In Q3 of 2021, I wrote an investment thesis on social capital and its impact on the pre-seed stage of venture capital, or "the key to prediction models in pre-seed venture capital". This is one post in a series of excerpts from that thesis. If you would like to see my complete thesis, please contact me to request the document.
III. Market Problems in Venture Capital
A. The Rules of Silicon Valley
Raising startup capital in Silicon Valley is a game with its own rules. Some of those rules are openly shared and others can only be learned through whispers at loud, dark bars and invitations to private dinner parties. It's not a complex conspiracy. It just goes back to the old saying, "it's not what you know; it's who you know."
The problem with the rules of venture capital in Silicon Valley is that they often don't optimize for the primary goal of cash on cash returns. These rules make it easy to justify hiring and funding “people like us” while excluding those who are not, and this bias has historically been rampant and gone unchecked.
In his book, Super Founders, Ali Tamaseb uses data to prove that the rules in Silicon Valley around startups are often not true - we'll look at a sample of those rules below. However, one key finding that Tamaseb does find true is that connections and venture capital funding play a huge role in the success of founders and companies. This is why more transparency around how and why funding decisions are made is critical to the future of venture capital.
RULES of SILICON VALLEY - TRUTH OR MYTH
- “Success indicates success”
Translation: Be in my network of friends (40% Stanford & Harvard)
THE RUB: This is a catch-22 that enables bias. How can one become successful if they are excluded and never given a chance to achieve success?
- “Be technical”
Translation: I like people who are software engineers like me.
MYTH: The truth is that 50% of unicorn founders are non-technical.
- “Get a cofounder”
Translation: Investors say that this is an important factor. They will use this rule to filter people they don't like and make "exceptions" for those they do like.
MYTH: The truth is the number of co-founders doesn’t affect unicorn status.
- “Be a young genius”
Translation: Unicorns look like Zuck. Did you see the movie?
MYTH: The truth is that half of unicorn founders are 34 or older.
- “Find a warm intro”
Translation: If you are not in my network, you can’t sit at my table.
FACT: Privilege & access are major determinants of success.
The rules of preseed and seed venture capital in Silicon Valley are mostly myths, and they are often used as conscious and unconscious bias factors in decision making. This paradigm is a cause of exclusion of minority and underrepresented groups of people, and it is less than optimal for achieving the primary goal of venture capital - greater cash on cash returns.
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