In the UK, half of a VC fund’s deal flow comes from “cold” leads (i.e. companies that submit their pitch deck to a VC with no prior contact) and 39 percent from “warm” leads (i.e. companies that are introduced to the VC by someone in their network). Yet warm leads are 13 times more likely to reach committee and be funded than cold leads. This is according to a new report this week from the British Business Bank on UK VC & Female Founders. The emphasis on warm leads over cold is fully rooted and accepted within the VC world: Warm leads are pre-qualified, ergo of higher quality.
There is of course some truth in that. Many of my firm’s portfolio companies have come to us through referrals from other founders, VCs, angels, and the like. But networks and warm leads should only be a piece of the deal flow puzzle. Multiplying origination sources will unlock extra market coverage, which is likely to produce more diversified portfolios and offer an opportunity for differentiation in your fund and results. Exclusive access and unbeaten origination paths are also an asset when fundraising with LPs.
Similarly, if you rely too heavily on network-based leads, you risk backing homogeneous founding teams, which can hinder performance. The UK VC & Female Founders Report found that all-female teams are less likely to have a warm introduction than all-male teams (36 percent vs. 40 percent), and women are in general less likely to receive a warm introduction. It’s not unreasonable to assume that these findings would also hold true for other minorities. Relying solely on networks to discover new companies could thus have a high opportunity cost and leave quality deals at the margins.
This is why I’m a strong advocate of outbound origination, which my firm defines more narrowly than the UK VC & Female Founders Report as a “reverse cold” lead, i.e. companies that a member of our investment team proactively reaches out to having had no prior contact.
As the graph above shows, outbound leads are the only ones that progress consistently through the VC pipeline. In fact, outreaches are one of our top-converting deal flow channels. Although restrictive in quantity, they are a sound and qualified source of deal flow. After all, why reach out to a company you’re not interested in in the first place? This kind of proactive outreach also helps build positive relationships with founders, who often get VC-chasing fatigue and thus value the humility of investors who turn the tables.
Focusing on outbound deal flow also does seem to foster diversity. From H1 2018 to H2 2018, my firm increased three-fold the weight of outreaches in our origination strategy. That same year, we added three female-led companies to our portfolio (out of seven new investments), and nearly a third of founding teams that came in for a team pitch were female-only or mixed-gender.
True outbound origination is hard. It’s time-consuming and resource-intensive. And unless you operate a call-center VC model, it rakes in a limited number of companies – so you can’t count on it to max out your end-of-year origination KPIs. But don’t let that scare you off. As VCs, we need to be more proactive in our sourcing and look for those outlier teams. Both our individual funds and our industry as a whole will lose out if we don’t.
Esther Delignat-Lavaud Rodriguez is an investor at London-based seed and series A focused fund Oxford Capital. She is also a Project Lead at non-profit organization Diversity VC, which is working to create a more inclusive venture capital industry.