How Warm Introductions Work

This week's tip: the 4 reasons why warm introductions still reign supreme for fundraising.

When I speak to founders, I always ask specific questions about their fundraising efforts. One of those questions is, "how many investors are you speaking to?"

For most founders, the answer is not enough (5-10 at most). I then inquire about their methods of reaching out to investors.

In nearly all instances (99% of them), they are trying to reach investors cold. They’ve sent hundreds, maybe even thousands of emails and no investor is willing to speak to them. Even if they do get to jump on a call with an investor, most come across cold or uninterested.

Now, why does this happen?

Because you don't have a proper investor network. And whilst you may think that sending out a sheer amounts of emails and knocking on doors will suffice, unfortunately, it doesn't work like that in the real world of fundraising.

As much as you think you can send thousands of cold emails and hope that one hits big, very rarely does that actually happen. In fact, for most of you, all you are doing is wasting time, money, and most importantly, your reputation.

One of the worst things you can do (and I saw this happen all the time) was founders who shotgun cold emailed multiple people in our fund. It was always a funny game in the office, as we would stand up and ask if anyone else received the same email, only for 4-5 of us to put our hands up.

We would laugh because we instantly knew that the founder wasn't good enough (and 9.9999999 times out of 10, we were right).

When you cold email investor the perception is always negative of you. When they start with a negative you fail before you start. It’s an uphill battle of making them excited to want to speak to you.

So why is this? Why are cold emails so bad? Why should you use them sparingly at best?

Here’s 4 reasons:

Reason #1: It shows you have a bad network

Fundraising relies heavily on perception, and without the right warm connections.

One of the main reasons for this is the impression that a cold email gives to an investor. It suggests that you lack a strong network to connect with the investor.

This raises doubts about your ability not only to raise funds (in this round and in the future), but also to handle other aspects of the business.

If you are unable to leverage your network for reaching out to me, how will you do it for sales? Hiring? What about the next fundraising round?

These questions put doubt in the investor's mind that you are good enough, especially when it comes to your network.

Reason #2: You are a random person to me

Everything in fundraising revolves around trust. Without trust, an investor may perceive you as either untrustworthy or lacking the ability to succeed.

One of the benefits of having a warm connection is that you can leverage the trust of someone else when meeting with an investor.

Let me provide an example from my experience leading an investment at Octopus into Skin+Me. They were introduced to me by their Chairman, who happened to be the founder of LoveFilm (which had a 9-figure exit) and Tails (also a 9-figure exit). Although we hadn't met the founders before, and they didn't have much experience, having the Chairman introduce us and be directly involved in the company greatly influenced our positive perception of them.

This was true for other investors as well, as the company ended up being oversubscribed and securing one of the largest seed rounds in recent years (£9m!).

Warm connections allow you to appear less random and more credible even before meeting with investors.

Reason #3: You come across as desperate

When cold emailing investors, the focus is never on building a relationship. Instead, the primary goal is to secure a meeting. This transactional approach can make you appear desperate, even if you're not.

Cold emailing investors gives the impression that you have been unable to establish warm connections, which is often true. It doesn't convey the image of someone who can generate high demand and momentum for their funding round. Instead, it portrays a founder who is resorting to shotgun cold emailing out of fear that the round will fail.

When you come across desperate like this, it completely puts off investors because they perceive that you have been rejected by everyone else and now resorting to cold emailing them. Even if this isn’t true, all they will think about is, “why is everyone else rejecting this company? What’s wrong with it?”.

Reason #4: My ability as an investor is questioned

Understanding the psychology of sourcing deals is crucial in the investment business, where the focus is on finding the best opportunities.

Deal sourcing involves generating "deal flow," which refers to the effort put into finding as many high-quality deals as possible. Typically, deal sourcing comes from three main areas: introductions from my network, inbound interest due to the fund's reputation or my brand, and outreach from my personal research.

At my previous fund, our primary goal was to review all available deals in the market. It was a key factor in determining whether I was a good or bad investor.

When you approach me without any prior connection, it forces me to question my own ability, and I can't attribute my success to my own skill in finding the best founders.

While you may consider this reason ridiculous (and it does seem that way when I write it out here), it actually plays a significant role in how an investor may perceive you negatively. By not allowing them to naturally believe they are a great investor and excited to invest in you because of it.

Conclusion

So why are the 4 reasons above important to know? Because cold emails alone are never enough. Is every fundraising effort perfect? Definitely not - you may still need to use some cold emails.

However, you cannot rely solely on cold emails. They should make up at most 5-15% of the emails you send.

That's why it's crucial to spend a significant amount of time nurturing your relationships before a fundraising campaign. It's important to do the necessary preparation work to ensure you can achieve your goal of establishing warm connections with over 80% of your contacts.

So, how do you go about doing this? Follow these steps:

1. Create a list of the investors you want to speak to.
2. Create a list of individuals who you believe can help you.
3. Combine lists #1 and #2 to identify potential warm connections.
4. For the remaining investors, focus on building your network around them rather than directly approaching them.
5. When connecting with new individuals, prioritize providing them with as much value as possible.
6. Once you have accomplished step #5, ask them to introduce you to 2-3 more people in their network.
7. Repeat steps #5 and #6.
8. Every 3 months, review your list and determine how many more warm connections you can establish for your fundraising efforts.
9. Continually repeat these steps until your fundraise

Will these 9 steps take a long time? Yes.

Will they require you to do a lot of work? Yes.

Are they some of the most important prep work you can do for your fundraise? 100% yes.

So make sure you are doing this way 6-12+ months before you need to fundraise again.