4 Essential Tips for New Investors to Navigate Deal Flow in the Financial Markets
If you’re looking to invest in the business initiatives of others, you’ve got to discover suitable projects first. Entrepreneurs with start-up ideas, established brands with new ventures, and companies with proven track records represent a few places to find them. But like the job market, openings for investors are influenced by the overall amount of activity.
Venture capitalists often describe investor market activity as the amount of pitches and proposals coming one’s way, a phenomenon they also call “deal flow.” When deal flow increases, you can pick the cream of the crop. If activity slows down, you may not have as many opportunities to pursue.
Several factors, including the state of the economy, can determine deal flow. Learning how to navigate it is a crucial capability for new investors. Let’s consider four tips to keep in mind.
1. The Economy’s Performance Has a Significant Impact
Deal flow can get a boost when the economy is performing well. Commercial activity tends to increase overall because everyone wants to strike while the iron’s hot. More people feel confident about taking a chance on their business ideas. And venture capitalists see promising upsurges in the value of their initial investments when those ideas take off.
In short, people are more willing to participate in investments and financial markets when the economy’s on an upward trajectory. You’ll stand a greater chance of achieving your targeted return rate, and the investment opportunity will more likely live up to expectations. Conversely, deal flow can become restricted when overall economic conditions are tight.
When that happens, people are less willing to get into the game. They’ll hold back on pursuing their entrepreneurial dreams and hunker down. Companies may shelve expansion plans, including new ventures. Investors will be more apt to shift from ground-breaking opportunities to deals with less uncertainty.
A sluggish economy doesn’t mean deal flow or opportunities stop altogether. But it could mean growth and return rates won’t be as high. On the other hand, lower economic performance might open up prospects with lower initial costs. If you don’t mind slower and steadier gains at first, you could reap bigger rewards when the economy improves.
2. Market Gaps Can Signal Growth
Deal flow can follow social and tech trends, such as the rise of AI. However, solid investment opportunities tend to be focused on closing market gaps. If everyone goes after the same thing, you can ride that wave for a while. But eventually, the market becomes saturated, lowering the amount of return each investor can achieve.
Entrepreneurs who come up with ideas to serve unmet market needs can be a better gamble for investors. Business ventures that follow the crowd may not be unique enough and fail to gain momentum. According to Lifestyle Investing expert Justin Donald, “Unconventional ideas should not discourage entrepreneurs. Untapped opportunities are often the best.”
Identify current market gaps before you assess your investment choices or hear proposals from startup business owners. Match your research results with the quality of ideas you see in the pitches that come before you. If there’s alignment between the untapped potential you’ve uncovered and an entrepreneur’s venture, it could signal future growth.
While projections can only be estimates, a unique product or service is more likely to stand out. Once it catches on, imitators will follow. If you start riding an investment wave before it crests, you stand a higher chance of backing a market leader.
3. New Ideas From Trusted Brands Can Be Less Risky
There’s a reason unheard-of brands take longer to gain traction. People aren’t as comfortable with what’s unfamiliar to them. Investors feel the same way when a new business or entrepreneur comes around. Not having a performance history can hurt a newbie’s chances of getting the funding they need to launch.
On the other hand, brands and entrepreneurs with solid track records have an easier time. Investors have more faith in these ventures because they have past returns to back up their hunches. A new company started by the CEO of an online retail giant isn’t going to seem as risky.
For an investor, risk includes the probability of loss and the likelihood of not getting their desired return rate. Taking a chance on an unknown doesn’t always translate to losses or lower returns. However, less risk can make you more comfortable as you learn how to navigate investment opportunities.
New ideas and ventures backed by well-known names can therefore be an easier sell. A novel single-family rental real estate investment trust will look more promising when backed by Wall Street’s heavy hitters. Similarly, a car dealership started by a former NFL Super Bowl–winning quarterback will have built-in visibility and tangible resources. Consider how much you’re willing to risk and weigh it against the venture’s market potential.
4. Consider Companies With Long-Term Relationship Experience
At any given time, investment deal flows can contain a mix of business proposals. Some will be from companies without long-term investor relationships. Other pitches will come from organizations with lengthy histories of dealing with financial backers. These are the proposals new investors can find more favorable.
To begin with, you’ve got brand recognition. Second, a history of investor relationships means these opportunities come from people with higher levels of credibility. You can check out references and see how they’ve worked with others in the past. If these organizations have had prior success, there’s a good chance there’s a winning formula behind them.
This isn’t to say you can’t have a good working relationship with an entrepreneurial newbie or achieve success with a less prominent company. Still, experience tends to be one of the best teachers. People with a history of successful investment partnerships know what they’re doing. Relationships with credible companies can translate into mentorship opportunities for someone new to the game. You can gain knowledge from top performers along the way.
Learning the Ropes
As an investor, you have choices. And when you’re new at it, the flow of potential deals can feel overwhelming. It’s easy to get lost in projections, pitches, and conversations. Outside factors, such as the economy, can also determine the quantity and quality of available opportunities.
Knowing how general economic activity impacts deal flow will help you sort through viable and less-than-viable proposals. So will remembering how market gaps, brand authority, and credibility influence return potential. Considering these aspects can give any investor the footing they need to navigate the financial markets.
