Investor referrals

This post is going to be short and sweet.

Entrepreneurs who we decide not to back often request that I introduce them to other investors who may be interested in their business. Sometimes this request comes after a single email exchange, and sometimes after a series of face-to-face meetings after which we decide to not invest in the company.

Independent of the extent to which we engaged with the entrepreneur in the past, I don’t think it’s right for me to refer a company that we’ve decided not to invest in to another investor. The first question I have for such inbound opportunities that I receive from other investors is whether the referring investor is investing in the company, and if they aren’t that creates a big question mark in my mind. If you’re not investing, then why should I? So I don’t take an action which I would question if I were on the receiving end of the same action.

It’s important to point out that this analysis is valid for referral requests from investors. An investor’s job is to invest in companies so an investor should be investing in the company themselves for their referral to be taken seriously. If the referral is being made by someone who’s not an investor, the referral can be taken seriously even in the absence of the referrer’s commitment to invest. In this case what matters is the referrer’s credibility based on other signals rather than whether they’re personally investing in the company.

I think that my approach is also beneficial for entrepreneurs. Although it creates a short-term challenge in that you need to find someone else to make the referral, the referral is that much stronger when you do find an investor who is also investing in the same round, or a credible non-investor, to make it.


Also published on Medium.