TL;DR Nutshell: If in today’s connected startup ecosystems, with today’s tools and resources, founder CEOs still need their (paid) lawyers to introduce them to investors, there’s a very good chance they can’t build a company. And most investors know that.
- Don’t Ask Your Startup Lawyer for Investor Intros – SHL
- Getting Introductions to Investors – The Ranking Algorithm – Jeff Bussgang
- Nailing Your Investor Intros – Samir Kaji
- First Round 10 Year Project – First Round Capital
Certain law firms I come across love to use the following biz dev pitch: “our firm has close relationships with many investors, and we love helping make intros to them for our clients.” Some have even attempted to institutionalize this into an entire department within their firms.
Sounds great, doesn’t it? Lawyers are constantly interacting with investors, so they must be a great shortcut to getting intros, right? Not so fast.
A paid intro is generally worse than no intro, particularly in today’s ecosystems.
I wrote Don’t Ask Your Startup Lawyer for Investor Intros about a year and a half ago, in which I made the following argument:
- Early-stage investing is at least as much about betting on founders, particularly CEOs, as it is about betting on a particular business.
- Because investors see 100-1000x more companies than they can fund, or even assess, they heavily rely on filters/signals to judge the quality of founding teams.
- The way in which a CEO obtains an investor intro (and from whom) speaks volumes about that CEOs ability to network, persuade, and generally hustle; all of which are extremely important skills for a successful founder CEO.
- There are far more ways, today, to get connected with investors and find true, authentic warm referrals – AngelList, LinkedIn, Twitter, Accelerators, etc. – than there were even 5-10 years ago.
- Therefore, in a world in which there are 100s of possible paths to get introduced to an investor, the fact that your lawyer (someone you are paying) ends up making the intro can send an extremely negative message about the founding team – including that they can’t hustle, can’t convince anyone else in their ecosystem (that they aren’t paying) to introduce them, or both. Samir Kaji emphasizes this last point, about a weak intro making investors think negatively about the founders, in his post.
At the time I published that post, most people providing feedback on it agreed, but I had a few dissenters – generally lawyers arguing that they’ve made successful intros themselves. I don’t doubt that they’re telling the truth, but what was telling is that few could give examples of successful intros in recent years – and my point is very time-contextual. Even five years ago, relationships within startup communities were far more opaque than they are today, and an intro from a lawyer didn’t have nearly the level of negative signaling then that it does now.
But one pattern become obvious that relates to another point I’ve made before:
For a lawyer’s investor intro to not have a negative signal for a particular investor, the lawyer and investor must have a very close relationship, and that means you shouldn’t want that lawyer representing your company in a deal with that investor.
There absolutely are particular lawyers who have very close relationships with particular investors, much more than other lawyers who simply run into those investors on deals and on boards (professional acquaintances). The issue is that those close relationships develop, nine times out of ten, from those lawyers working for those investors. And for reasons that should be obvious (but if they aren’t, read the above post), the last lawyer you want representing your company in a VC deal is the lawyer who is BFFs with the VCs you are negotiating with.
So maybe some lawyers can make a decent intro… but you shouldn’t work with them… which makes it significantly less likely that they’ll make the intro. Life is complicated.
Other founders, particularly well-respected ones and especially those who’ve been funded by an investor, are the best source of referrals. Other well-respected, non-service providers (advisors, accelerators, angels, etc.) are the second best. Anyone you are paying comes dead last.
Jeff Bussgang has a great post on how to ‘rank’ different potential paths to investors – Getting Introductions to Investors – The Ranking Algorithm. His hierarchy makes a lot of sense. And aside from other founders being the best source of referrals, they are absolutely the best source of intel on investors, when you’re diligencing them. If a group of VCs have provided you a term sheet and you aren’t actively (but discreetly) talking with their portfolio founders to understand what working with those VCs is actually like, you’re doing it wrong.
As ecosystems become more transparent, and prospecting tools become more sophisticated, investors may be relying less on referrals anyway.
I found the data reported by First Round Capital in their 10 year Project to be pretty interesting, including the data suggesting that First Round’s referred investments significantly underperformed relative to investments that First Round hunted on their own. Honestly, this isn’t that surprising.
A lot of studies on investor performance emphasize that, while many people get lucky with one or two home-runs, the people who consistently outperform the market are those who actively take a process, data-oriented approach, and try their best to counteract their biases. That doesn’t mean success in VC is about number crunching, but it does mean that if your personal relationships are the main way that you find companies, you’re going to have a lot more sources of bias in your decision-making than someone who takes a broader, but more calculated approach.
In short, we live in a very different world from the one in which VCs sat in their offices relying on proprietary, somewhat opaque deal flow sources. In that world, lawyers were a better source of investor intros. That world no longer exists. Investors fund hustlers, and (today) hustlers don’t need their lawyers to introduce them to investors.