Thoughts on startups by investors that
fund them & entrepreneurs that run them

Is Connecting People a Business Model? I Doubt It.

Posted by on May 28th, 2013

Is connecting people a business model? I don’t think so.

Connecting people is what happens when the entrepreneur gets recommended to the investor, or group of investors. It’s an introduction. In some cases it’s a door opener. And it can seem like the connection leads to investment that might not have happened otherwise.

The startup and angel investment ecosystem in this country is a web and network of connections. Some people are natural connectors. They want to help. They introduce people who should know each other. What would be called networking if it were conscious is a natural result of people trading favors and making recommendations.

I know — we all know — some people who do that naturally. And most of us, and most people, will do it on occasion when the moment is right. The normal human wants to help other humans when it’s easy and natural. We see it, and we respect it.

Making connections can become part of a business’ normal work flow. I see it all the time, especially with professional service providers — attorneys, accountants, professional marketers. And doing a person a favor is a good way to build and maintain a relationship. Quite often, favors done come back as favors received. Being helpful is good for business.

Where I get skeptical, and downright negative, is when making connections is part of the business model. When service providers offer that as part of the service, and charge for it, I get the wrong kind of chills down my spine. That smacks of sharks and charlatans. I really don’t like finder’s fees for introductions related to entrepreneurs and investors. I’ve seen a couple of rare cases in which that might have been appropriate; but they are rare. And yes, there is the Lehman formula that defines commissions for introductions between entrepreneurs and investors.

Why do I object?

First, because people and relationships aren’t assets to be traded, and favors aren’t favors when you sell them.

Second, because what happens between entrepreneur and investor is about the deal, the startup, the business, and risk-return relationship, and not in any way a matter of who introduced whom. If I charge you a fee for an introduction am I not implying that I’ve added economic value? Do you not feel cheated if the investor doesn’t like your deal? Am I promising, ahead of time, something that I really can’t control and can’t deliver?

Third, a good business, especially a professional business, does in fact connect people when it makes sense; but that’s part of its professional service, not for a fee. And it’s never built into the business model. It works as serendipity, and client satisfaction; and doesn’t work as soon as you build it into the revenue plan and start promising.

And — late addition — I hope it’s clear that I’m not referring here to software and systems built to create places and forums and formats for entrepreneurs and investors to connect automatically. I’m referring to individuals who do introductions for money.

Written by Tim Berry

user Tim Berry

Tim is the founder of Palo Alto Software and bplans.com, the co-founder of Borland International, and the official business planning coach at Entrepreneur.com. He has been called the "Obi-wan Kenobe of business planning" and "The Father of Business Planning." He is a serial author of books and software on business planning.

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Comments

One thought on “Is Connecting People a Business Model? I Doubt It.”

  1. Francisco says:

    I think it will be interesting to exolrpe the difference in expectations between traditional venture investors (e.g. venture capitalists, angel investors, etc.) and those investing in social entrepreneurs / ventures. Do social investors have limited partners? If so, are they the same limited partners that the traditional venture investors approach? Do the social investor’s limited partners have non-economic interests or motivations? If so, does this mean they have different IRR expectations? How do they quantify the impact of their investment?I think there are lots of interesting questions and areas of discussion around these topics. I look forward to hearing your thoughts.Thanks Randy! Bill Hodak