Argues its impossible to find the needle in the haystack, so VCs use other founders to sift the chaff.
But a VC was quoted that they funded zero cold contacts. That doesn't sound like its hard; it sounds they're incapable of evaluating cold contacts at all. I'm guessing they use contacts for their expertise, because VCs lack any.
Why would they run the risk if they have enough warm leads from trusted contacts? The VC money to startup lead ratio is obviously one sided to present sufficient profit motive to invest in cold introductions.
If the VC market becomes sufficiently in favour of warmly introduced startups that there is profit motivation in investing in those startups that cannot garner warm introductions then someone will do it. But they will be assuming much greater risk.
The ecosystem changes: sometimes leads are scarce; sometimes plentiful. That can't explain never, ever investing in cold contacts.
Risk can be mitigated by doing some diligence. It sounds to me like the only diligence VCs do (are capable of?) is "what does some other smart guy think?"
I'm not trying to paint VCs as incapable, but this story makes it so likely. Zero cold contacts invested in? Zero ability to evaluate leads on their own? That's pretty damning.
You're missing a third category here. "Cold contact" implies that the startup contacts them. I imagine the really-smart VCs are going out, doing research/watching the market, and cold-contacting the startups, with nobody having reached out to them first.
Warm intros have a built in safety net, too. In a downside, the credibility of the referrer helps to blunt the damage to the VC's reputation. Also, the potential upside from other deals coming through that system, which is lost or diminished by non-investment, offsets the immediate loss. These are some important political dynamics. So, as a result...its not just the "information" efficiency that is at play.
they get a tax incentive to take risks and not taking it is cheating I think. Super-connected people will attract money no matter what.
They can also call themselves a hedge fund or an investment bank and stop pretending if they are afraid of the risk, they can invest in oil extraction that is always in need for capital and is of absolutely no risk.
Comments
Argues its impossible to find the needle in the haystack, so VCs use other founders to sift the chaff.
But a VC was quoted that they funded zero cold contacts. That doesn't sound like its hard; it sounds they're incapable of evaluating cold contacts at all. I'm guessing they use contacts for their expertise, because VCs lack any.
Why would they run the risk if they have enough warm leads from trusted contacts? The VC money to startup lead ratio is obviously one sided to present sufficient profit motive to invest in cold introductions. If the VC market becomes sufficiently in favour of warmly introduced startups that there is profit motivation in investing in those startups that cannot garner warm introductions then someone will do it. But they will be assuming much greater risk.
The ecosystem changes: sometimes leads are scarce; sometimes plentiful. That can't explain never, ever investing in cold contacts.
Risk can be mitigated by doing some diligence. It sounds to me like the only diligence VCs do (are capable of?) is "what does some other smart guy think?"
I'm not trying to paint VCs as incapable, but this story makes it so likely. Zero cold contacts invested in? Zero ability to evaluate leads on their own? That's pretty damning.
You're missing a third category here. "Cold contact" implies that the startup contacts them. I imagine the really-smart VCs are going out, doing research/watching the market, and cold-contacting the startups, with nobody having reached out to them first.
Warm intros have a built in safety net, too. In a downside, the credibility of the referrer helps to blunt the damage to the VC's reputation. Also, the potential upside from other deals coming through that system, which is lost or diminished by non-investment, offsets the immediate loss. These are some important political dynamics. So, as a result...its not just the "information" efficiency that is at play.
they get a tax incentive to take risks and not taking it is cheating I think. Super-connected people will attract money no matter what.
They can also call themselves a hedge fund or an investment bank and stop pretending if they are afraid of the risk, they can invest in oil extraction that is always in need for capital and is of absolutely no risk.