Getting Introductions to Investors - The Ranking Algorithm
My friend, Ed Zimmerman, wrote a terrific post for his WSJ blog - "Help Me Help You" - on soliciting him (and others like him) for investor introductions.
I wanted to add to Ed's post and observe that not all introductions are created equal. The source of the introduction matters a lot. As a result, when the introduction comes in to the investor, judgment is applied based on the source. Most investors apply a simple ranking algorithm against introductions which determines how they react to them in terms of prioritizing their time and the seriousness with which they approach the opportunity. Here’s how it works in my experience:
- Entrepreneurs who have made them money. There’s no more powerful introduction to an investor than from an entrepreneur who has made them money. Investors will drop anything to take a meeting with or seriously consider evaluating an entrepreneur recommended by someone who previously made them money. No investor wants to hear feedback from a former moneymaking entrepreneur that they didn’t treat a friend of theirs respectfully. The CEO of one of our top-performing companies made an introduction to a former technical colleague of his and we jumped all over it. He personally invested (another huge positive signal in the ranking algorithm) and we ended up leading the company's seed and Series A.
Entrepreneurs in their personal portfolio. VC investors may have 8-12 actives investments at any time. Each of those portfolio companies may have 6-8 executives that are senior enough to have board visibility. These 50-100 executive represent the next rung in the ranking ladder. Active angels might have twice this number. Investors will take these introductions seriously, although may be more judicious depending on what they think of the executive making the introduction, how their company is performing and what their assessment is of the opportunity (all factors in the ranking algorithm).
Entrepreneurs they respect. Generally, accomplished entrepreneurs are like soothsayers - if they're a part of a successful company, then it is assumed that they have great insight into how to build other successful companies. Thus, if an entrepreneur I respect sends me something, I always take a close look.
Service providers they respect (lawyers, bankers, accountants, headhunters). Some service providers have very close relationships with investors and when an introduction is made, a rapid response and close look is taken. Other service providers claim to have close investor relationships, but in truth merely are "friendly" with some VCs who may not think much of their investment judgment and sourcing suggestions. Be careful with this category. It can be gold (e.g., one of our best deals came from an introduction from a banker whom we respect greatly) and others are disregarded (e.g., the random investment banker / broker semi-cold emails).
- Existing investors. This is one of the trickier categories for introduction sources as there can be a wide disparity in how it is viewed. All existing investors promote their portfolio companies - that's part of their job. Many have reputations for being indiscriminate promoters. Others have reputations for being great at picking winners and thoughtful in who they expose their best companies to. Before you ask your existing investors to fire off introductions, think through who has the best relationship with whom and what their impression of that investor is. I've seen an existing investor who claimed to their entrepreneur to have a great relationship with a top-tier firm, but be dismissed out of hand as a small timer. VCs, in general, are wary of the "buddy pass" - when one of their "VC buddies" (who isn't really a close friend but rather a professional colleague) passes along their crappy portfolio company and tries to promote it aggressively.
Cold emails / LinkedIn messages. Seriously? This is the worst way to approach an investor. In today's transparent, super-connected era, if you can't find a way to get to an investor through one of the methods above, you have failed a basic test. This will result in a low ranking, for sure.
Other investors who are not investing. After turning down an opportunity, I sometimes hear back from an entrepreneur a request to make an introduction to another investor. Here's why that's a bad idea. Imagine the conversation...VC1 to VC2: "Can I intro you to this great entrepreneur raising money?"
VC2 to VC1: "Sure! Are you investing?"
VC1 to VC2: "No."
VC2 to VC1: "Oh. Well have you worked with the entrepreneur before in another setting?"
VC1 to VC2: "No."
VC2 to VC1: "Well if it's not good enough for you to invest and you've never worked with the entrepreneur, why should I bother spending time with them?"
I'm sure there are plenty of other permutations of the ranking algorithm, but you get the picture. Think carefully not only about how you approach the introduction (as Ed recommends) but who you approach to affect it.