Investors Referral as a Tool for Fundraise Traction

Referencing one of my team's sourcing strategy, It is no longer news that investors referral (for co-investments) is now an invaluable source of rapid fund-raise traction, especially for startups in the African and LATAM ecosystems, exhibiting significantly similar features.

From time to time, solid entrepreneurs and founders have leveraged this open-secret, asking one investor for referrals to other investors. After all, investors network frequently, work together and have long term relationships, hence a referral would go a long way. However, not all introductions are equal.

The most successful investor-to-investor referrals are those where the referring investor is investing in the business and is seeking to fill out the round with complementary capital. By investing, the referring investor sends a strong signal to others about his/her excitement about the company. This happens most often in seed rounds but also occurs in Series A, B and subsequent stages.

The next most successful referrals are sent by an investor with expertise in a category who is precluded from investing in a company for some reason but is enthusiastic about the business. Most often, the investor is blocked because a portfolio company is potentially competitive with the startup.

On the flip side, the most challenging and usually unsuccessful referrals are those where the referring investor is not committed to investing, has not decided to invest, nor specialized in the said business area. These kinds of referrals introduce some ambiguous signaling. The natural question is "why would a potentially competing investor refer me to an investment opportunity he didn’t pursue? 😒" It is an adverse selection issue.

These dynamics are similar to the hiring referral dynamics. The most successful candidate referrals are those from someone who has worked with the candidate in the past and would hire them, but can not because of an unrelated externality (no hiring budget, role already filled within the company, etc).

Dear Founders, having established that Investor to investor referral is a powerful tool in the hands of the right entrepreneurs, but as with any tool, it is important to map-out an implementation strategy to maximize result, this among other things would include delivering on key milestones promised to existing investors.