit is cheap or when a sector goes through a wave of consolidation.
In practice
Real-world examples.
Example
A seed fund with a strong reputation in climate hardware receives most of its opportunities directly from founders who were referred by companies it already backed. Because this proprietary flow arrives before any banker is involved, the fund typically pays a lower entry valuation than it would in a competitive process and has time to run proper technical diligence.
Example
A healthcare group's corporate development team builds a target list of 45 independent clinics in three regions and contacts them systematically over 18 months. Only nine engage in any depth and three transactions complete, but the pipeline gives the board a credible picture of how far the roll-up strategy can run.
Example
A boutique advisory firm finds its deal flow drying up as clients delay sales in a weak pricing environment. It responds by shifting resource towards refinancing and debt advisory mandates, which are counter-cyclical, keeping the team busy until transaction volumes recover.
Formula
Calculation
Deal flow conversion rate = Deals closed / Deals sourced
A venture firm logs 1,200 opportunities over a year. It screens those down to 300 first meetings, takes 60 into full due diligence, and completes 12 investments.
Stage conversions are 300 / 1,200 = 25% from sourced to first meeting, 60 / 300 = 20% from meeting to diligence, and 12 / 60 = 20% from diligence to completed investment. Overall conversion is 12 / 1,200 = 1%.
With four investing partners and a 50-week working year, the firm handles 1,200 / 4 / 50 = 6 new opportunities per partner per week, which is a useful sanity check on whether the screening process is realistic or whether opportunities are being rejected on a glance at a deck.
If the firm wants to make 16 investments next year at the same conversion rates, it needs 16 / 0.01 = 1,600 sourced opportunities, a 33% increase in top-of-funnel volume rather than a change in how it decides.Case study
Seen in the real world.
Ashfield Ventures is a fictional early-stage fund created for this illustrative example. In its first two years the partners closed 5 investments from 240 opportunities, and complained privately that the market simply was not producing good companies.
A review of the pipeline told a different story. Almost 80% of what the firm saw came from two accelerator demo days, which meant the fund was seeing the same cohort of companies as every other fund in the city and consistently losing the best ones on price. Proprietary flow accounted for fewer than 30 opportunities across the whole period.
In this illustrative scenario the fund reallocated one partner to full-time outbound sourcing in two chosen sectors, published a short quarterly research note, and hosted small technical dinners. Sourced volume rose to 600 a year within 18 months, and, more importantly, the share arriving through the firm's own network rose from 12% to 45%.
Watch out
Common mistakes.
- Measuring deal flow purely by volume, which rewards a team for looking at things it was never going to fund.
- Confusing being shown a deal with having access to it, since seeing a competitive process late is not the same as being able to win it.
- Cutting sourcing effort during a slow market, which starves the pipeline exactly when valuations become attractive.
Questions
People also ask.
What is a healthy conversion rate?
Venture firms commonly complete around 1% of what they see, while corporate acquirers with a narrow target list may convert far more, so the number is only meaningful against a firm's own strategy.
How is deal flow different from a pipeline?
Deal flow is the arrival rate of new opportunities, while the pipeline is the stock of live opportunities at various stages at a given moment.
Can deal flow be bought?
Access to intermediated flow can be paid for through relationships and fees, but proprietary flow is built through reputation, sector expertise and a track record of behaving well with founders.
From the founder's library
Take it further with the book.
Build your financial confidence beyond this definition. Shihan's full-length guide, Accounting Fundamentals, takes the same plain-English approach and turns it into a complete, practical playbook for non-finance managers, business owners and students - with chapter-end quiz answers and presentation slides included.
25% off with code MMHQ25, applied at checkout. Priced in USD - checkout may show the equivalent in your local currency.
View the book and save 25%