What impact does an entrepreneur's network have on capital raising success? originally appeared on Quora - the place to gain and share knowledge, empowering people to learn from others and better understand the world. 

Answer by Bonnie Foley-Wong, CEO Pique Ventures, Pique Fund, author Integrated Investing, on Quora:

Whether it's private venture capital or institutional finance, relationships and network matter.

Anecdotally, sourcing capital for hard-to-finance early-stage businesses is possible when we have a network of potential investors that know us and trust us, that we can turn to quickly and socialize the idea. Early-stage businesses and turnaround situations are risky and investors are unwilling to part with their capital, unless they know it's going to be in good, safe hands, that have the know-how to reduce the risk of the situation and generate a return on investment.

Beyond anecdotes and personal experience, researchers found that better-networked VC firms and portfolio companies of better-networked VCs perform better. This goes beyond the context of raising capital and looks at the financial performance and success of VC firms and ventures. Researchers found that "In short, many VCs show a preference for networks rather than arm's-length, spot-market transactions."[1]

A number of different factors matter when it comes to the impact of network on capital raising:

  1. Having potential investor(s) in your network gives you a place to start, but there is no guarantee that they'll invest.
  2. Experience combined with business acumen, an idea, vision, and ability to convince people that you can navigate the risk facing your venture is a starting point for building your network (from scratch or building upon your existing network).
  3. Social capital amplifies financial capital. Someone who is willing to invest their money AND their own network, influence, and reputation is very valuable and amplifies the capital they put, attracts more capital and attention. Capital (social + financial) begets capital.
  4. You have to be willing to ask your network. I am as guilty of this as the next person. You never know who is in your existing network. You only find out by sharing your vision, strategy, and by asking.
  5. Think like an investor when approaching or building your network. You bring something to the table. Approach the potential investors in your network like you're a peer. You're the first and biggest investor in your own business and invite others to co-invest alongside you.

Who you know and what you know go hand-in-hand when it comes to starting a venture and ensuring it is properly capitalized. If you have a good network, do your homework, make sure you know what you're talking about, gain experience, and give investors the confidence to invest in you and your venture. If you have experience, socialize your ideas, meet people before you need to meet them, and grow your network to be what you want it to be.

Footnotes

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Published on: Dec 12, 2017