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3 reasons social proof stinks
Recently I have seen a bunch of founders focus on social proof as THE fund raising strategy and I wish they wouldn’t. I have seen it as an entrepreneur and now as an investor and I think the social proof strategy leads to sub-optimal outcomes for everyone — especially at the seed stage. Granted, it might lead to a faster close, but closing a funding round is just the beginning of your journey as a company.
Social proof is powerful. Unfortunately one of the best ways to get a VC interested in your company is to get another VC interested in your company but here are three reasons it is a shitty primary strategy:
1. It can create a stinky mess
The best investors for your company will be the people who want to invest in your vision and your team, not the people who want to co-invest with other firms. Taken to the extreme, the social proof strategy can result in club rounds where everyone is in because someone else is in and no one is there for the company and the founders when they need help and support. When you focus on creating leverage with social proof rather than creating leverage with the best investors for your business, you optimize for fundraising, not for your company. This usually does not end well.
2. Everyone does it, but you don’t talk about it when you first meet.
It is important to create a market for your company and to make sure the individuals in the market know you have options, but if the opening slide/first five minutes of your pitch highlights “top-tier VC interest” rather than your top-tier team, meaningful product and big market it is hard for me to engage. If you think I am more interested in who your investors are than what your company does, I wonder how compelling your vision really is and if you really believe in it yourself.
To make sure I am respectful of a founder’s timeline, I typically ask about the fund raising process and try to get a general sense of the round dynamics and where an entrepreneur is in the process. This is a great opportunity to get leverage from your options and use social proof to your best advantage — without letting it over shadow your vision for the business
3. It always flows down hill
The final challenge of a fundraising strategy based on social proof is the best investors tend to create social proof rather than be influenced by it — in my experience, social proof only flows one way — downhill. This means your initial investor traction and “brand names” matter much more than the level of fit between your business and your potential investors. In a strategy designed to build social proof, especially early in the process, it is easy to chase brand rather than deep engagement from quality people. I think this is a mistake.
In every investment I have been part of at First Round, we have been joined by other investors. No matter if we are leading or joining a round with a pre-existing lead investor, I love to co-invest with angels and VC’s who resonate with the founder, engage in her vision and offer unique insight, support and guidance.
Social proof can be powerful in the right situation but it should be used carefully. It can open doors and shorten timelines, but it can also send the wrong message if you appear to emphasize your short term funding prospects rather than the long term future of your company.
Don’t get me wrong, as a founder, you do need to create a market for your start-up when you decide to raise money — especially as you head towards the close of the process. I just think you can create that market with your team, product vision and the importance of the opportunity rather than with perceived interest from top-tier funds.