Venture capitalists rarely find their deals in the inbox. In a survey of 885 of them, Gompers, Gornall, Kaplan and Strebulaev (2020) found that more than 30% of deals came through professional networks, 20% were referred by other investors and 8% came from existing portfolio companies. Only about 10% arrived inbound from the company. Buyout investors also value deals that don’t come through an open process, describing almost half of their closed deals as proprietary in some way (Gompers, Kaplan and Mukharlyamov, 2016).
Hiring shows something similar. Burks, Cowgill, Hoffman and Housman (2015) studied nine large employers in call centres, trucking and high-tech, and found that referred candidates were more likely to be hired and to accept offers than applicants with similar skills, and were substantially less likely to quit. What a referral adds is someone who knows both sides vouching for the fit.
That vouching is most of the value of an introduction, and it is easy to spend. Anyone can build a list of relevant companies in an afternoon. Most of the people on it are not ready, cannot decide or are not looking, and each introduction to one of them makes the next a little less believable.
Studying placement agents in US venture capital fundraising, Rider (2009) found that the more reputable agents tended to represent funds raised by larger, more experienced and better-regarded firms. We expect to be judged the same way, on who we put forward.
So before two parties meet, we check four things. None of them is complicated, but each takes time.
Fit, in writing
The brief comes first, and it is written down. It sets out what fits, what doesn’t and who has the authority to act, and we don’t loosen it halfway through to make the numbers look better.
For Regent Peak Wealth Advisors, an independent advisory firm in Atlanta, fit meant reading the market through the clients the firm is already set up to advise: business owners, executives, families and trustees with significant wealth and the authority to make their own decisions. Wealth on its own was too broad. Six qualified introductions followed in 46 days, all inside that profile.
A need that exists now
Lots of companies might need something next year. That is not a reason to introduce them.
A healthcare network in Texas, running more than 60 clinics and four pharmacies, could not get enough of several medications from its existing supplier. It needed around 400 bottles a month and was ready to talk to a qualified supplier within 24 hours. It had a volume, a timescale and someone ready to talk, which is what we mean by a live need.
Someone who can say yes, on each side
The person we speak to has to be able to decide, or at least put the decision in front of whoever can. The company we introduce has to be able to deliver. Before connecting Advanced Medical Sales with the Texas network, we checked that the wholesaler met the network’s distribution, accreditation and regulatory requirements.
Skipping that check would have been quicker. It would also have wasted the buyer’s time if the answer had turned out to be no, and that is the kind of mistake people remember.
A purchase that is still live
Last, the purchase has to be live. Before introducing DGR Systems, a Florida technology company, to the School District of Manatee County, we contacted the district and confirmed that its purchase of 1,510 Wi-Fi 7 access points was still open. However good the fit, there is no point introducing a supplier to a purchase that has already been decided.
After the meeting
Every introduction is followed up and tracked to an outcome. Over time, that record shows which signals held up, which counterparties act and which only talk, and where the next qualified situation is likely to come from. It is slower than sending names, but it is what keeps both sides taking our calls.
On either end of an introduction
When someone offers to introduce you, ask what they have actually confirmed: the need, the timing and who decides. If they can’t say, treat it as a lead.
If you are paying for introductions, put the fit and bad-fit criteria in writing at the start and judge the work on qualified meetings, not volume.
References
- Burks, S.V., Cowgill, B., Hoffman, M. and Housman, M. (2015) ‘The value of hiring through employee referrals’, Quarterly Journal of Economics, 130(2), pp. 805-839.
- Gompers, P., Gornall, W., Kaplan, S.N. and Strebulaev, I.A. (2020) ‘How do venture capitalists make decisions?’, Journal of Financial Economics, 135(1), pp. 169-190.
- Gompers, P., Kaplan, S.N. and Mukharlyamov, V. (2016) ‘What do private equity firms say they do?’, Journal of Financial Economics, 121(3), pp. 449-476.
- Rider, C.I. (2009) ‘Constraints on the control benefits of brokerage: a study of placement agents in U.S. venture capital fundraising’, Administrative Science Quarterly, 54(4), pp. 575-601.
Client examples are from engagements run in partnership with myoProcess.
General commentary only, not investment, legal or tax advice.