The Tyranny of warm introductions
If you want diversity in your workforce, you can’t rely on employee referrals. So why do many VC’s insist on a ‘warm introduction’?
VC has a problem. Well, it has a few problems, but the one I wanted to focus on is deal-flow filtering. The solution is that most VCs demand (or at least strongly prefer) introductions from people VCs already know. It is a solution, but I don’t think it’s working. It is terrible for diversity. It is frustrating to founders. And it’s bad for the bottom line.
By relying on referrals, what are you optimizing for?
I have a question. By relying on referrals, what are you optimizing for? If you spend a bit of thinking about that question, I bet you’d unearth some uncomfortable unintentional consequences.
I was recently part of the TechCrunch Justice event, where one of the topics explored was how a company can build a more diverse workforce in tech.
One of my biggest take-aways of that discussion was that companies need to take a closer look at their hiring practices. Specifically, it is worth exploring the funnel they use for attracting new customers.
Customer referrals in hiring
If you’ve ever had the experience of getting hired at one of the big tech companies, you’ll remember how it goes. Within a few weeks of you joining the company, an amicable person from HR will take you aside, and ask you to dig deep: Did you recently work with anyone who would be a good fit at the company?
“We’d love to hear from you. The best way to reach us is through someone we mutually know.” — From a VC firm’s website
For many companies, employee referrals are one of the main entry-points for attracting new talent. That’s all good and well until you stop to think who your newest hire is likely to know best. It doesn’t take many rounds through that particular mill until you end up with a relatively homogenous group of people with similar education, similar socioeconomic backgrounds, and similar values.
If that’s what you’re optimizing for, great, well done. If it isn’t — perhaps it’s time to stop and think why this still continues being a common practice.
Warm introductions aren’t working
If you read any guides about startups or raising money, they’ll tell you that you need a ‘warm introduction’ to a VC in order to land a meeting. Given the above parallel with hiring — that’s a problem.
“If you can’t get a warm introduction to a VC then how on Earth are you going to [be successful]”
Let’s put it this way. Even though I’ve spent the past two years deep in the tech space, I recently discovered that if I play by the rules, I can get myself in front of maybe 20 VC firms. That’s problematic for 2 reasons. Most of those VCs don’t invest in the space/market I’m in. More importantly, the thousands of other investors that I can’t reach through warm intros never find out about us.
The tyranny of warm introductions is where the diversity question becomes particularly painful for the VC community. There are some notable exceptions, but from my research, the vast majority of VCs don’t post their email addresses on their websites. Instead, they’ll write “We’d love to hear from you. The best way to reach us is through someone we mutually know.” or “To tell us about what you do, get an intro from one of our portfolio companies.” or “If you can’t get a warm introduction to a VC then how on Earth are you going to [be successful]”.
I get it. VCs are inundated with emails and people pitching companies to them. You have to filter somehow, right? I get that — but at the same time, maybe it’s time to take a good hard look at the collateral damage VCs are inflicting in the process.
Who are you filtering out when you optimize your funnel for people who have access to those types of introduction networks?
In effect, what you’re saying is that unless you know people who know us, we don’t want to talk to you. That doesn’t fly if you are trying to hire a diverse staff. And it probably isn’t going to, either, if you’re trying to fund a diverse group of companies.
How do you filter?
Solve the filtering challenge with technology, not by relying on networks. How? By making submissions easy.
- Clearly state your investment thesis on your website. Include what stage(s) you invest in, what market(s) you target, and what you are looking for in an opportunity.
- Have an open channel for pitch submissions. A web form would be perfect here.
- Get back to founders as quickly as you can. We’re running a marathon at sprint-speed here. I can’t tell you how much rather I’d take a hard ‘no’ over a fluffy “eh, maybe?”
About that web form… That’s your opportunity to leverage technology and filtering (you could even use a bit of AI here, if you wanted to get really fancy). Yes, you will get 1000x more pitches — but you can filter most of them out right away, because they don’t fit your investment thesis.
Filter for location, round size, investment terms, market, founding team, traction, market size, partnerships, customer growth… Whatever you care about. Use the form to automatically reject founders that have companies you per definition wouldn’t be interested in.
Of the remaining inbound requests, get one of your associates to read every submission, and create a tool that makes it easy to give macro-driven responses.
Best of all: If you make it take 5 minutes to fill in the form, founders will start to read your investment theses more carefully. 5 minutes isn’t a huge amount of time to a founder who is doing a targeted pitch to ten investors they want to talk to. But it will drastically decrease the founders taking a spray-and-pray approach.
It’s easy to do, helpful to founders, makes you more approachable, and it means that potentially great opportunities that you otherwise wouldn’t have even seen don’t slip through the net.
Haje is a pitch coach based in Silicon Valley, working with a founders all over the world to create the right starting point for productive conversations with investors — from a compelling narrative to a perfect pitch. You can find out more at Haje.me. You can also find Haje on Twitter and LinkedIn.