VC: Pay for Leads

1. Update
   1. Answer: Probably because it is discouraged by the SEC.
   2. “Furthermore, even where the compensation received by a finder is based on the introduction, and not the outcome of the transaction, the SEC has taken the position that a person who accepts a fee for introduction of capital more than once is probably “engaged in the business of selling securities for compensation” and required to register as a broker-dealer.8 As a result, the ability of a finder to operate without a broker-dealer license is extremely limited.”
2. Description
   1. Paying for leads describes a practice in which VCs pay third parties to introduce them to they can invest in. Currently, it is rare or nonexistent in the venture capital world. Why is it not more common?
   2. Analogy: Companies offer “bug bounties” to improve tech security, allowing hackers a sum of money if they can identify a weak spot or companies pay for hiring referrals.
   3. Already, VCs incur expenses for leads when they attend conferences, purchase marketing resources, or host events and other sourcing programs. “Pay for Leads” is a more direct approach.
3. Benefits
   1. “Pay for Leads” might help VCs articulate more clearly what they look for in a good deal, and it might also encourage more broad global searches for good deals.
   2. Often connections play a role in which VCs have access to excellent sourcing. A “Pay for Leads” model could open things up to a greater number of VCs.
4. Potential Trade-offs
   1. Many other sourcing techniques inherently filter leads or skew towards high quality. Would a program like this offer too high a volume of deals without a quality filter?  Would it require a standard application form combined with software to sort through all the leads?
   2. When should VCs pay? When the deal has been finalized or when the lead was first sourced?
   3. Establishing attribution may be a problem. Should the first person who tells you be paid? Or should there be a shared payment to all groups that reach out with information prior to a deal?
      If the source of lead is already an investor, should they be paid?
   4. Individuals associated with the company would likely need to be disqualified from providing leads.
   5. Possibly remove the mystique of privileged networks and access that GPs often sell to LPs?
      Though the option to pay for leads can be an egalitarian force that limits the benefits of industry connection, it is possible that VCs could bid up the price of the leads, creating new barriers.
5. Examples from Outside VC
   1. Indie.vc: Piloting a scout program that promises to pay participants if they refer them to a company that they fund. Indie.vc is a revenue-based financing so not directly an example of VC.
   2. Tiny Capital: Promises a car, a trip “around the world”, cash ranging from $25,000 to $200,000 for introducing a company they acquire. These are majority to total purchases so not an example of VC.

by Miles Lasater with Julian Jacobs