I had a spirited debate with a founder friend this week. He raised $20+ million in venture capital for his company and sold it for nine figures. Based on his experience, he believes social proof is a critical driver in the fundraising process for founders. If you have a bigger, better network inside VC (investors and founders who have raised from investors), it gives you social proof. The more social proof you have, the more likely you are to get a meeting and get funded.
My friend is right. That is currently how VC works. I don’t think this is good. Venture capital is about finding new problems to solve and taking risks. Risks with ideas. Risks with people. Social proof is often justified as a proxy for what you can expect from a founder. The thinking goes, if you can’t figure out how to get a meeting with a VC investor, how will you get a meeting with a potential customer? Said differently, will this founder hustle to make things happen?
Founders need to have grit and hustle. Those qualities are critical to surviving the inevitable ups and downs. But social proof has evolved into something beyond evaluating hustle. It’s been used to derisk the entrepreneur; that is, it’s a way to evaluate whether this entrepreneur is a quality person worth betting on. If other people in the VC investor’s network know the founder, the investor can derisk the entrepreneur by asking others about them. Unfortunately, the feedback, instead of being about the founder’s abilities, is often based on shared personal characteristics and relatability.
In venture capital, you want to back founders who see the world differently and identify overlooked problems. Said differently, you want nonobvious problems and markets, which are usually identified by people with unique perspectives. These people and the problems they see may not be part of the “in” crowd. They may have different personal characteristics. People may not be able to relate to them or find commonalities, but that doesn’t mean they can’t be amazing founders.
Using social proof to evaluate founders isn’t a great practice. Instead, founders should be judged on their abilities, the severity of the problem they’ve identified, and the potential of the solution they envision. The number of connections they share with a VC investor shouldn’t factor into funding decisions. In fact, social proof as a founder evaluation tool can lead to false negatives on under networked high-potential founders solving nonobvious problems.