Deal flow refers to the total number of investment opportunities available at one time. Most often, it is referred to in the context of a single VC firm. Deal flow can either be quantitative and objective – as in the absolute number of cold calls or pitches coming across the desk of an interested VC or angel investor – or highly subjective.
When used subjectively (as in "we're seeing excellent deal flow right now"), this term can be used as a barometer of overall market health. In other words, during a boom period for VC, all firms will see the right deal flow. However, in bearish environments, it becomes much more challenging for any but the very best VC firms to maintain steady deal flow.
So how do venture capital investors maintain consistent deal flow? Traditionally, word of mouth is the way that venture capital firms have attracted potential investment opportunities. Since VC firms traditionally have a local or regional focus, it is important to stay plugged into the local deal environment. Presumably, tech whiz kids at Stanford have a pretty good idea of which California VC firms invest in certain types of companies, and MIT whiz kids probably have a pretty good idea of which local Boston VC firms are most likely to invest in them.
As the venture capital game has become more and more competitive; however, lower-tier and mid-tier VC firms have had to work much more aggressively to maintain steady deal flow. For example, it's now not unusual for VC firms to sponsor business plan competitions, hackathons and maker festivals. While this involvement in the local tech community can be viewed as somewhat kind (especially if they are writing big checks), it is also a way to get the first crack at some of the best talent and business ideas percolating on university and B-school campuses.
Another way to boost deal flow is to partner with local R&D hubs, incubators, and accelerators. Incubator programs, for example, are perfect for VC firms trying to get access to seed-stage and early-stage VC financing opportunities. And accelerators are great for VC firms looking for Series A or Series B funding targets.
As a general rule of thumb, not all deal flow is created equal. For example, if a VC firm receives ten cold calls or pitches a week, it's quite likely that only 1 of them has a realistic shot of ever becoming a potential investment target. Thus, for VC firms looking to put their capital to work (and earn the "2 and 20" they are charging investors), they need to make sure that deal flow is as steady as possible. In recent years, for example, VC firms have embraced options such as the "Entrepreneur-in-Residence" (EIR) program, which is necessarily a way for a very talented serial entrepreneur to hang out with venture capitalists all day and dream up a potential new startup idea that can be funded immediately.
Deal flow is particularly relevant in the context of the portfolio approach that VC investors take. VC firms know that, for every ten investments they make, six will probably end up losing money, three will break-even, and only one will be a big-time home run. Thus, the apparent focus of deal flow is to find that one home run deal that will necessarily pay for all the others.