Deal flow is a term that is sometimes used to refer to the pace or frequency with which investment opportunities are presented to venture capitalists, angel investors, and investment bankers. Measuring this flow is a good indicator of whether the entity is coming in contact with enough opportunities to create a desirable amount of return, or if the lack of offers is preventing the entity from reaching its full potential. This means that a deal flow can be described as healthy or poor, as well as good or bad.
With just about any type of funding institution, the object is to identify the right investments to generate a reasonable return on the amount of resources invested in each project. For example, a group of angel investors would want to make sure that there was a constant access to new deals that would make it possible to keep earning a steady return, with new deals coming in to replace those that have been successfully completed. Without this type of ongoing deal flow, the investment group would soon find itself with no inbound return, and cease to have any reason for existence.
As with many financial situations, the idea is to establish a deal flow that is considered healthy. This usually is a state where there are enough deals coming in to offset the completion of other deals, but not so many that the funding institution is placed into a situation of being in a state of low cash flow, even for a short period of time. When there is an equitable balance between what is going out to fund new investments with the amount of return coming in from established investments, the deal flow is considered to be within an acceptable range, and therefore healthy.
In many instances, angel investors will seek to create a deal flow that is somewhat diversified. In order to accomplish this, the type of investment opportunities that are undertaken may vary somewhat. For example, the investor may invest in helping established businesses that are on the road to becoming profitable again, while also investing in new businesses that are seek to establish a presence in the marketplace. Some of these businesses may be aimed at selling directly to consumers, while others manufacture goods or services that are sold to suppliers who in turn market them to consumers. This diversity helps to minimize the chances of the angel investor from losing a great deal of money, even if there are unforeseen shifts in the general economy.