Today we’re going to answer the question “What is Deal Flow?”.
I’m sure you’ve seen the ads that say something like “Invest in the next Unicorn with as little as $50,” or “You can make 1000X or more by investing as little as $X in startups.” Of course, those ads then take you to their membership site or crowdfunding platform where you’re presented with a limited selection of opportunities to invest in or an offer to join that platform’s VIP service to be exposed to “vetted deals”.
The way those ads work is not accidental. These companies make money by bringing in investment funds or charging you to make a connection with a company that’s raising funds, and they know that people are looking for the easy way to make a buck.
While it is technically possible, the reality is that most startups actually fail, so the chances of you picking a unicorn right of the bat are slim. Even worse, many of the unicorns out there, aren’t even on most of the platforms. They’re snatched up by venture capitalists and handled in private deals, not available to the public. On top of that, of the opportunities the public does have access to, those that do succeed usually provide returns at a much lower multiple than 1000X, or even 100X. This is stuff that you’ll find in the fine print of those ads or the disclaimer after following the link.
While these services are useful, they shouldn’t be your only resource for finding opportunities…
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So, What is Deal Flow?
Deal flow is your funnel of opportunity sources. It’s comprised of the various channels you have available to you from which you pull potential deals to invest in.
The bigger your funnel, the more opportunities you’re exposed to. This gives you a much bigger play space vs. simply having to pick from a select few options that may or may not present an opportunity that truly fits your investment goals.
Those ads I referred to earlier, they’re potential deal flow sources. Luckily, they aren’t your only ones…
How can I create my deal flow?
Deal flow can come from a variety of sources:
Word of Mouth
Depending on the mouth they’re coming from, this can be one of the best resources to tap. What I mean by this is, if the person bringing the deal to you is reputable, chances are the deal is something you’re going to want to check out.
Look at it this way, if Elon Musk let slip to you that he’s starting a new tech business and is looking for funding, chances are that you’ll back it without even needing to know more. He’s what I call a reputable source. The same can’t be said for overhearing someone you don’t know at McDonald’s talk about they’re investing in X, Y, or Z. Now, obviously, this is an extreme example, but I think it drives the point home.
The way I look at it, deals brought to me in this fashion are at least something to give a quick once-over to see what might be there.
I didn’t even know that the JOBS Act opened angel investing/crowdfunding up to the rest of us until I came across an ad on Facebook, of all places, for a membership site aimed at vetting such deals. I just assumed it was still locked down to the wealthy. That was a little over two years ago. Thanks to that ad, I was able to add this potentially lucrative investment class to my portfolio that I would have missed out on otherwise.
Advertising is a powerful tool. Not only do the membership sites use advertising, but the crowdfunding sites and even the companies raising funds use it as well. Keep your eyes peeled, you never know what might pop up.
Let’s face it, most of the investments you’ll make (at least as a non-accredited investor) will be through various crowdfunding portals. After all, that’s where most of the deals actually are. The only problem is, sifting through them to find the ones that fit your Investment Policy.
One thing to note, although you can invest with virtually any platform out there, I highly recommend that you stick to those that are members of and regulated by FINRA. Here is a list of FINRA Regulated Funding Portals. Just keep in mind that some companies may be listed as Broker Dealers which is a different list. As long as the portals are on either of those lists, you’re good.
An easier way to determine FINRA membership/regulation is by using the BrokerCheck tool.
Crowdfunding Educational and Tool Sites
Crowdfunding Portals aren’t the only source of deal flow. There are several sites dedicated to educating investors and reviewing opportunities. Some of them are strictly to educate, where others are membership platforms that offer educational material, reviews, and other pay-for services.
There are other sources, but this should give you a pretty good start on your journey.
Why are multiple sources for my deal flow so important?
The more sources you have, the higher the potential is that you’ll be exposed to a winner. The possibility of missing out on an excellent opportunity is too high when you only have one or two sources for your deal flow and the limited selection may leave you with mediocre options at best.
Let’s compare your angel investing/crowdfunding portfolio to diet and assume a healthy diet is akin to building that diversified portfolio. Now, let’s head over to the grocery store…
What are the chances we’re going to get all the nourishment that a healthy diet provides when our only source of food (or deal flow) is the bread aisle? Pretty slim.
Let’s add the deli and produce departments (two new deal flow sources). I bet we can start to make a pretty healthy meal or at least a good-tasting sandwich (your portfolio).
Now, we happen to find a superfood (let’s say Avocado) that we add to the sandwich and it just puts the taste over the top (we’ve found a real winner here). That avocado is your unicorn. Had we not added the produce department, we would have missed out.
In the end, we invested $2 in the bread. It was an organic nut-based bread which gave us a 2X return for being healthy-ish. The ham, that we spent $10 on, was just bad and we lost it all (-$10). At this point, our sandwich would have put us in the hole -$6 ($4 – $10), but that $1 avocado brought a 100X health benefit ($100), being the superfood that it is. Thanks to that avocado, our sandwich earned us $94 (-$6 + $100) or 7.23X overall ($94/$13). That’s why multiple sources of deal flow are so important.
I know, talk bout a convoluted analogy, but I think you got the point, right?
Where can I find sources for my deal flow?
Word of Mouth
It’s very important to build a network of fellow investors. The reason for this is simple, as you share deals with others and build a reputation for yourself, not only will people take notice of the deals you’re looking at, but they’ll also start bringing deals to you to get your “take” on them.
The best way to build that kind of network is to join crowdfunding, membership, and educational sites, and start contributing (i.e. asking questions on raise pages, commenting as to why when you invest, answering other member’s questions, etc.).
As your reputation builds, people will start following you and reaching out when they think they’ve found something you’d be interested in or to get your opinion on something that caught their eye, etc.
Join social media groups that talk about startup opportunities. Many ads focus on these groups because they’re filled with the company’s target customers. You never know what opportunity you might pick up from a random ad in a relevant group.
Where are you going to find other investors like you (or unlike you)? Where you actually invest in the deals, of course. Join those portals. Follow raises and people. Engage in discussions. That’s where you see which people think like you do or fill in gaps in your own investment knowledge.
About once per week, I go through multiple (31 at the of this writing) crowdfunding sites to see what new opportunities may be available. I also follow other investors who might be knowledgeable in an area that I’m lacking or even those that seem to invest in the same deals I do, to see what their expertise leads them to.
The primary crowdfunding sites, whose opportunities I’ve invested in are:
Crowdfunding Educational and Tool Sites
The crowdfunding portals aren’t the only place to connect with other investors or discover new deals. Educational, service, and tool sites are also great places to connect.
Some of the more notable resources out there are:
Of course, I’m going to list us here. We’re actually a mix of word of mouth, educational, and tool services.
Our forums are all about members bringing deals that interest them so we can all chime in and provide a kind of crowd due diligence. We also offer blog posts (like this one), courses, and other educational material. Our tools include the following:
- Investment Policy Creation Tool
- Form C Tool
- Simple Potential Earnings Calculator
- Priority By Date Tool
- Accreditation Status & Investment Limit Calc
- and more…
This is a great place to sit down and listen to various interviews with founders of potential investment opportunities.
This platform is chock-full of great information. They also offer various membership levels that give you access to a variety of tools that can be useful in your due diligence process. I tend to visit this one often when researching deals.
As you can see, short of the opportunities themselves, deal flow is vitally important. Without it, your options are extremely limited and you could be missing out on the truly exceptional opportunities out there.
I hope this article answers the question “What is deal flow?” for you.
Build your network and do what you can to build that deal flow from a trickle to a raging river.
I’d love to hear your thoughts on this article. Did I answer your questions about deal flow? Can you think of other sources of deal flow that should be added to the list? Did I miss anything? Does my sandwich analogy make sense? Please let me know by commenting below.