Ban Warm Introductions!👏🏾
It’s time to end one of Venture Capital’s most exclusionary, value destroying practices.
Growing up in a tech bubble:
“I grew up in Northern California. It was this hyper-tracked process, where my eighth-grade junior high school yearbook, one of my friends wrote in, ‘I know you’re going to get into Stanford in four years.’” — Peter Thiel
I spent the summer of 1999 at my aunt and uncle’s apartment in Mountain View, California, a quiet town of 70,000 in the San Francisco Bay Area. My cousins and I played tag in Eagle Park, raced ten speed bikes down Shoreline Boulevard to catch the newest Will Smith blockbuster, and spent the hottest days at the Rengstorff pool debating the merits of Britney and Christina while Dr. Dre bangers blasted through the poolside speakers. At night we returned to the small, two-bedroom apartment on Villa, passing streets lined with cumquat and avocado trees, as mothers and fathers in 4-cylinder Toyota trucks returned from days spent manicuring lawns, serving meals, and watching over children who weren’t their own.
Unknown to us, 1999 was the peak of the great dot-com bubble. In offices mere yards from where we rested, casually dressed techies stayed glued to glowing screens watching as fortunes were made and destroyed in microseconds.
So much wealth was created in the Silicon Valley in those days — created, then destroyed, then created again. But for the people on streets like my aunt and uncle’s, what was happening next door might as well have occurred thousands of miles away.
While the children of the elite and upper-middle class could avail themselves of processes that nearly ensured their eventual spot near the top of the social order, the children of the un-networked, the non-tracked saw diminishing prospects.
“Today, the tech industry is apparently on track to destroy one of the world’s most valuable cultural treasures, San Francisco, by pushing out the diverse people who have helped create it.” — Kim-Mai Cutler
A “pay it forward” culture?
Twenty years later, I found myself in an intense Twitter exchange with a well-known partner of a Bay Area based venture capital firm. He lauded the “depth” of the “pay it forward” culture in Silicon Valley.
I took exception.
The elite bubble
Most of the conversation regarding the Bay Area, and Silicon Valley tech culture on Twitter and in the tech media is filtered through an elite bubble. VC and tech culture’s insularity has historically served to systematically lock out talented people who aren’t well-connected and don’t fit into popular pre-conceived patterns. It favors demographic and class proximity over merit. There is and never was any general “pay it forward” culture prevalent in the Bay Area, not for the un-networked, not for most people who live there.
The fact that some folks who consider themselves outsiders claw their way to successful careers does not change the every-day reality for most, that structural barriers and biases work to unjustly lock out many other deserving investors, employees and entrepreneurs from reaching their potentials.
Despite the prevailing narrative of meritocracy, who you know, who your parents are, and where you went to school continues to play such a large role in life outcomes that eighth-graders can accurately predict the career trajectories of their classmates. It does not change the fact that one can grow up yards away from the epicenter of innovation and still be seen as an outsider.
The truth is, success in our industry often isn’t a matter of merit at all, it’s a matter of network. To achieve our industry’s highest ideals and reach our greatest financial potential, we must work to dismantle these unjust network-based structures— and we can start by eliminating introduction requirements.
What is a warm introduction?
Imagine you are the first-time founder of an early-stage startup and need capital to scale. You begin to research a few VC firms that seem to fit with your company’s goals and values. But when you go to firm websites, you are met with spartan pages that reveal little information about the investors, nor a clear way to contact them. Nevertheless, you find a few email addresses from web searches. Days after sending your messages you have gotten no responses.
Why are so many VC investors secretive and non-responsive to the very entrepreneurs they purport to want to partner with and support? Why do the hottest VC job openings almost never come into public view?
The answer is frustratingly simple — many VCs continue to adhere to a legacy practice that requires the non-networked, including founders and other investors, to find someone the VC knows and trusts, and convince that third-party to refer you to the VC before the VC will respond. These third-party, network-driven referrals are known as “warm introductions.”
Venture Capital funds must abandon their warm introduction requirements not just because they are anti-meritocratic, but because they are damaging to financial returns. If the VC industry is to shake its record of asset class underperformance, the antiquated practice must end.[1] All VCs should use this necessary restructuring of their fund’s sourcing and hiring processes as an opportunity to reconceptualize the methods and systems we use to identify and support innovators. If we don’t act now, we risk further damage to the asset class.
1. Warm introductions are antithetical to the nature of venture
Venture Capital: capital invested in a project in which there is a substantial element of risk, typically a new or expanding business.
Pathbreaking and boundary pushing, even the name “venture” denotes progress through risk-taking. Venture is designed to be the asset class where investors empower founders to build the future by placing bets on ideas traditional investors deem too risky. However, VCs too often engage in risk-averse behavior that stands in direct opposition to the spirit of the asset class.
Warm introduction requirements damage fund returns
“Venture capital is not even a home-run business. It’s a grand-slam business.” —Bill Gurley
Warm introduction requirements may make sense in other industries, but not in venture, because venture is all about finding outliers. We can run a direct through-line between warm introductions and the recent financial underperformance of the asset class because warm introductions reduce an investor’s chance of finding outlier companies.
Introductions and vouching work in situations involving normal distributions. If you need a referral to someone to repair your windshield, for example, the difference between being sent to someone in the 80th percentile of window fixing skill and someone in the 99th percentile is likely to be small — you’ll probably get your window fixed either way.
Startups are much different, they follow power-law distributions. This means a “great” investment you made might perform 100 or 1000 (or more) times better than a “good” investment. In the world of venture investing, the difference between a good company and an excellent company can be the difference between a fund’s success and failure.[2]
Warm introductions and “pattern matching” combine to create a toxic mix. Using the demographic traits of previous successful founders to try and predict which new companies will perform best sits in opposition to the spirit of venture because, definitionally, the outliers of the future are less likely to look like the ones of the past.
What risk-averse early-stage investors fail to understand is that VCs are tasked and rewarded for finding the pattern-breakers, the outliers and exceptions to the rule. Focusing on patterns and networks makes it more likely that an investor will miss a true disruptor.
a. Dots not lines?
The idea that potential investments should be sourced from a small circle of trusted individuals within a VC’s network, like much of VC orthodoxy, falls prey to “linearity bias.”[3] A strategy of ignoring or deprioritizing non-networked deals might guard against a VC encountering and expending energy on the least promising companies, but since a small percentage of investments generate most of venture returns, “Venture investing is all about investing in massive winners, not optimizing for failure rate.”[4]
The observation that networks produce stronger dealflow on average can lead investors to over-rely on in-network deal sourcing, eliminating downside risk but also making it harder to produce outsized returns:
“It’s like putting a governor on your engine that stops the car from going over fifty-five; you’re far less likely to get into a lethal crash, but you won’t be setting any land speed records either.”[5]
Supporters of the warm introduction requirement argue that introductions from known and trusted sources such as investors and founders the fund has previously worked with leads to greater returns. However, research suggests the opposite, that deeper venture relationships lead to lower exit returns and are likely to damage relationships over time.[6] In fact, it looks to be the breadth, not the depth of investor relationships that leads to better network position and higher fund returns. The ability to make introductions has little effect on a fund’s network position—it’s the demonstration of skill in the selection of companies that makes others want to co-invest.[7]
b. Network-driven sourcing models fail to capture new markets
Perhaps when VC was a cottage industry, dominated by a small region of the U.S., and tech networks were similarly small, the industry could sustain a dealflow model built on personal networks. But as strong companies begin to populate outside of the valley, and entrepreneurs become more diverse in terms of identity, socio-economic status, and educational background, solely or mainly relying on personal networks for dealflow becomes increasingly unsustainable because the best founders will be increasingly less likely to already be in VC networks.
As Aaron Holiday, GP of 645 Ventures notes:
“(T)op venture capitalists must become more sophisticated at filtering and partnering with the best founders …in the (series A) gulf — a process that is imperfect if it only relies on human intelligence and personal networks as sources of the information. Traditional methods of deal sourcing and vetting simply cannot scale to sufficiently evaluate the rapid experimentation that is occurring…”[8]
c. VC network homogeneity contributes to asset class underperformance
The unsustainability of introduction-driven dealflow is exacerbated by the fact that VCs are an incredibly homogenous group. Not only do VCs tend to share the same demographic and socio-economic backgrounds, 40 percent of all VCs went to just two schools.[9]
VC managers’ inability or unwillingness to diversify their hiring pipelines leads to significant overlap in investor networks. Network overlap, combined with networked-based sourcing increases competition for a small subset of insider deals, driving up their valuations. Sure, your fund may have access to Stanford’s network, but so does nearly every other fund—there’s no real differentiation.
Fund managers must begin asking what additional utility lies in hiring yet another demographically homogeneous Stanford/Harvard MBA. Limited Partners must begin to ask if continuing to double-down on the same homogenous fund manager profile will yield acceptable returns as the number of VC funds rises, but investor diversity lags. Founders should begin to question the ability of homogenous teams to add maximum value as technology makes information, contacts and resources more diffuse.
If networks are important at all, then access to differentiated networks should be a main focus of network-driven sourcing and investment team hiring.
2. Warm Introductions outsource judgment to others, leading to herd-driven, suboptimal investment decisions.
“In an age of infinite leverage, judgment becomes the most important skill.” — Naval Ravikant
VCs hold themselves out to be independent, contrarian thinkers, but the industry is dominated by group think and FOMO (fear of missing out). It’s not uncommon for an investor to ask “who is leading,” or “who else is in the round” to a fundraising founder.[10] VCs closely watch for “signals” from other investors to determine which markets and investments to pursue [11]
Partnering with strong investors is often an important piece of an effective investment strategy, especially in cases where the investment partner possesses specialized knowledge, but being able to independently “pick” investments and markets holds greater importance to fund success because independent conviction guards against investors’ value-destroying tendency to follow others into “hot” markets.[12]
VC needs leaders, not followers
Following increases a fund’s likelihood of failure. Research from the Stanford University Graduate School of Business shows that when VCs use others’ investments as keys to determine which markets to pursue, the companies in which they invest suffer “harm” with in the form of market viability, investment and likelihood of IPO.[12] It’s counterintuitively the businesses started by “non-consensus entrepreneurs,” those who refuse to follow fads, and are more likely to enter “tainted” markets that produce superior investment outcomes.
Think about it, non-consensus entrepreneurs are nearly definitionally less likely to be strongly recommended via networks because of their overrepresentation in disfavored markets and their unconventional natures. Other investors are less likely to identify these founders and companies as “good investments,” presenting the perfect arbitrage opportunity for any fund equipped to recognize it. It is the investor’s job to create processes that identify outlier founders. Outsourcing outlier identification to your network amounts to investor malpractice.
Since most VC networks overlap significantly, outsourcing outlier identification to your network makes dealflow more consensus. Since market consensus has been proven to produce suboptimal investment outcomes, networked-based sourcing practices like warm introduction requirements are particularly poor deal filtering mechanisms.[13] VCs must begin to experiment with differentiated strategies better tailored to finding outliers if they are to reap the gains of non-consensus thinking.
3. Popular arguments in favor of warm introduction requirements no longer reflect market realities
Proponents of the warm introduction requirement argue that warm intros serve an important purpose as a test of founder sales and hiring ability. As Marc Andreessen, co-founder and general partner of Andreessen Horowitz puts it:
“(I)f you can’t pass the test, The Test, to get a warm inbound referral into a venture firm, then what that indicates is, you are gonna have a hell of a time as an entrepreneur. You are gonna hate being an entrepreneur because guess what you have to do, once you raise money. (W)e’re the easy part of the process. The pain specifically is trying to get people to work for you…to try to get a customer to buy a product, … and so to actually sell something to somebody.” [14]
But Marc’s argument must be reconsidered as it runs counter to both formal logic and present-day market realities:
a. Warm introductions are not indicative of founder ability
Marc’s argument assumes that acquiring warm introductions and salesmanship are equivalent skillsets. However, the skills needed to sell products into large markets are often irrelevant to, or stand in opposition to, the ability to obtain warm introductions.
While customer introductions play some role in modern sales processes, in the consumer segment, and increasingly in B2B, the main channels of new customers acquisition, the way most prospective customers are turned from “cold” to “warm,” are cold outbound and broad-based marketing.
Marc actually recognizes this market shift, and explains a few reasons why this is the case:
“The good news is that markets are bigger than ever. There are more consumers on the internet than ever before. There are more businesses that use software than ever before. There are more sectors of the economy where this stuff all matters. … But that means that the challenge of building an organization, a model, and a distribution capability that can actually get the product to all the customers is an intense challenge.”[15]
So if investors seek to test a founder’s ability to take a market, they should select for the the skills best suited to tackle the “new,” “intense” challenges posed by a growing economy. That is, the ability to access and distribute to large, diverse markets, not closed, insular networks.[16]
The skills Andreessen sees as integral to taking new markets all involve scale. Personal networking ability of the type Marc advocates testing for no longer measures what is relevant to taking markets because obtaining a good referral from one person within a niche network tells us very little about a person’s ability to build and scale an organization that reaches the masses. If VCs see it fit to test founders, they should at the very least test what matters.
Warm introduction requirements may counterintuitively select for less talented founders.
Additionally, warm introduction requirements lead to VCs’ unduly privileging founders who naturally sit close to VC networks. The closer a founder’s existing connections to a VC’s network, the less “work” the founder has to do to secure an introduction. For connected founders, there is literally no “ability” to test.
If VCs think that being connected to VC networks is such an advantage that they are willing to pass over all founders who are not, they should say that, not hide behind a nonsensical argument about “skill.” As it stands, privileging networked founders over non-networked ones runs a high risk of benefiting non-talented insiders over talented outsiders.
b. Non-networked companies can be proprietary
VCs are obsessed with the idea of gaining “proprietary dealflow,” yet reject some of the most easily implementable methods to expand and diversify dealflow pipelines. They argue that cold inbound is definitionally non-proprietary because everyone sees non-networked companies. That’s clearly not the case since most funds don’t accept cold inbound and therefore don’t “see” anything in that domain. Most importantly, their argument fails to conceptualize inbound dealflow sourcing and filtering processes as themselves powerful fund differentiators and branding opportunities.
c. Moving from a network-based inbound filtering system to non-network-based systems does not require all VCs to move to the same alternate system.
A popular argument in favor of warm introduction requirements is that VCs are strapped for time and cannot evaluate all the cold inbound they receive. They must therefore leverage their networks for dealflow. This argument presents a false choice. Although embracing cold inbound will likely increase a fund’s chances of finding outlier companies, cold email and warm intros are not the only sourcing options available to VCs.
Reconceptualizing the way that VCs obtain inbound allows funds to tailor their processes to better select for the skills fund managers think fundamental to company success in a given market. VCs can still leverage their networks for dealflow without privileging network-sourced inbound.
A deep-tech or crypto fund looking for highly technical domain experts could, for instance, open their applications only to founders who solve a complex cryptographic challenge. The problem is the one-size-fits-all, network-based process as currently constituted. It fails at providing true fund differentiation.
4. Warm introductions are anti-founder
“Founders and founding moments are very important in determining what comes next for a given business. If you focus on the founding and get it right, you have a chance. If you don’t, you’ll be lucky at best, and probably not even that.” — Peter Thiel
a. Warm introduction requirements are a massive waste of founder time.
Forcing founders to navigate opaque VC networks takes founder attention away from the important job of building a company at the most critical time in the company’s lifecycle.
Investors might not think obtaining one introduction is particularly onerous in isolation, but that’s because they fail to think about the issue systematically.
The Y Combinator Model
Recognizing that there are more investors in the world than the investment team could possibly meet, the folks at Y-combinator built an investor portal to track their batches’ Series A fundraises. The portal allowed investors the ability to request meetings with startups under the logic that the investors would do a better job at identifying which companies they would like to talk to than YC could.[16]
The results of the experiment surprised the YC team. Not only did the software create more investor-startup matches than the team could have facilitated otherwise, the results highlighted just how daunting a process startup fundraising could be.
“ On average, the companies that raised As had 30 coffee meetings with individual investors. 50% of these meetings led to pitches to individual partners. About 30% of partner pitches led to full partnership pitches. On average, 1 of every 5 partnership meetings produced a term sheet.”
While the outcome was unexpected for the folks at YC, it probably wouldn’t come as a surprise to most early-stage founders. The average seed-stage fundraising process can take 8–12 weeks even for strong companies.[17] Since most venture capitalists invest in a limited number of companies out of each fund, even exceptionally strong founders are likely to hear no much more often than they hear yes.
The fact that fundraising is unexpectedly difficult for series A companies from elite accelerators highlights the hurdles earlier stage, non-networked founders face. The fundraising “marathon” is inefficient. Investors should follow YC’s example and streamline fundraising by experimenting with more efficient methods to source and evaluate startups.
Requiring entrepreneurs to possibly have to find warm introductions to each new investor with whom they speak is an unreasonable ask that unnecessarily adds time to an already time-intensive process.
Claire Coder, Founder and CEO of the TechStars and Harlem Capital backed Aunt Flow needed 101 investor meetings to fill her company’s seed round.[18] Even if a founder is networked, introduction requirements serve as an annoying distraction to both company building and true relationship development. The time burden is increased when the founder is non-networked and has more social distance to cover.
Improving the fundraising process will help asset class performance
Innovation in deal sourcing strategy and investor matching is needed to improve startup ecosystem health. As Y-combinator shows, the more funds a company can connect with, the greater chance of successfully raising. If the industry as a whole begins experimenting with technological solutions like YC’s more efficient investor-startup matching algorithm, not only will VCs gain access to new dealflow pipelines, but the odds that their own portfolio companies will successfully raise investment from other funds will increase.
5. Warm introductions contribute to negative perceptions of venture
“I think we should, as investors, take seriously our role in driving some of these destabilizing forces in society…(a)s one of the controllers of capital, I’m raising my hand and saying, ‘Wait a minute, let’s really think about this.” — Rukaiyah Adams, chief investment officer at Meyer Memorial Trust [19]
The venture capital industry has a perception problem. The problem stems both from serious allegations of VC malfeasance, and a more general feeling that a growth at all costs mindset has opened a rift between investors and founders. Processes such as warm introductions contribute to the negative perception of VC by startup founders, media and other potential partners.
Warm introductions have an outsized influence on the VC-founder relationship because being forced to navigate VC networks is often the first interaction new founders have with the investment process. First impressions are important and prime subsequent interactions, setting the tone for the business relationship moving forward.
If the process of raising VC is excessively difficult, and VCs continue to be seen as arrogant and misaligned, strong founders may more readily consider alternative funding options such as equity financing and bootstrapping.
b. VCs are hypocritical
VCs are hypocrites. Funds regularly task their junior investors with cold calling and cold emailing founders, yet reject those same forms of cold inbound from founders. Investors like Harry Stebbings, host of the popular podcast The Twenty Minute VC, has embraced both the cold inbound and outbound email:
“I do my work, make the email concise, relevant and precise and email founders. Delighted for founders to do the same!”
Surely if VCs are going to forego introductions to founders, they should allow some process for founders to access funds without introductions.
Founders want to be respected and treated as equals. Founder-friendly process changes, like the elimination of introduction-based sourcing will help repair some of the negative perceptions VCs have engendered over the years, attracting strong entrepreneurs who may otherwise pursue alternate forms of financing.
6. Introduction based sourcing and hiring perpetuates exclusion and lowers fund returns
“Some VCs have been on the record saying if you’re not smart enough to get a warm intro then I don’t want to see you. Warm intros have nothing to do w/smarts they have everything to do w/zip code” — Freada Kapor Klein [20]
The tech community prides itself on being a meritocracy, but warm introduction requirements are a shockingly anti-meritocratic practice. Multiple studies have shown that both investment team diversity and company management team diversity, in terms of ethnicity, gender, and school attendance, improves fund investment returns and company revenue. Despite the evidence, VCs continue to hire and source from their homogenous networks. [21][22][23]
a. Diverse investment teams significantly improve fund performance
The lack of investor diversity has severely deleterious effects on investment returns. A study from Harvard University found that VC investors tend to work with other VCs who possess similar characteristics in terms of ethnicity, educational background, and employment history “regardless of whether the similarities (are) ability-based or affinity-based,” and, “the more affinity there is between two VCs who co-invest in a new company, the less likely it is that the company will succeed.”[24]
These effects are significant. For example, fund partners who were members of the same ethnic group were 20 percent less successful than investors with different ethnic backgrounds.” [25]
Since investor networks are homogenous, funds that use network-based hiring and partnering mechanisms like warm introductions reduce their chances of hiring and partnering with the very people that are best situated to improve their investment performance.
b. Lack of investor diversity leads to lack of founder diversity for cultural reasons, not financial ones
Only 8% of VCs are women, 2% are Hispanic, and fewer than 1% are black. VCs are also non-diverse in terms of school attended, socio-economic background, gender identity and sexual orientation. Not surprisingly, the founders that investors back are similarly non-diverse. For example, only 2 percent of investment dollars go to women founded companies, and even less, .002 percent, goes to companies founded by black women. [26]
Diversity focused investment strategies have beaten the market
Kapor Capital, an Oakland, California based fund that “invests in tech-driven early stage companies committed to closing gaps of access, opportunity or outcome for low income communities and/or communities of color in the United States,” released their annual report showing they had significantly outperformed TVPI benchmarks both in terms of Internal Rate of Return (IRR) and Total Value to Paid In (TVPI) Multiple.[27]
Cross Culture Ventures, a $50 million LA fund focused on investing in global culture and emerging trends amassed “three exits and seen the paper value of the fund’s portfolio grow by an aggregate of 2,085 percent” with “a portfolio where 72 percent of the founders are white women and women and men of color.”[28]
Given the strong evidence that diversity improves fund returns, fund managers who resist incorporating diversity into their investment strategies and investment team hiring processes are likely leaving LP money on the table. LPs, founders, and investors must begin to ask if these fund managers are either consciously of subconsciously prioritizing their personal comfort over returns.
b. Non-diverse investment teams are ill-equipped to evaluate diverse founders and markets
In their Medium post entitled “Venture Capital Blind Spots,” Aaron Holiday and Nnamdi Okeke, Partners at 645 Ventures highlight the tendency for investors to gravitate towards founders who share identity characteristics [29]:
“VCs may subconsciously be looking for founders who share similarities with themselves and may not be able to effectively assess founders who have exceptional but different qualities.”
Investors also tend to back companies that serve their own markets and solve their own problems. This investment approach, if unchecked, may harm investment returns because many of the largest, most valuable investment opportunities now sit outside of investor markets as a result of the rapid globalization and diversification of markets. A non-diverse investment team is more likely to misunderstand and devalue opportunities that fall outside of their own markets, leaving potential returns on the table.
“Most of the things that are coming out of the Valley these days are meant to be used by people in the Valley as opposed to people in the Bronx, or Queens or Baltimore.” “This is the time to be here. If you are going to invest in the companies of tomorrow you have to go where the world is moving to …”—Marlon Nichols
Take the story of Stitch Fix. 30 investors, mostly male, passed on the female-founded company due to either underestimating the market, or not being able to get personally “excited” about the opportunity.[30] The company went on to IPO, providing sizable returns for the investors who understood the market.
VCs must recognize the danger in assuming that they are the market. The less diverse an investment team, the more susceptible the team is to undervaluing diverse markets. Warm introduction requirements are a particularly poor filtering mechanism for founders who serve diverse markets because founder proximity to investor networks may not only have no bearing on a founder’s ability to capture an unrelated market, it may be a negative signal. The greater the divergence between the investor-market and the founder’s market, the greater the distance there may be between that founder and the VC’s network.
The funds best equipped to recognize and appropriately evaluate diverse founders and markets, and therefore win the future of global markets are those with more diverse partnerships and team members. Diverse teams are more likely to belong to different networks than traditional investors and have a higher likelihood of being situated closer the networks of diverse entrepreneurs.
Warm introductions disadvantage diverse founders and potential VC hires because diverse people tend to sit further away from traditional VC networks for sociological and historical reasons, not merit-based ones.
Founders and investors who sit further from traditional investor networks, often must exert extra effort to access these investors. Not only is the traditional warm introduction process ill-equipped to capture this extra effort, when diverse founders are afforded the opportunity to pitch to fund managers, there is evidence to suggest they are evaluated more harshly.[31]
c. A roadmap to reducing identity-based errors
“I can be tricked by anyone who looks like Mark Zuckerberg. There was a guy once who we funded who was terrible. I said: ‘How could he be bad? He looks like Zuckerberg!’” — Paul Graham
The people at 645 Ventures have given investors a roadmap to reducing identity-based errors when evaluating diverse founders:
Since predictors of founder success are often contingent and ever-changing based on a variety of shifting market and non-market factors, investors must approach founding team evaluation with an “open mind,” or “beginner’s mind.”
I add to this point by noting that warm introduction requirements fail this 645 test, because they begin with a “closed” mind—assuming networking acumen to be the most effective method of founder evaluation in most circumstances, with little evidence or experimentation with alternate systems.
A diverse investment team should be table stakes for new funds entering the market given the significant advantage diverse teams possess in evaluating founders over homogenous teams. When evaluating new funds, LPs must price in investor homogeneity as the investment risk that it is, and apply additional pressure on the managers in their portfolios to diversify existing VC investment teams. The industry must also work harder to build pipelines of diverse emerging managers to take the reins moving forward.
Bursting the Silicon Valley bubble
“It’s not about “helping” founders, it’s about fueling an untapped ecosystem so that you may be lucky enough to reap the rewards in years to come.” — Arlan Hamilton
It’s time for VCs to emulate the best attributes of the founders we support by reimagining and reconceptualizing many of the processes we have long thought integral to the industry. The rapidly declining relevance of traditional networks in VC as evidenced by the rise of successful ecosystems in new markets both domestically and internationally, along with an increase in the number of high-quality founders with diverse profiles requires our industry to adapt or lose our dynamism.
VC funds must further experiment on the product of VC, building new, more open processes that leverage our industry’s considerable resources to unlock the potential of outsiders and gain access to new markets and new ways of thinking. Funds can start this journey by eliminating warm introduction requirements.
If you are a founder interested in being connected to the organizations, investors and funds who are at the forefront of this movement, a fund looking to implement processes to source diverse founders and co-investors, or a Limited Partner interested in exploring new ways to support underrepresented emerging managers, feel free to email me at [deljohnsonvc][at]gmail.
No introduction required.
References
[1] https://www.cambridgeassociates.com/research/vantagepoint-first-quarter-2019/
[2] https://angel.co/blog/what-angellist-data-says-about-power-law-returns-in-venture-capital
[3] https://hbr.org/2017/05/linear-thinking-in-a-nonlinear-world
[4] https://medium.com/@645ventures/venture-capital-blind-spots-23381dc9488d
[5] http://money.com/money/4779223/valedictorian-success-research-barking-up-wrong/
[6] https://www.institutionalinvestor.com/article/b1gh9499q3nhhb/Close-Ties-in-VC-Don-t-Pay-Off#.XUCATE7ZkAM.twitter
[7] “Economically, VC firms benefit the most from having a wide range of relationships, especially if these involve other well-networked VC firms” https://www.cis.upenn.edu/~mkearns/teaching/NetworkedLife/VC_networks.pdf
[8] https://techcrunch.com/2015/02/24/software-and-data-are-disrupting-venture-capital-firms/
[9] Richard Kirby, Equal Ventures: https://blog.usejournal.com/where-did-you-go-to-school-bde54d846188
[10] https://elizabethyin.com/2019/05/17/15-annoying-things-that-vcs-say-or-ask-and-how-to-think-about-them/
[11] https://bothsidesofthetable.com/understanding-the-risks-of-vc-signaling-37dff617306f
[12] https://www.gsb.stanford.edu/sites/gsb/files/publication-pdf/nonconsensus_entrepreneur.pdf. Non-consensus entrepreneurs are more likely to stay in the market, receive funding, and ultimately go public
[13] While some VC funds attempt to supplement their introduction-based processes with outbound strategies such as content and events marketing , these supplements prove insufficient because most funds ultimately require warm introductions from the founders they source.[23]
[14] https://a16z.com/2019/03/12/hallucination-vision-scenius-networks-selling-using-making-art-brian-koppelman-marc-andreessen/
[15]https://a16z.com/2018/07/20/after-product-market-fit-marc-andreessen-elad-gil/
[16] https://blog.ycombinator.com/investor-funnels-for-series-as/
[17] According to David Finkle of Founder Collective.
[18] https://www.linkedin.com/pulse/86-meetings-close-15mm-claire-coder/
[19] https://www.nytimes.com/2019/01/11/technology/start-ups-rejecting-venture-capital.html
[20] https://ecorner.stanford.edu/podcast/freada-kapor-klein-kapor-capital-closing-techs-diversity-gap/
[21] https://hbr.org/2016/02/study-firms-with-more-women-in-the-c-suite-are-more-profitable
[22] https://hbr.org/2018/07/the-other-diversity-dividend
[23] Studies also show that relatively older entrepreneurs outperform younger ones, despite VC bias towards young founders.
[24] https://hbswk.hbs.edu/item/in-venture-capital-birds-of-a-feather-lose-money-together
[25] https://hbswk.hbs.edu/item/diversity-boosts-profits-in-venture-capital-firms
[26]https://www.fastcompany.com/90214465/the-state-of-black-women-getting-funding-in-2018
[27]https://impact.kaporcapital.com/
[28] https://techcrunch.com/2019/04/12/a-focus-on-diversity-reaps-rewards-for-this-los-angeles-investor/
[29] https://medium.com/@645ventures/venture-capital-blind-spots-23381dc9488d
[29]http://cdixon.org/2015/06/07/the-babe-ruth-effect-in-venture-capital/
[30] https://www.npr.org/2018/06/07/598302861/stitch-fix-katrina-lake via https://medium.com/@645ventures/venture-capital-blind-spots-23381dc9488d
About
Del Johnson is a venture capital investor, speaker, and writer. Prior to joining VC, Del worked with the People Operations team at Google creating the first successful initiative to source and hire underrepresented software engineering talent from coding bootcamps. He was also an award-winning B2B account manager at Oracle. Del holds a Bachelors degree from the University of California, Berkeley and received his Juris Doctorate from Columbia Law School. You can find @deljohnsonvc on Twitter and LinkedIn
- Special thanks to Geri Kirilova, Elizabeth Yin, Justin Gage and David Goldberg.
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