The Network Effect in Venture Capital
By Mike Collins
At Alumni Ventures, we value the power of community and networks. We currently coordinate and work with a very large network of 600K supporters and venture enthusiasts. For us, our network (especially our alumni networks) are our main sources of capital, deal introductions, and assistance to portfolio companies. We rely on network members for everything from referring an interesting startup, to making intros to lead investors, to helping identify independent Board members, and more.
So, what do other say about the importance and use of networks in the venture industry? Check out some opinions and studies below.
Article: How Venture Capitalists Make Decisions
Harvard Business Review
Networks matter. Underscore and bold that. This 2020 Harvard article details how nearly 60% of venture deals come from referrals (VCs, investors, portfolio companies), while another 30% come from VCs reaching out to startups.
Having lots of sources matters as well. As this article further notes, VCs typically only close one deal out of about 100 they consider.
Blog: Why (and How) to Build a Network in Venture Capital
Hector Mason, a partner at UK VC firm, argues that at the seed stage, networks are particularly vital. He comments that he sees a high hit-rate for deals referred by others. He also observes that networks are valuable for deals you don’t do — as in referring a portco to follow-on investors. And while Mason says he’s not worried about someone stealing a deal, he finds it pays to network with funds with a different stage or sector focus who “have an incentive to share their best companies with us.”
Video: Venture Capital Networks and Entrepreneurial Performance
Dan Wang, Associate Professor of Business at Columbia, offers interesting insights into the impact of VC networking on outcomes for companies. Specifically, he looks at how the backers’ history of previously co-investing together impacts whether the company is acquired, IPOs, or fails. Wang concludes that VCs who have invested together before tend to limit the upside and the downside for a company. VCs who haven’t invested together before, on the hand, see more IPOs and write-offs. Viewer tip: Check the last 3-minutes of his presentation for Wang’s findings about VCs investing in a portco’s competitors.
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Alumni Ventures (AV) provides smart, simple venture portfolios to accredited individuals. PitchBook listed AV as the third most active VC firm in the world in 2021.
Mike Collins is the Founder and CEO of Alumni Ventures. He has been involved in almost every facet of venturing, from angel investing to venture capital, new business and product launches, and innovation consulting. He began his career at VC firm TA Associates. He holds a BE from Dartmouth and an MBA from Harvard Business School.