Venture Capital Funding

Venture Capitalists: No Means No (Referrals)

Written by Chris Martin for Gaebler Ventures

Many people are taught in business school, conferences, and seminars to "always ask for a referral if you are rejected." In some circumstances, this is sound advice. But when soliciting venture capitalists, asking for a referral after you have been rebuffed is an inappropriate breach of courtesy.

All entrepreneurs know that networking is a pivotal part of their approach to doing business.

Venture Capitalists No Means No

The more working contacts that you amass, the more relationships that you can build and the greater the chances are that you can leverage your network to improve your business.

But during this process, you must keep the mantra "everything in moderation" in mind. Because it is possible to "overdo it" when it comes to networking - especially when asking for referrals.

Many people are taught in business school, conferences, and seminars to "always ask for a referral if you are rejected." In some circumstances, this is sound advice - like when a potential employer tells you they are not hiring. But in entrepreneurial networking, asking for a referral after you have been rebuffed can be an inappropriate breach of courtesy.

One major example of this axiom occurs when you are trying to secure venture capital. Entrepreneurs commonly seek out venture capitalists when they need funding for a new idea or plans for expansion.

If you make numerous overtures to venture capitalists, you will probably receive a certain number of polite rejections. Very often, the number of rejections will be greatly exceeded by the amount of non-responses. So the notion that you need to procure a lead from someone who actually took the time to answer your appeal is understandable.

However, this approach is not only discourteous, but also smacks of desperation. Think about it: if you ask someone out on a date but are rebuffed, do you follow up with a request for a referral of someone who might be interested in you? Of course not.

This same logic applies when making solicitations for venture capital - and perhaps even more so. Individuals and companies who make their livelihood in the world of venture capital investments take referrals very seriously. If a venture capitalist distributes a referral which turns out to be a poor investment, it reflects badly on him or her (much like if you recommended a friend to a company looking to fill a job opening, only to discover later that the person was caught embezzling funds from that employer).

Brad Feld, who has been a venture capitalist and entrepreneur for over two decades, utilizes an approach which is typical among his fellow early-stage investors. If Feld receives a referral from one of his peers, he immediately asks for more information about the referred individual. If the venture capitalist doesn't know the individual, Feld says he is immediately suspicious about the validity of the referral. Feld then asks the venture capitalist if he or she plans to invest in the referred project (and if not, why not).

If Feld doesn't receive satisfactory answers to these questions, he is very unlikely to take the referral seriously. Furthermore, if the venture capitalist in question continues to make similarly sketchy referrals, Feld says he heavily discounts the value of any introductions that venture capitalist is willing to make.

In other words, venture capitalists view the term "referral" as more of a tacit recommendation rather than a simple introduction. And it only takes one or two bad recommendations to negatively affect the reputation of the referring individual.

It's important that as an entrepreneur, you understand and accept this dynamic so you don't focus on getting referrals after you have been rejected for venture capital. Not only is this behavior nonproductive, it is also bad manners. And entrepreneurs face enough challenges as it is without having to battle any problems associated with a negative image.

Chris Martin has been a professional writer for the last seven years. He is interested in franchises and equity acquisition.

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