Deal flow

What is deal flow?

Deal flow refers to the pipeline of potential investment opportunities available to venture capitalists, angel investors, or private equity investors during a given period of time. The term can be used to describe the rate at which investors or firms receive investment offers, as well as the quality of the prospective investments.

Having a strong or healthy deal flow allows investors to evaluate a wide range of opportunities and prioritize the most promising companies for their portfolio. This is essential for maintaining a competitive edge and ensuring a consistent supply of high-quality investments.

Deal flow process

Deal flow process can vary firm to firm and across venture and private equity, but typically involves sourcing, evaluation, due diligence, investment committee, deal document negotiation, and closing. 

1. Deal sourcing

The deal flow process begins with deal sourcing. Depending on how they are sourced, deals can fall into one of two categories: proprietary deals and intermediated deals. 

Proprietary deals are investment opportunities that are sourced directly by a venture capital (VC) or private equity (PE) firm, whereas intermediated deals are typically received via a third party—such as an investment bank, M&A advisor, or investment broker. Intermediated deals are usually part of a structured or competitive auction process. 

Proprietary deals are considered advantageous to investors because they are less competitive than intermediated deals, which usually means better terms and more control for investors. However, they require more legwork on the part of the firm to source and manage directly.

2. Screening and evaluation

The next step is to narrow down the field of potential investments. Screening prospects at this stage helps investors  assess the company’s potential before spending time on due diligence.

The evaluation process typically involves reviewing pitch decks and other preliminary materials to determine whether the opportunity aligns with a fund's investment thesis. Investors will also want to learn about the founding team and their experience, as well as the competitive landscape and market size. 

After some initial research, an investor may schedule an introductory meeting with the founder or leadership team. This gives them an opportunity to review the fundraising pitch, ask questions and identify any red flags—such as personality conflicts or legal liabilities.

3. Initial due diligence 

If the deal moves past an initial meeting, investors will begin conducting initial due diligence on the company. This process usually involves in-depth research, several  meetings, market and competitor analysis, and financial modelling.

During the financial diligence phase, investors focus on gathering and analyzing information to decide whether to write a check, how much to invest and at what  valuation. Some legal diligence may take place during the early stages of a deal to unearth any major litigation or regulatory issues, but most legal diligence happens alongside the following steps. 

4. Investment committee and term sheet

When a venture investor has enough confidence in a potential portfolio company, they will present the opportunity  to an investment committee, which is typically made up of all the general partners (GPs) of the firm. 

Once the committee has approved a deal, the investor who sourced it begins negotiations by sending a term sheet to the company. Note that, in private equity deals, a letter of intent (LOI) takes the place of a term sheet. 

5. Negotiation, legal diligence and deal drafting

After receiving a term sheet or LOI (as appropriate), the company negotiates with prospective investors until they agree on the key deal terms. Then, the legal counsel will begin drafting the full contracts that document and operationalize the deal terms. 

In venture, term sheets are non-binding and ultimately depend on the outcome of due diligence—especially legal diligence which takes place during the negotiation of the full investment contracts.  During the diligence process, important documents and sensitive data are shared with investors via a secure data room. 

Deal structure and term sheets can vary widely depending on company stage. For venture deals, the National Venture Capital Association provides template documents to start from,  but deal structures and terms may become more personalized and complex as companies grow. That’s why having trustworthy legal counsel is so important. 

6. Deal closing and capital deployment

After finalizing negotiations and due diligence is complete, it’s time for deal closing. This is when the actual contracts are signed and, provided that all closing conditions are met, investors then transfer cash to the portfolio company.

In venture, major investors often join the board of directors. In private equity, where the transaction is often a full buyout, the PE firm takes full control of the company.

7. Post-investment monitoring

The closing of a deal represents the beginning, not the end, of the investor-company relationship. Company leadership will provide regular board and investor updates, while investors will monitor and track the performance of their investment. Communication and transparency are crucial for maintaining strong investor relations. 

Deal flow management best practices

How to increase deal flow

To increase deal flow, many investors and firms focus on building brand awareness, credibility, and industry presence so that founders and company executives will want to work with them. However, cold outreach can also be an effective strategy: According to a Harvard Business School Survey, 30 percent of venture investments begin with VCs reaching out to founders. Here are some best practices for optimizing deal flow:

Build and maintain strong networks

• Cultivate relationships with founders, advisors, startup accelerators, incubators, and other investors.

• Attend and speak at industry events—such as pitch competitions and conferences—to increase visibility and signal expertise.

• Host targeted, small-group events like roundtables, dinners, and workshops.

Create thought leadership content 

• Write blog articles or newsletters on topics that will be useful to founders and operators (e.g. First Round Review).

• Host a podcast (or appear as a guest speaker) to showcase your experience, network, and portfolio (e.g. a16z Podcast).

• Share case studies and founder stories that demonstrate how you’ve added value to companies post-investment.

• Publish social media posts to share insights, make deal announcements, and discuss market trends.

Develop a targeted outreach strategy 

• Shortlist founders and business leaders based on industry relevance, timing, or recent milestones. 

• Use CRM tools and databases to build a qualified list of potential targets.

• Create outbound marketing campaigns focused on specific themes or subsectors. 

How to manage deal flow effectively

Generating a healthy pipeline of investment opportunities is only one piece of the puzzle. If you regularly review and refine your deal flow process, it will be much easier to keep track of current and potential investments. Here are some ideas for creating a more streamlined, scalable process:

• Leverage technology and tools: Use CRM systems to track and manage deals. Automate workflows for sourcing, screening, and follow-ups.

• Define clear investment criteria: Establish sector, stage, size, and geographical preferences. Use a consistent scoring system for initial screening.

• Prioritize quality over quantity: Focus on high-potential, strategically aligned deals. Avoid deal fatigue by filtering early and often.

• Standardize internal processes: Create structured pipelines for screening, diligence, and committee reviews. Use checklists and templates to ensure thorough evaluations.

• Track and analyze deal flow metrics: Monitor deal volume, conversion rates, and timelines. Adjust sourcing strategies based on performance data.

• Collaborate across teams: Foster communication between sourcing, diligence, legal, and post-investment teams. Share key insights and concerns early on in the deal process.

• Continuously refine your approach: Review past deals to identify success patterns and missed opportunities. Stay adaptable to market trends and emerging sectors.