How VCs use Referral Networks in Deal Sourcing?

I ran Slush investor operations in 2017 and 2018 and co-founded Wave Ventures, which sparked an interest to dive deeper into networks in venture capital. Luckily, I needed to do my Master’s Thesis as well so I chose the topic Referral Networks in Venture Capital Deal Sourcing. Here’s what I found.

Importance of Networks in Venture Capital

One of the main reasons why networks are so crucial for VCs is the referral deal flow generated from these networks. VC’s connections who come across potential companies can refer them to the VC if they fit the VC’s scope. This pre-screening makes referral deal flow better in quality than other sources. Referrals are also a powerful tool to increase the reach of VCs.

VCs can source up to 80% of their deal flow through referrals from their networks and are significantly more likely to invest in referred companies compared to companies found through outbound or cold contacts. Some VCs put an active effort in building and maintaining referral networks with impressive results while others do not even realize they are missing out on the highly relevant referral deal flow. VCs can benefit from understanding how other VCs build and maintain their referral networks and whether there is something they could also implement in their strategy. This is your chance to do precisely that. Let’s examine the referral phenomenon by identifying (1) the motives for making referrals, (2) motives for choosing the referral recipient VC(s), (3) importance of referrals for VCs, (4) main characteristics of referral networks, and (5) factors affecting referral network.

Why do people refer companies to VCs?

A double opt-in referral takes very little time and is a convenient way to build social capital by connecting two people who should know each other. If the referral is relevant, both the founder and the VC are more eager to help the referee in the future. The motives for making referrals depend on the referee and the main motives for different groups can be found from the table below. Referees can also be driven by multiple motives.

How are the fortunate VCs who receive the referral chosen?

One of the primary goals in fundraising is to get the best possible investors on board. The brand of the VC firm, the brand of the individual partner, and the knowledge of the VC’s focus (industry, stage, etc.) affect this decision. VC’s brand is affected by a vast number of things but especially the quality of work (portfolio & exits), the quality of interactions (do founders want to work with you), and content creation drive the creation of a first-tier brand.

However, with referrals, it gets a bit more complicated. How VC treats the referred companies they receive and how strong is the relationship between the referee and VC also affect this choice profoundly. If the VC replies slowly or forgets to respond to an introduction, there’s a high chance that VC won’t receive the referral next time. Especially angel investors who are not always the biggest fans of VCs can create highly relevant deal flow (for seed stage VCs) but can also be very selective in choosing which VCs they refer companies to. Some VCs are also actively encouraging referrals from their portfolio founders and other founders they meet, which improves their referral deal flow.

VCs also have groups of preferred partners (co-investors, lawyers, bankers, etc.) who tend to work most often together, and these groups affect the referral recipient as well. Fundraising founders seeking referrals tend to emphasize more the VC’s brand, while the referee also adds weight on their relationship and past interactions with the VC. Hence, whether it’s the founder or the referee who decides the referral recipient affects the criteria used for the decision.

Why Referrals Matter?

Referrals are a vital deal source for many VCs. Referrals not only account for a significant share of deal flow (in Helsinki around 20% and in London almost 60% of deal flow in this sample) but their relative share increases drastically from deal flow to investments. In Helsinki, a referred company is three times more likely to receive funding than a company sourced via other means, while in London a referred company enjoys a 50% better chance of being invested in. Hence, referrals not only account for a significant share of deal flow, but they are drastically better quality than other deal flow sources on average. British Business Bank (2019) also found similar results with a larger sample.

(N = 11, so this merely gives you an idea of the scale but not a completely accurate view)

Referral Network Characteristics

The main characteristics of VCs’ referral networks are the number of referees, their activity, their role, their centrality in the network, and the strength of relationship with them. The number of active referees (2-7 referrals per year) ranges from 10 all the way to 200 among the interviewed VCs, and many have a large group of occasional referees (1 or fewer referrals per year). Almost all interviewed VCs mentioned other VCs as one of their most important deal flow sources while founders and angel investors were mentioned almost as many times. For several VCs, other professionals (lawyers, bankers, etc.) are also one of the most important sources. More central actors are more valuable in generating referrals, and VCs had a significantly different number of central referees in their networks. Some VCs are more calculative in building their network towards central players while others don’t pay much attention to it. The referral network is tied more closely to an individual partner instead of the whole VC firm. So, if the VC leaves the firm, the referrals tend to follow.

Factors Affecting Referral Network

VCs create their referral networks via three different means:

  1. Some VCs have a significant advantage since their inception due to the networks the founders have gained from their previous work experiences. Ex-entrepreneurs often know a lot of entrepreneurs already compared to VCs with less relevant experience.
  2. Many VCs have been able to build an impressive referral network by directly investing and working with companies. Investing in wildly successful companies is a very effective way to build your referral network.
  3. VCs spend a lot of time explicitly building and maintaining their network. This means that they host and attend events, have regular catch-ups with key connections, some have structured programs for specific groups (for angels, for example), and many VCs spend time doing ecosystem work with no immediate payback. A vital aspect of maintaining the referral network is also reciprocity with active referees. Especially relationships with other VCs require mutual sharing of deals to flourish while portfolio companies might not require any explicit reciprocity.

Referral Deal Flow Generation (Korpela, 2019)

Ok, this all sounds cool, what should I do?

The first recommendation for VCs is to track your deal flow sources accurately. Tracking helps you to identify the critical referral sources with whom you should keep a strong relationship, and also the areas where you could improve the most. For example, if you have more than a dozen portfolio companies and you don’t get any referrals from them, you should consider reaching out to them and saying that you’re more than happy to check out relevant companies they might be aware of. Second, consider building your referral network more systematically, and taking actions to generate more referral deal flow from your existing network.

For founders, the message is simple: get a referral to a VC instead of approaching cold.

This post is based on the results from my master’s thesis conducted for the Master’s Programme in Industrial Engineering and Management at Aalto University. The data is collected from 11 interviews with Helsinki (5) and London (6) based partners at VC funds. The interviewed VCs invest at seed and Series A stages. If you’re interested in reading the whole thesis, send me a message to and I’ll share it with you.


British Business Bank (2019).

About the author:

Janne Korpela
The honourable mention on FVCA’s master thesis competition.


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