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.
An intelligent social capital model can identify & select credible pre-seed startups for investment better than human intuition. It may also mitigate bias and diversify the pool of capital recipients while delivering greater cash on cash returns to the fund.
Social capital is the value gained by creating and leveraging a crowd on the internet. It is an evolution of social networking where people tap into their networks to make money. This is a megatrend that started over a decade ago and is certain to continue its upward trajectory into the future. Some emerging trends that are contributing to social capital include: meme investing, the creator economy, and communities built around any given product category. Humans are becoming increasingly skilled in this art, and they continue to push the limits on how to create and profit from it.
Venture capital is the financing of startups, where investors exchange capital for equity. In 2020, global venture capital was over $300 billion.(1) In Q1 of 2021, venture capital hit an all-time record high of $125B in investments for a 94% YoY increase.2 More than one “unicorn”, a company valued at $1 billion or more, was created every day in this same quarter.(2) Innovation continues to be a major driving force of the US economy, and it all begins in the angel and seed stages of venture.
As VCs search for the next big thing, social capital has become a top area of interest. D'Arcy Coolican of Andreesen Horowitz pointed out, “The best version of every consumer product is the one that’s social.”(3) Likewise, great business products often look similar and reflect user experiences from social consumer products - think Slack. These trends point to a secret hiding in plain sight - the next big opportunity in social is in venture.
Today, angel investors and seed stage venture capitalists rely on intuition, emotion, and closed networks in their decision-making. In the near future, these methods will be deprecated for innovative models that create social capital as data, signals, and momentum. This new data combined with modern technology is the key to predicting success at the pre-seed stage of venture, and it has the power to unlock the greatest returns in the industry.
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