“The Social Subsidy of Angel Investing”, 2019-11-27 (; backlinks; similar):
The difference in angel investing between Silicon Valley and everywhere else isn’t just a difference in perceived risk/reward or a difference in FOMO. It’s that angel investing fulfils a completely different purpose in Silicon Valley than it does elsewhere. It’s not just a financial activity; it’s a social status exercise.
Angel Investors in the Bay Area aren’t just in it for the financial returns; they’re also in it for the social returns.
The Bay Area tech ecosystem has been so successful that startup-related news has become the principal determinant of social status in San Francisco. In other cities, you acquire and flex social status by joining exclusive neighbourhoods or country clubs, or through philanthropic gestures, or even something as simple as what car you drive. In San Francisco, it’s angel investing. Other than founding a successful startup yourself, there’s not much higher-status in the Bay Area than backing founders that go on to build Uber or Stripe…The end result is that the Bay Area has a critical density of people who are willing to offer founders a term sheet for enough investment, and at attractive enough valuations, that it makes sense for the founder to actually accept them. I honestly believe that without this social “subsidy”, a lot of angel investing stops working. If investors were being purely rational, they could only offer something like a $2 million valuation for founders’ first cheques. And if entrepreneurs are smart, they know they can’t accept it; it makes them un-fundable from that day forward.
The social rewards of angel investing solve an important chicken-and-egg problem in early stage fundraising that financial rewards does not.
One of the biggest frustrations you face as a founder out fundraising is the refrain: “This sounds really interesting. I love it. Let me know when there are a bunch of other people investing, and then I’ll invest too.” From far away, it’s easy to label this behavior as cowardly investing. But it happens for a reason…The social returns to angel investing resolve our chicken/egg problem: they turn angel investing into a kind of “race to be first” that is much more aligned with the founder, and more conducive to breaking inertia and completing deals. The founder wants you to move first, and so do you.
The social returns to angel investing have a strong geographical network effect, because they require a threshold density in order to kick in.
…If you can assemble enough early stage investors together, it should conceptually become self-sustaining. Once you have that sufficient density of people who care about the social return to angel investing, and you establish a genuine “early stage capital market” that is subsidized in part by the social and emotional job that it’s doing for its angel members, you create something really special. You get the rare conditions where capital is available for founders at high enough valuations, with no strings attached, and by investors who are evaluating them “the right way”, that you actually sustain a scene that produces startups in sufficient numbers to generate those few unlikely mega-winners that replenish angels’ bank accounts and keep the cycle going.
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