For Venture Capitalists, Private Equity Partners, Investment Bankers and even Angel Investors, deal flow is important. Deal flow refers to the stream of business proposals or investment offers these firms or individuals receive. A high deal flow (i.e. a high rate of potential deals received) is good and indicates a successful investment practice.

While deal flow certainly isn’t the only thing that is important for these investors to make good investments, it is certainly necessary. Deal flow allows professional investors to develop an informed perspective both at a detailed level and at a global level. They can compare each specific ‘deal’ to other specific deals and also look at it in the context of the high level perspective of all the proposed deals. Decisions can be made based on the assurance that they are seeing a representative sample of investment opportunities and therefore they are seeing some of the best deals and choosing among them.

Imagine a Venture Capital firm that gets 2-3 business proposals a month. This VC firm has millions to invest and is motivated to put money into ventures – that is what their investors expect them to do. They need to invest at a rate of $1M a quarter. In one quarter, they will have heard pitches from 6-9 companies and they need to decide how to allocate $1M among those companies. Should they put all $1M into one company, spread it among 2, 3, or 4 companies, or not invest in any one of them?

By all accounts, this would be a spectacularly unsuccessful VC firm. They have only seen very few companies out of a world where there are thousands of possible investments. The likelihood that a great investment opportunity is contained within the group they see is much lower than a top venture capital firm that regularly receives hundreds of business plans each month and funds less than 1%.

Yet this is exactly the situation that many executives at major corporations face. They feel lucky if they get to choose from among a half dozen opportunities a quarter. Often decisions are made on a single opportunity – do we or don’t we invest in this project or that one. These point decisions, while they may be very well studied, documented, measured, etc. are, by definition, being made in a self-constrained, limited context, often a context that pits the new opportunity against existing projects or that pits strategic opportunities against sustaining or incremental ones.

There are numerous differences between the investment decisions of VCs and private equity firms and the decisions of company management and executives, but the basic principle of ‘flow’ is still valid. An effective front-end innovation effort needs ‘opportunity flow’ the same way an effective venture capitalist needs deal flow. In the case of a company making internal investment decisions, the flow of new, strategic opportunities is the lifeblood of innovation and transformation. Increasing the flow of opportunities a company is looking at results in more informed and contextually relevant investment decisions. It is only by seeing a large number of opportunities that the ‘best’ ones can be recognized. If only a few opportunities are ever considered at once, then the best of the small group may not be very good overall. It is only through volume that you can be assured to not be trapped in mediocrity.

An example of the power of opportunity can be seen from the experience of one of the US’s largest health insurance and health services providers. They undertook a project in 2012 to specifically create a number of new, strategic opportunities and to invest in the top ones. To do this, they acknowledged the value of opportunity flow by using a process that systematically, rigorously and efficiently uncovers literally hundreds of new opportunity hypotheses and focuses and shapes this flow to come up with, in this case, fourteen truly unique and compelling new strategic opportunities. From this portfolio, three were funded immediately to take them to the next stage. The fact that these fourteen came from a flow of over 125 opportunities that were looked at over a period of four months, gave them confidence that the ones they invested in were the best and had the greatest likelihood of success, not just in the world, but within the company itself.

Flow cannot just be left to happenstance. While efforts like open innovation initiatives  and idea management systems that encourage internal employee generated concepts are important, these devices alone will not generate the volume or quality of opportunity flow that is needed to truly transform an organization and drive future value creation. Neither will regular brainstorming sessions or technology scouting activities. All of these activities are necessary, but not sufficient, for high quality opportunity flow.

The best source of high quality opportunity flow is a system and framework that produces regular, purposeful, directed, structured and rigorous innovation initiatives. These initiatives focus on specific domains that are of strategic interest to the company and enable, and indeed force, the systematic exploration of these domains to uncover the truly strategic opportunities from among hundreds of possibilities.  The hundreds of possibilities are created by a team of individuals whose job it is to learn about the domain, create new opportunity ideas, evaluate the ideas and select those that deserve further time and attention. When this is done over the course of several months, with the iterative methods of focusing on the best opportunities and shaping their design, then the result is eye-opening. No longer is the question if something has been missed, instead the question is which opportnities deserve spending more time on . No longer must you decide between a few mediocre alternatives. Now, at the end of the initiative, all the opportunities you are seeing are exceptional in their own way and you need to choose among them.  The decisions may still be tough, but they will be much more pleasant.

The particulars of deal flow for venture capitalists and opportunity flow for companies are very different but the principle of flow, the idea that seeing a large volume of possibilities results in better decision alternatives and ultimately better investments, is applicable in both the private and the corporate investing world. The concept of opportunity flow is one that can inform both the type and pace of innovation initiatives a company undertakes and also drive organizational structure and process architecture within a company. Making opportunity flow an integral part of how opportunities get created and acted upon, creates the environment, the mechanism and the will to be truly innovative.

I'd like to learn more about this subject

  • This field is for validation purposes and should be left unchanged.