Warm Intros…. A Venture Capital staple that is slowly destroying the industry
For over 4 years we have been using an AI bot, named Wendal, to help us screen and prioritize investment opportunities. Wendal not only helps us manage deal flow and investments with a super small team, but it also provides a fair funding shot to any founder with internet access.
We knew this was a novel concept 4 years ago but we assumed other funds and entrepreneurs would gradually introduce similar concepts that moved from warm introductions and gut-decision making to equal opportunity funding and data-driven decision making. Fast forward 4 years and our investment process is still “cutting-edge” and is frequently met with confusion and disbelief by other investors… which is disappointing for founders and the industry as a whole.
Venture Capital industry relies heavily on warm introductions to source deals and the majority of deals that get funded are through these warm intros… Keeping funding and entrepreneurial opportunities within a small subset of people who typically look, act, and think the same.
The justification for this typically lies in the thought process of if a founder can’t find a way to make a warm intro, then they will struggle as a founder. Here is a quote from Marc Andreeson on this specific topic:
“If you can’t pass the test, The Test, to get a warm inbound referral into a venture firm, then what that indicates is, you are gonna have a hell of a time as an entrepreneur.”
Despite what Marc and other legacy VCs say, this approach is fundamentally flawed and creates barriers for startups and investors alike. Here are a few reasons why warm intros are bad for venture capital and startups:
Limited access
Relying on warm intros limits access to a small network of people who may not be representative of the broader startup ecosystem. This can lead to missed opportunities and a lack of diversity in the startups that receive funding.
Bias
Warm introductions can perpetuate bias in the venture capital industry. Investors may be more likely to invest in startups that come from their own network, even if they are not the best fit for their portfolio. This can lead to missed opportunities for startups that don’t have the “right” connections.
Inefficiency
Relying on warm intros can be an inefficient process. Investors may spend a lot of time networking and building relationships rather than focusing on the data and metrics that really matter.
So, what’s the alternative? Data and AI can provide a more efficient and effective way to source and evaluate startups.
Here are a few reasons why:
Broader access
Data and AI can help investors source deals from a broader pool of startups, including those that may not have the “right” connections.
Objective evaluation
Data and AI can provide an objective evaluation of a startup’s potential based on metrics like revenue, customer acquisition, and market size. This can help investors make more informed decisions and reduce bias in the decision-making process.
Time-saving
Data and AI can save investors time by automating the process of sourcing and evaluating deals. This frees up time to focus on building relationships with portfolio companies and helping them grow.
In conclusion, warm intros may have been the norm in the past, but they are no longer the best way to source and evaluate startups. Data and AI can provide a more efficient and effective alternative that benefits both investors and startups. It’s time for the venture capital industry to embrace the power of technology and use it to drive innovation and growth, because if they don’t we may not fund the right founders and ideas that keep VC as the main growth engine of the economy.
Here’s to hoping we aren’t in the same spot 4 years from now!
Shout out to two recent TechCrunch articles that pushed us to chime in on the conversation!
- Warm intros are awful for diversity, so why do investors keep insisting on them?
And if you are a pre-seed or seed stage startup, we’d love for you to have a quick chat with Wendal.
You can do that here: www.wendal.io/invite/connetic
If you want to know if you are a fit, check our our FAQs here: Our Process — Connetic-Ventures (conneticventures.com)
