Recently, I came across this awesome (like always!) 2012 post from Fred Wilson (Union Square Ventures) – Social Proof Is Dangerous. Quoting a line that captures its essence:

If you can’t figure out why you like an investment and why it will be successful, don’t make it.

One of the big investing ideas I have distilled from studying the best investors across asset classes – from Charlie Munger and Howard Marks to Bruce Flatt and Vinod Khosla, is that to outperform the average (the index), one has to be “non-consensus-and-right”.

In fact, in my July’23 post ‘An Investing Framework To Find Startup Diamonds‘, I outlined a Consensus vs Signal 2×2 and argued that the outlier venture returns opportunities tend to be found in the High-Signal-Non-Consensus quadrant.

It was only in 2022, almost a decade after I first started my career as an institutional VC, that I truly embarked on this journey of trying to become a non-consensus-and-right venture investor. As I have outlined in the above 2×2, molding my mindset toward this approach has required consciously working on the following 2 elements:

1/ Having a unique world-view and trusting my instincts to be able to spot ‘Signal’.

2/ Totally ignoring any social proof noise while doing this.

I have observed that while it was really hard to ignore social proof early on in my career (eg. which VC is leading the deal), having seen so many Tier 1 VCs across geos do such foolish things over a decade, I must say with much humility that as of today, I find it much easier to ignore their POVs on something.

A few months back, I also came across comprehensive LP data that validates this organic learning. David Clark of VenCap shared with Jason Calacanis how loss ratios are surprisingly similar across various percentiles of funds, and even the best strike out a lot.

That’s why in my view, it’s foolish to do one-off deals purely on the basis of the social proofing of a lead investor in that deal unless one is actually replicating their entire portfolio construction (which is a benefit only LPs in their Funds get).

This idea also explains why I remain skeptical of loose angel networks, angel communities, and syndicates that really don’t have a unique, grounds-up world-view and right-to-win, and therefore in most cases, do spray-and-pray on allocations in deals being done by VCs.

These deals often suffer from major adverse selection (“if the founder/ startup is so good, why are they raising from you?” OR “what specific value are you bringing to the table because of which a star founder is giving you allocation?”) and are therefore, likely to be on the wrong side of the loss ratios of major funds.

Coming back to the point of social proof, let me neatly summarize my POV on it:

• If the best Tier 1 VCs are striking out as much as an average Joe VC, there is no value in blindly following them.
• There could be value in investing in the “best” companies of a Tier 1 VC portfolio but especially at the seed stage, it’s impossible to know beforehand which company will turn out to be this “best” company. Also, companies keep going in and out (and back in) of this “best” bucket multiple times anyway during a Fund’s 10-year lifecycle.
• Even if there was a way to know which company is indeed the best company in a Tier 1 VC portfolio, why would they give me allocation in it? The best VCs want to keep every bps of ownership in their best companies only for themselves.

Hence, what’s the point of doing a deal purely because of social proof? I would rather spend that effort looking for the best contrarian deals in places where no one is looking, doing the work (and trusting my instincts) to spot Signal in them, and investing in them as early as possible, driven only by my strongest conviction and nothing else.

This approach is already starting to reflect in the early Operators Studio Fund 1 portfolio. In a majority of recent investments (eg. Soulside, Confido, Loop, Astrophel Aerospace, and a recent one in Stealth), I was literally the first investor to build conviction and say “yes” even before the round started coming together with other VCs. In several of these deals, I ended up catalyzing the round itself, making intros to eventual lead investors and even sharing my customer diligence notes with VCs evaluating the company.

In a way, this approach is Anti-Social proof and Pro-Signal. What is Signal, you ask? It can be of two types, as I explained in my July’23 Investing Framework post (quoting from it here):

• Internal – extraordinary founder-market fit eg. the founder has spent a decade just going deep in the field. Or a backstory that provides an authentic “why” behind pursuing this idea. Or an execution track record in the startup’s arc that is outstanding on important elements like capital efficiency, iteration velocity, or organic customer acquisition.
• External – eg. a visionary customer is taking a bet, partnering with them in building the early product. Or a domain expert, skilled operator, perhaps even a specific GP in a venture firm, has taken the time to evaluate & build high conviction in the company.

As you can see, there is a little bit of social proofing baked into evaluating Signal too, but it’s much more oriented around operating and execution-oriented conviction vs deal FOMO and an investing herd mindset.

As you churn on this post, here are more POVs on this topic from some really distinguished venture investors over the years (Source: a 13-year-old Quora post titled Is social proof a rational approach to investment selection?)

1/ Roger Ehrenberg (Founding Partner – IA Ventures, one of the best-performing seed funds of all time)

2/ Naval Ravikant (Co-founder – AngelList, one of the best angels of all time)

3/ Dave McClure (Founder – 500Startups, now running PracticalVC)

Additional readings: The Death of Social Proof by Hunter Walk (Co-founder of a very successful seed VC Homebrew).

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