Visitors to the “contact” portion of the Web site for First Round Capital, a prominent seed-stage venture capital firm, will find the following strong hint:
“We place a much higher priority on deals that are referred/endorsed by people we know and trust.”
The message is the same from Silicon Valley to the East Coast: If you’re an entrepreneur who wants to meet with a venture capitalist, you’re better off knowing someone they know.
Because venture firms and angels are flooded with business proposals, most advise entrepreneurs to forget attempting to get in over the transom.
“We have accepted cold pitches, but they don't work out as often,” said Jonathon Perrelli, general partner at Fortify.vc in Washington. “Introductions from other people credited with success and knowledge — those have the most weight and those are the ones we give the most credit to up front.”
But for entrepreneurs who aren't well-connected, getting the initial face-time can be a challenge. Research has shown that investors tend to cluster their funds in specific geographic areas and within their own tightly knit networks, making it more difficult for entrepreneurs who don't run in certain circles or live near major cities.
This introduction conundrum is part of what inspired several new companies that aim to make it easier for entrepreneurs to use online networks to reach investors.
If a person is interested in meeting someone in a specific company or industry, for example, a site called Meeteor can mine the user’s Facebook and LinkedIn contacts to find peripheral connections at those companies. The site then asks a common friend to make the introduction.
“Getting an introduction shows the investor you have the ability to hustle,” said Meeteor co-founder Philip Cortes. “If you can’t network into a venture capitalist, then maybe, the thinking goes, you don’t have what it takes. Our algorithms analyze your existing network to get you the warmest introduction possible.”
Introductions are sometimes seen as the “first filter,” a kind of test of a founder’s mettle and cunning. According to the experiences of 48 people interviewed by the Federal Reserve Bank of Boston in 2007, personal networks were the most commonly used strategy among entrepreneurs seeking either angel or initial investment capital funding.
Part of the motivation is to hedge risk. Angels invest their own money, and venture capitalists must provide returns on their investments, so there's little room for a bad bet.
"If they know the person, they are more likely to invest in them," said Patrick FitzGerald, a professor of entrepreneurial management at the Wharton business school at the University of Pennsylvania. "The investor spends so much time with [the entrepreneur]... and so much energy and money. It's much harder if they come out of the blue."
Introductions often take place at conferences, pitch events, incubators or through informal meetings within the venture capitalist’s professional network. When FitzGerald was a 25-year-old in 2002 trying to launch Recyclebank, a site that rewards people for performing environmentally conscientious deeds, he didn’t know any investors. Instead, he talked about his idea constantly — at bars, coffee shops, social events — anywhere there were people. He finally did get funding through a contact he met at a friend’s 2-year-old’s birthday party.
But it can be tough for unknown entrepreneurs to gain access to these funders, particularly if they aren’t in areas that buzz with entrepreneurial activity, such as Silicon Valley, New York or Boston.
“Angels invest almost exclusively in the local area that they're in,” said Candida G. Brush, a professor of entrepreneurship at Babson College in Wellesley, Mass. “They want the opportunity to meet the person face to face.”
Brush's research has shown that being located near angel firms significantly improved the odds of new ventures passing the various stages of the investment process. She’s also found that investors often look to their past colleagues for referrals, but these networks tend to be rather homogeneous (consisting mostly of graduates from just a handful of universities, for example.)
On top of that, the work life of an entrepreneur can be rather solitary — with just a few founders working together in a small office, for example — making it harder to reach out through professional connections.
"They’re not plugged into a physical social framework," FitzGerald said. "It's next to impossible to have water-cooler conversations where one thing leads to another."
Officials at sites like Meeteor think online networks make for a virtual water cooler of sorts. Since the average Facebook user has 130 friends, Cortes views the site as a way to leverage the loose connections with the 16,900 people who are friends of friends (and more, of course, if one has friends who are above-average networkers.)
Granted, start-up founders have for years sought out potential investors by researching them on the career-oriented social network LinkedIn. But Meeteor aims to take the guesswork out of finding the best investor to court by analyzing dimensions like alumni connections, activities and mutual interests.
Meeteor is still adding features and plans to launch publicly in early 2012, but it’s already fostered the occasional success story: The founders of the The New Hive met one of their potential investors, David Pakman at Venrock in New York, using the service .
“I’m in Seattle, and it’s difficult to meet people on the opposite coast,” said Zach Verdin from The New Hive. “I do networking offline as well, but Meeteor opens up opportunities to meet people I might not know I have a mutual connection with.”
Another option is Favo.rs, whose users provide each other with all sorts of digital support, such as re-Tweeting and re-blogging content, offering advice and making introductions. (To ensure reciprocity, users earn points based on how many “favors” they ask for and how many they fulfill, and the selfish are eventually pushed to the outer edges of the network.)
"Our users want to build relationships with people who help them," said Favo.rs co-founder Adam Rodnitzky. He said the service is especially useful for those working on start-ups or other solo endeavors. "Entrepreneurs don't have typical professional network structures — you might meet someone at an event and connect with them on LinkedIn, but in a year you don't remember who they are. On our site, the favors you ask are the fuel that builds relationships."
Favo.rs, which launched in December, has attracted a few influential followers, including the investor Jay Levy at Zelkova Ventures. Rodnitzky also said it's also gained traction with pockets of rural stay-at-home parents looking for guidance as they start their own businesses far from the coastal tech hubs.
It may be too early to tell whether these new online methods will be as effective as old-fashioned hand-squeezing. Rachel Sheinbein, an investor with CMEA Capital in San Francisco, said an e-introduction may not help much if it's from someone in an unrelated field.
"If someone randomly used a social network connection...I don’t know if that would have a lot of real value," Sheinbein said. "It would have to be a source that has some meaning to me." (She noted that her company does review cold pitches more often than some other V.C. firms do.)
What matters, it seems, is who's doing the referring — not how. The success of Meeteor’s and Favo.rs’ introductions may rest on the influence of the sites' users.
"Going through Facebook or e-mail would be as effective as an in-person introduction, but it's weighted based on who's sending," Perelli said. "If it's Don Rainey from [V.C. firm] Grotech, then I'll absolutely talk to that company."
FitzGerald, who worked with Cortes on Meeteor at Wharton’s start-up incubator, thinks the site can bridge the gaps in online networks, depending on how powerful its matching engine gets.
“Mining the data within Facebook contacts is still relatively new,” he said. “When it gets to be more ubiquitous, it will feel more normal to see the message, ‘Our site did the research and it makes sense that you guys should get together.'”
Though online networks can be a way for hopefuls to identify investors, Brush said the investor will also want to visit the start-up's office in person before making a deal, which may bring the geography barrier back into play. She recommends that a new company have a team, a proof of concept and an advisory board before attempting to get angel funding. And despite the online networking tactics that are cropping up, she said sometimes it's best just to get the advisory board to chauffeur you to an angel.