Gaining a foot in the door to investors

By Alistair Jones

SMU Office of Research – Who do you know? In professional environments the right connections can make all the difference. Contacts enable networking and, with it, the strategic exchange of information and resources, creating further connections that may be mutually beneficial.

The process of entrepreneurial network activation is the focus of research co-authored by Jared Nai, Assistant Professor of Organisational Behaviour and Human Resources at Singapore Management University (SMU).

"We investigate how entrepreneurs can leverage their social networks to gain access to early-stage investors for potential funds or other resources," Professor Nai says.

Some people embrace networking, others find it almost distasteful, but it is an integral part of doing business.

"Start-up owners who have stronger and wider networks are more successful at resource mobilisation, which helps mitigate the challenges of newness and smallness," Professor Nai says. "Access to wider networks allows for the discovery of more opportunities for businesses, which translates to greater performance."

And can a reluctant networker learn to like doing it?

"I am not sure if they can learn to like it but [they can] perhaps learn to not dislike it," Professor Nai says. 

"They can definitely get better at it by simply putting themselves out there to make contacts. And keep in mind that networking does not merely benefit the self, but can potentially benefit others as well by providing connections or referrals to others.

"Other research has found that networkers should not be purely instrumental when networking, as others may detect it and not view the networker positively. Networkers should not be solely aiming to make use of their network contacts. In my research, I find that focusing on reciprocity helps."

Returning a favour

According to the researchers, an offer of a future reciprocal favour to a contact for providing an introduction to an investor can be more motivating than an explicit financial incentive. They estimate that with a promise of reciprocity, the likelihood of securing successful referrals is about three times higher. 

"The reciprocity condition in our study included the phrase, 'We look forward to reciprocating your help and support appropriately in the future'," Professor Nai says.

"Interestingly, it need not be something concrete and specific. I did not study that in this research, but perhaps a broader promise of reciprocity might be more effective than a specific reciprocity promise of, for example, helping to link the contact up with another investor in future. That may not be as relevant or valuable to the network contact."

It seems unlikely that a start-up seeking capital would be in a position to offer a monetary reward to a contact.

"A resource-starved entrepreneur may not have immediate financial incentives to offer, but they can offer future help, support, or other forms of non-monetary reciprocity such as sharing expertise, mentoring someone, creating connections with other network contacts, providing testimonials and so on," Professor Nai says. 

"There are limitless ways that one can help others that may not be immediately evident, but may present itself in future under different circumstances."

But are there potential issues of legality in reciprocating for a strategic exchange of information?

"Not that I am aware of. I would think this is normal human behaviour; to reciprocate help. The key difference is in making it explicit, as a promise of future reciprocity: 'I may not be able to reciprocate your favour right now, but I can promise you that should the opportunity arise in future, I will do so'," Professor Nai says.

Referral results

The type of contact an entrepreneur approaches for a referral is important. The research suggests that compared with the habitual pattern of requesting referrals from contacts proximate to themselves, entrepreneurs are about six times more likely to secure successful referrals when they select investor-centric contacts for referral requests. 

"Investor-centric contacts are more likely to lead to referral success because they are socially closer to the targeted investors," Professor Nai says. 

"This means the social search chains are shorter and have less opportunity for premature termination. Entrepreneur-centric contacts, though likely to have stronger relationships with the entrepreneur, are often socially distant from the investors, necessitating longer, less effective search chains. 

"This means that they have to go through more referrals in order to reach the investors, and these referees may not agree to and/or be able reach out to the investors."

When asking for a referral, how important is the strength of a personal relationship with the contact for reaching the investor target?

"The strength of personal relationships is important in getting the contact’s attention and willingness to help. However, the strength of the relationship between the contact and the investor is more important for the referral to be successful," Professor Nai says. 

"The study found that investor-centric contacts, despite potentially weaker ties to the entrepreneur, yield better referral results due to their closeness to the investors. Investors were more likely to pay attention to referrals from contacts that are closer to them."

Friendship factor

Would the professional reputation of the person asking for assistance be a stronger deciding factor than friendship?

"I did not directly study that in this research. My guess is that friendship will be a stronger factor, but professional reputation will be a contributing factor as well," Professor Nai says. 

"[For example], I will not be willing to recommend someone that I have zero relationship with, even if they have a strong professional reputation. On the other hand, I will be willing to recommend a close friend, presuming that their professional reputation is not poor."

The study was experimental, but aside from its insights into investor-centric contacts and reciprocity, it gives some sense of the scale of contact networks needed to gain referrals in the real world.

"[In the main Singapore study], 42 entrepreneurs reached out to a total of 684 contacts, and only 40 of these referrals were deemed successful," Professor Nai says. 

"I cannot answer what the specific number of contacts that an entrepreneur should reach out to is, but a higher number will be more helpful given the low success rate." 

And what comes next for Professor Nai?

"In future research, I aim to look at how the timing and structure of equity split impacts team dynamics and outcomes in entrepreneurial teams," he says. 

Back to Research@SMU February 2025 Issue