Nivi · March 6th, 2011
“The easiest way to become a millionaire is to start off a billionaire and go into the airline business.”
Summary: Every investor uses social proof to filter dealflow; Ron Conway has a fund that uses social proof as the sole investment criterion. Angels should almost do more homework than a professional VC would—VCs invest other people’s money while angels invest their own. We should all be thankful that we live in a world in which VCs exist. Finally, the accelerating returns on innovation means that all of the value in the public markets will be shrunk and put in the hands of startups.
I’m not an investor. And maybe that’s a good thing. Because it means I don’t have an investment philosophy.
Naval has a personal investment philosophy that he uses for his own investments—it’s focused and it has nothing to do with social proof. But there is no AngelList investment philosophy. The site helps startups and investors connect and the rest is up to them.
On Social Proof
Almost every investor uses social proof to filter dealflow. They just call it a “personal intro” or a “referral”. In fact, it’s usually the first filter they apply.
If social proof is a good filter, is it also a good investment strategy? Can I make my entire investment decision based solely on social proof? Will I make money if I invest in a company just because Warren Buffet invested in it, as long as I get the same price as him?
As in all investment matters, the answer is “who knows”. When I share a startup on AngelList, I consider the company’s traction, product, team, and social proof—in that order. If you do a great job with an early item on that list, it doesn’t really matter how bad the later items look.
But some interesting people are pursuing the social proof strategy. Yuri Milner, Ron Conway, and David Lee created Start Fund to “blindly” invest in every Y Combinator startup. And several VC funds are set up to provide follow-on capital to startups backed by Sequoia, Benchmark, Khosla, and other tippity-top-tier venture funds.
If you’re going to invest your own money in private companies, as an angel or otherwise, get educated. Read Mark Suster‘s series on angel investing. Listen to our (old and somewhat out of date) podcast on the topic.
Angels should almost do more homework than a professional VC would—VCs invest other people’s money but angels invest their own!
And don’t invest in a startup if you can’t lose all that money tomorrow, with a smile on your face. Frankly, I wouldn’t invest in anything if it didn’t meet that criterion (except money markets and very broad, low-fee index funds).
“Why we should be thankful that we live in a world in which VCs exist, even if they yell at us during board meetings, assuming they’ll fund our companies at all:
“Imagine living in a world in which professional venture capital didn’t exist.
“There’s no question that fewer new high-potential companies would be funded, fewer new technologies would be brought to market, and fewer medical cures would be invented.”
Startup valuations are up. That’s because capital is flowing into the system and, therefore, there is more demand. That’s a cyclical trend: the amount of available capital will go up and down and so will valuations.
But there are some secular trends that are driving up valuations.
First, many investors believe that the vast majority of returns come from a few new companies every year and, therefore, those companies attract a disproportionate amount of investor interest.
Third, startups have become a (bit of a) science. Entrepreneurs are much smarter about the art of building companies than they were even five years ago.
Fourth, the accelerating returns on innovation means that all of the value in the public markets will be shrunk and put in the hands of startups. The NYSE alone has $14 trillion of value. NASDAQ has almost a trillion dollars of volume every day. Today’s startups are the heirs to that value.
Of course, today’s startups will be disrupted by more startups. And on and on, with shorter and shorter time cycles. But I don’t think big companies will hold onto this value. The principal-agent problem is too pervasive, among many other reasons that big companies are considered “dumb”.
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