I was struck recently by the realization that I no longer discover deals--or even attempt to--anymore. Everything I have done comes via trusted referral.
Although I receive thousands of LInkedin solicitations, cold emails, follow ups from events, and the like, all of that, in the last year or more, has produced literally nothing.
Despite the risk of sounding elitist and aloof, I think it's important to draw attention for entrepreneurs to exactly how essential a good referral is to actually getting things done in the startup industry.
To some degree, I am an extreme case. I run syndicates of influential angels, so my deal flow naturally comes from my members' referrals. Beyond those, they come from referrals from top VC funds we work with regularly, and/or are LPs in, either as a syndicate or through our individual members. Given that we have more than we can handle just from our own members' referrals, it's natural that we wouldn't act on more random opportunities, given the heightened risk of unfamiliarity.
However, I took a straw poll of my friends in the industry and found they all nearly felt the same way: cold outreach on rare occasions works with individual angels, particularly inexperienced ones with less than 20 lifetime portfolio investments, and once in a blue moon you will read a cool blog post about how cold outreach to a major VC led to investment, but these are outliers.
I was even more interested when I broke down my internal data points further, and found that, within the pool of deals from good referrals, I was both unconsciously and consciously putting companies into firm tiers based on the referrer.
With certain exceptional referral partners, particularly those who have brought me multiple A+ deals in the past, the effect was so strong that I was predisposed to fund them even before taking the meeting! While I never fund anything without significant diligence, review, and outreach to experts in the space, I was able to look back and detect an attitude of "I'm planning to fund this if it checks out," as opposed to "prove it to me" nearly from the outset.
My personal data on my own portfolio also showed me why this was the case, and even further reinforced the importance of continuing this strategy--perhaps even heightening it.
When I broke down my top 15 portfolio companies by their current valuation, looking only at those that have raised at minimum a $5m Series A, I found that fully eight of them had come from a VC firm I trusted and/or was a Limited Partner in, four were instances of funding fellow investors in my networks who were doubling as entrepreneurs who had previous major exits on their resume, and two more came from one trusted network I am part of. Only one of the fifteen came from a less clear cut exceptional reference--yet even that one did come from what I would consider a "good referral."
Equally interesting, when I broke down a sampling of 10 of my failed portfolio companies that have shut down since 2014, fully eight were opportunities I invested in alone, without a trusted source introduction, very early on in my career as an investor.
So, as an entrepreneur, if you know you have what it takes and you just have to show the investor so they can help you take the leap, just remember: if you find a not only warm but also exceptional introducer, you will have a much more open ear.