The Nature of Warm Introductions

Securing investor attention in the competitive world of fundraising is no easy feat. This is where warm introductions come in, serving as a crucial tool in navigating this challenging process. But how exactly do they work?

Search the internet for advice on fundraising for a high-potential startup, and you will inevitably run across the recommendation to get a “warm introduction” to potential investors of interest.

Why Getting Investor Attention is Hard

For anyone with money to invest, the sheer volume of people seeking to raise money from them is practically overwhelming. That means breaking out of the noise to get busy investor’s attention is hard. For a moment, think about why that might be:

• “Typical” angel investors are high-net-worth individuals who often do angel investing as a side project to other priorities such as running a business of their own, serving on Boards, traveling, engaging in non-profit organizations, spending time with their families, and other pursuits. The bottom line is that angels are often not spending their full-time effort trying to deploy capital, so they frequently like to leverage their trusted networks, angel groups they may be part of, and other resources to screen potentially interesting deals for them so they can spend the bulk of their time on other things.
  
  
• Venture capitalists are devoting their full-time efforts to screening potential deals, investing in startups, and supporting their existing portfolio companies as well as their own fundraising efforts. However, they are still super busy with travel, investment screening and due diligence meetings, and other commitments such as portfolio management, portfolio company governance and support, and their own investor relationship management. Because VC firms have websites, they are relatively easy to find, which means they get spammed by a zillion requests.

The reality of the fundraising market is such that only a tiny percentage of investor-to-startup connections will result in an investment. The vast majority will be mis-matches, so investors try to streamline their workload by leveraging others as “screeners.” 

Why Do Warm Introductions Help in Fundraising

Warm introductions are the manifestation of investors using trusted screeners to sift through the clamor of people vying for their attention. Because investors use this technique in search of efficiently finding good deals to invest their limited high-risk capital in, cold out-of-the-blue approaches rarely work to get the attention of those in control of money.

• Within VC firms, screening the “cold inbound approaches” is often delegated to the lowest rung of the investing team, and it is hard to get past those gatekeepers who only want to raise truly exciting opportunities to the investment committee partners they are screening for.
  
  
• For angels, ignoring inbound  “Great Opportunity!” emails or calls is often the easiest way to tame the overflowing inbox.

So, what catches the attention and bypasses the automatic ignore barriers of investors? The email, text, or phone outreach that comes from someone they know, respect, and trust. That is a “warm introduction.”

Why Should I (the Investor) Respond to This Introduction?

Again, let us view this from the investor’s perspective. Why should I respond to this outreach amongst the blizzard of communications I am sifting through? Only because it is worth it for me to do so. Here is a representative list of some reasons I (the investor) might decide it is worth it:

• The person who reached out to me is someone I have a valued relationship with. Responding to their introduction conveys that I value my relationship with the person making the introduction.  
  
  
• I am actively looking for opportunities to invest, and the person who reached out to me is known and trusted as someone who knows a good deal when they see it, saving me time and effort in sourcing potentially good deals.
  
  
• The person who reached out to me knows what I am interested in and, hopefully, has identified something that potentially fits within my preferred box. This saves me time and effort.
  
  
• If I respond to this person’s introduction, they are likely to return the favor when I make an introduction to them. This tit-for-tat behavior enhances both of our statuses as ecosystem insiders.

Notice that these reasons are about maintaining the investor’s relationships in the ecosystem and efficiently identifying likely good fits for a potential investment with the minimum screening effort required.

What Increases the Value of a Warm Introduction to an Investor?

As an investor evaluating an incoming warm introduction, there is often a question about how serious and valuable this introduction is. How much weight I may choose to give any particular introduction depends on signals of how knowledgeable and convicted about the investment opportunity the person making the warm introduction is. Signs of knowledge and conviction include:

• Level and type of involvement with the startup being introduced:  Introductions from members of the startup’s Board of Directors, lead investor, or other committed investors carry more weight than someone who only knows them from networking because those who are more involved and have made their own time or money investments are likely to be better screeners. They have tangibly demonstrated their commitment; therefore, their opinion is more valuable.
  
  
• Investors introducing other investors ideally want to be told about co-investment opportunities: There is a big difference between an introduction that starts with “I have decided to invest, and thought you might consider investing alongside me” versus “I have decided to pass, but thought you might be interested anyway.” There is a lot of appeal in being asked to join together with people you like and trust. 

The Cost of Making Warm Introductions

Now, it seems there would be little cost to make warm introductions for others. However, that is not true. Spamming your contacts in the ecosystem with a ton of minimally vetted introductions defeats the reasons for responding listed above. It risks abusing an investor contact’s valuable time, eroding your reputation, and the future value of your introductions. As a result, those with valuable warm introductions to give become choosy about when they make them.

Action Tips for Getting Warm Introductions

When we are fundraising, we want all the help we can get! However, a solid understanding of the dynamics of warm introductions will help you realize when to ask for one and when it is unlikely to bear fruit. Here are some tips:

• Ask for introductions from those who know you and your company well, have invested in your current round, and are otherwise in a position of credible knowledge and their own commitment to make the introduction. This puts a premium on finding that lead investor who is well-positioned in the fundraising ecosystem since their willingness to put terms on the table and make further introductions can be pivotal to successfully closing a round.
  
  
• When someone passes but gives the softener of “let me know if there is some way to be helpful anyway,” recognize that their decision to pass dilutes the value of any further introductions they might make unless you are clearly outside the scope of their investment thesis (which raises the different question of why you were talking to them in the first place, but sometimes there is a good answer to that…). You can follow up on any introductions resulting from this, but keep your expectations low.
  
  
• Succinctly tell your story from an investor’s point of view if someone asks for a blurb or materials to share with the one they might introduce you to. This may be your only touch, and you want to make it easy for the one making the introduction to tell the highlights of your story accurately. Also, while the downside is that you do not get to make your pitch directly, the upside is that if the person is not in the market for investing, this saves you precious time.
  
  
• Remember that your goal is to create an exciting investment opportunity because people are happy to jump in and share exciting deals. A warm introduction can get you a brief introductory meeting, but what you share in that meeting has to generate enough excitement for the potential investor to dig in. Often, that initial meeting is a favor to the one who made the introduction rather than a true expression of genuine interest, so the request for follow-up conversations is the real indicator of interest. If they pass on hearing more, remember that a fast “no” saves you time and is the second best thing to a “yes.”

Warm introductions are powerful because they take advantage of multiple smart investors’ screening opportunities for each other and help startups break through the noise in the fundraising market. However, harnessing that power depends on being careful and selective about who introduces who based on the abovementioned dynamics.