The Social Subsidy of Angel Investing
Alex Danco, 2019-11-27
Fundraising in the Valley is Qualitatively Different
(obviously) More success in the Valley breeds more FOMO. Everyone has a story of thinking “what a stupid idea” only to see it get funded and maybe even wildly successful.
However, the key reason is the social status exercise.
Social Returns Are All the Rage
Everywhere status flexing is the membership in a country club, living in an exclusive neighbourhood, etc.
In SV it’s: #1 – being a founder of a successful startup; #2 – being an angel investor in a successful startup.
Angel investing is about being someone. The motivation is not the money (time to exit can be 5-8 years), it’s the role and reputation in the community and staying relevant.
Angel investing is contrarian: you invest in a would-be star before everyone else does —> regardless of the financial returns, the social returns are big and undilutable.
Even losing the angel investment money may be given a nice spin.
Without this “social subsidy” angels won’t be as motivated to invest into small startups as on a pure financial scale it may not be worth the risk.
So the angel investment looks like a “wealth tax” with money redistributed to startups (unless founders don’t know the ropes of SV and can’t unlock social FOMO).
Solving the Chicken-and-Egg Problem In Early Stage Fundraising
Typically, angels follow other angels but aren’t willing to commit financing first.
However, with social capital it’s the opposite: “I funded them first!”.
Even if an angel passes, founders can ask for contacts/referrals —> social pressure, or the angel’s network is not that big after all.
Social returns also make angels be on good behaviour as the word spreads out.
In SV angels and entrepreneurs are peers; the system immediately retaliates against bad behaviour.
Elsewhere angels have an age gap, a culture gap, etc. Don’t mingle together with startups.
In SV angels can’t be annoying / a drain on founders. If you peers are angels – you act like entitled investors do; if peers —> you accept what the startup gives you.
Threshold Density and Social Capital
The return to the investment in the next Stripe is a square of the # of people who can congratulate you —> again, a network effect.
The “early stage capital market” is subsidised in part by the angels’ social and emotional job.
Can’t replicate that elsewhere (same as you can’t create Facebook #2): easy money attracts the wrong companies; grants require too much time and have strings attached.
If no one knows about a startup, the bragging points of being the first investor in it evaporates —> why bother? Just join a golf club.
People moving out of SV bring this “bug” with them, and it’s a beautiful thing.