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.