A Guide to Using Authority & Social Proof in Fund Raising

Posted on Jul 25, 2010 | 48 comments

A Guide to Using Authority & Social Proof in Fund Raising

I recently read a book I’d highly recommend to every reader of this blog called “Yes, 50 Scientifically Proven Ways to be Persuasive” by Robert B. Cialdini who is also author of a very well received book called “Influence” (which I plan to read).

“Yes” was given to me by one of my favorite angel investor / seed VC’s to work with – John Greathouse of Rincon Venture Partners and author of the blog InfoChachkie that you should check out because it is filled with great info from a guy who has been a very successful operator.  Rincon is part of the new breed of Seed Stage VCs and with the leadership of Jim Andelman has charted out the most authentic early-stage investment strategy in Southern California.  Any SoCal entrepreneur raising early-stage money should put Rincon on their short list.

John gave me the book after I spoke at his entrepreneurship class at UCSB.  I was excited to read it because Robert Cialdini had been a speaker at Google when my wife worked there and she told me that many members of the senior management team at Google had been raving about his work.  I decided not to be bothered by the cheesy title and to read it anyhow.  You should, too. (no, I don’t take affiliate commissions!)

The book is a layman’s guide to understanding how we as humans make decisions and is underpinned by data-oriented studies to prove his claims.  He lists 6 principles of social influence that I’d like to cover in a series of posts: authority, social proof, reciprocity, commitment / consistency, scarcity and liking.

I’ve been meaning to write about this for a while and was going to use AngelList by Nivi & Naval as the basis for my example and the perfect prompt came yesterday when I read Fred Wilson’s blog post on AngelList.

Social proof is defined as “looking for others to guide our decisions” and it can be both explicit and implicit.  We all want to think that we’re unique and original thinkers but we’re far more guided by others than we think.

In the book he talks about movement over the past decade to get us to reuse our towels more when we stay at hotels.  It is clearly a ploy by hotels to cut costs but it also benefits the environment.  No cookies for guessing which reason they use to market to us.  It turns out that more than 50% of us reuse towels at least once during our stay at a hotel because it appeals to our “commitment / consistency” value trait to want to be respectful of the environment.

But Cialdini knew they could do better.  He ran an experiment in a hotel in which he polled people on whether or not they reused towels during their stay and as expected just over 50% did.  He then put signs in some of the hotel rooms that said, “the majority of guests at this hotel reuse their towels at least once during their stay.”  26% more people reused their towels at least once during their stay when they had this sign versus the standard sign.  Classic social proof in decision making.

He went one step further.  He then put a sign saying, “people who stayed in this exact room reused their towels at least once during their stay.”  This increased the number of re-users to 33% above the control group.  We want to do what we believe others like us are doing.

While I feel that I tend to have a strong POV on many things I’ve always been aware of the social proof impact on my decisions.

The very first thing I do when deciding which movie I want to see next is check its rating on RottenTomatoes and if the film is North of 80% then it’s a “no brainer” for me to go and see.  If it’s below 50% I will almost never go and see it.  I suppose you could call this “The Wisdom of the Crowds” (another great book).  If you haven’t read it you should definitely buy it – other people just like you did 😉

When I want to go to restaurants I check out Zagat and Yelp.  Before booking a hotel I always check out Trip Advisor and read reviews.  This is all explicit decision making.

So how does this apply to you?

First, no matter what anybody tells you (people don’t want to believe that we’re influenced by the crowd), social proof is hugely important in fund raising. Every angel, seed investor or VC  is influenced by who else is talking with you, who else is investing in you and they (we) are all influenced by who introduced us to you.

If you want to hear an entrepreneur talk about this topic listen to Farb Nivi tell the story of how he got Rob Lord to invest in Grockit and how that led to Reid Hoffman and in turn Benchmark Capital, Integral and Atlas – more than $15 million in total.  He covers this is the first 15 minutes or so of the video and he’s awesome to listen to (more than 25,000 people have listend to this video so far – mostly entrepreneurs ;-))

Nowhere is social proof more prevalent than in angel investing.  As Fred points out in his post:

“Angels love to share deals with each other. It is how angel rounds come together.”

Or put another way – angels look for social proof from other angels.  It’s hard for angels to assess whether or not to invest because they often have day jobs and can’t commit to the kind of due diligence that most VCs go through.  Angels are writing smaller checks so they typically don’t want the overhead of complex analysis in order to make their decision.

So what you really need to get an angel round together are your “anchor tenants.”  These are the people who make the early commitment to you to fund your round before having any social proof.  You should seek to get people who are respected by others in your field and who will therefore make it easier to raise the rest of your angel round.

In the video I linked to above Farb talks about how he got Rob Lord on board at Grockit.  He first worked hard to get him to be an advisor to the company.  From there Rob decided to make a small investment.  Often people don’t like to be the only person writing a check so they’ll try to find safety in numbers by investing other angels to look at the the deal and “see what they think.”  That’s social proof, too.

I was once thinking about writing a blog post called “Is Reid Hoffman the Kevin Bacon of Silicon Valley” because it seemed that every angel / seed investor I knew looking at deals was shopping their deal to Reid and everybody wanted Reid’s opinion before committing.  Maybe a more apt title would have been “Is Reid Hoffman the Yoda of Silicon Valley?”  When I met recently with Keith Rabois of Slide he called Reid, “the smartest thinker in consumer Internet in Silicon Valley.”  Chris Dixon called Keith (paraphrasing), “the new Reid Hoffman now that Reid works for Greylock.”  Social proof meets social proof meets social proof.

But what is at play with Reid is another principle called “authority.”  Again, even though VCs are populated by Stanford & Harvard MBAs who all seemed to graduate near the tops of their classes – we’re all in search of authorities we trust to help guide our decisions.  Because I built two SaaS companies and sold my second one to Salesforce.com (where I then took on the role of VP Products) I am often asked to look at SaaS and/or sales-oriented deals for others.

Whenever I see something in financial services I always ask my partner Brian McLoughlin who has spent more than a decade looking at Fin Services deals or I might send it through to Mark Goines who is a phenomenal angel investor (invested and on the board of Mint.com) and was previous SVP at Intuit.  Anything requiring lead generation and/or customer acquisition I call Matt Coffin.  We all want authorities who are smarter on specific topics than we are.

So you need to find anchor tenants who have authority in your field and who are respected by other angel investors in order to maximize the benefits of social proof.

Another successful strategy (in addition to bringing on people as advisors) that I’ve often recommended to people who don’t have a track record is to carve out a very small amount of seed investment (say $50,000) and offer 5 people to invest at $10,000 each at a $500,000 post-money valuation (which means you give up 10% of your company for very little money.  The key to this strategy is getting 5 people who form the social proof to help you get a bigger angel round done at a higher valuation by tons of industry insiders and thus offering the social proof you need attract great employees and ultimately venture capital investors.

Obviously I’m assuming that you have a great product and/or strategy.  Having the right angels in a round that is cheap won’t help you succeed if your product or strategy sucks.  But assuming those are sound, strangely I have found over the years that even the wealthiest people want to feel like “they got a deal.”  So if that is all it takes then it is a rounding error to your future success.  I’d far rather dilute 10% early and get some investor traction than to wither for another 3-6 months trying to get my seed round together.

And to echo what Fred Wilson said in his post about AngelList – it is social proof on steroids.  You often have to have your anchor tenants before Nivi will send around your deal.  The emails we all get on the AngelList get say something like, “New gaming platform invested in by Dave McClure, Chris Yeh and Jeff Clavier.  They’ve raised $200k and are looking for $500k in total.”

As an investor it’s hard to not be influenced by an email like that where you respect the early investors and at least want to read about the company.  So even if you’re not getting funded by everybody you’re instantly on the who’s who radar of the investment world.  In a way, it’s even more precision for the investment world that TechCrunch.

To finish with a quote from Fred,

“I am on AngelList. I see all the deals come together. I don’t personally invest in angel deals in the web/tech space because of potential conflict with USV down the road. But even so, I find it immensely useful to see what companies are getting traction in the angel market. It’s part of my radar/early warning system.”

Authority + Social Proof + Traction in getting rounds done quickly = perception that this is a company that should be on my radar screen / I should pay attention to.  So what are you waiting for?  Go get your anchors.

UPDATE: Just because I believe in the power of social proof does not mean that I advocate being a lemming when one makes an investment.  I have always been and remain anti conventional wisdom.  In this post I’m merely pointing out that people look for references from authority and knowing that people are influenced by social proof should help people looking to raise money.  As someone investing – caveat emptor.

In my next post I’ll talk about using social proof in getting customer traction.

  • Ray Schmitz

    Awesome. I like this post a lot.

  • http://www.smoothentrepreneur.com Stephen

    I've been looking for books like this. It's amazing how true this social persuasion stuff is…especially after you pointed them out in real-life scenarios.

    Next time, give yourself the affiliate commissions on Amazon– you deserve it!

  • http://bothsidesofthetable.com msuster

    ha. I'd rather people 100% trust my recommendations than wonder if I'm hawking books 😉

  • http://shanacarp.com/essays ShanaC

    Be aware of too much social proof, it can cause groupthink problems, it tends to work best if you don't know what the other person is thinking (wisdom of crowds). it is why there is piling on of certain trends of investments.

    FYi, I really like the narration element of the posts when it is there- very nice for people who are blind, or who are too busy to read and want it read to them. Just thinking about it, thought I should mention it.

  • http://www.gorankem.com adamwexler

    i love it…but mark, somehow you managed to avoid the keyword for the entire post: crowdsourcing.

    we've been crowdsourcing the music discovery process @ http://gorankem.com & i'm convinced just about every industry can benefit from it's implementation.

    when it comes to investing in deals, it makes too much sense to lean on all of the other guys that are operating in the same space. when i first caught wind of angellist, i knew it was going to be big…and it sounds like it's about to really take off.

    looking forward to a more transparent & collaborative fundraising process for entrepreneurs & investors moving forward!


  • http://twitter.com/Aerials24 Latif Nanji

    Excellent post. Its fascinating to see how we rely on our social web to help us in our decision process not just in business but even in our purchases. Example, I've added Cialdini's book to my Amazon wish list for my next order…

  • http://bothsidesofthetable.com msuster

    re: social proof – yes, you need to be careful not to be overly influenced by it in a narrow sense versus in an aggregate rating. In investments it can be particularly dangerous. I try hard not to be swayed.

    re: Hearablog – yeah, I love those guys. I'm not an investor or in any way involved with the company but I love what they're doing so much I thought I would let them put their banner on my blog for a bit and see how it went. I appreciate the feedback. Never thought about the blind angle.

  • http://bothsidesofthetable.com msuster

    I think there's a huge difference between social proof (drawing conclusions from others) and crowdsourcing (using the crowd to accomplish tasks). Crowdsourcing can form social proof but it doesn't necessarily need to. You can crowdsource work – think Mechanical Turk or CrowdFlower.

    I'm a huge fan of crowdsourcing. I think I'll talk about that another day. Thanks for mentioning it. And no doubt it has worked tremendously well in music discovery.

  • http://bothsidesofthetable.com msuster

    For sure. Almost all of my books now come from social recommendations from people in my network.

  • http://www.gorankem.com adamwexler

    i think there's worlds of potential in crowdsourcing music discovery, but i don't think anybody has really nailed it yet. last.fm & their top play charts are the closest thing you'll find, but even that lacks a necessary human component…and that's where we fit in :)

    i see where you're coming from about the difference b/t social proof & crowdsourcing. if we were pooling the investor opinions of each deal, it'd be a little more conducive for your crowdsourcing definition.

    i smell an open API for angellist…might need to reach out to nivi & naval some time soon.. 😉

  • Michael Lampler

    groupthink syndrome not only effects investor decision making it also negatively effects investor feedback. I will be in the market for raising funds over the next 6-10 months. In my conversation with three different potential investors (at different times and locations) each must have used basically the same four lines when providing feedback. I quickly realized I was wasting my time b/c while they were all very positive on the idea and our execution; yet they did not move the conversation forward in any meaningful way.

  • http://stickyslides.blogspot.com Jan Schultink

    Valid advice for fund seekers.

    Investors though might make the once-in-a-lifetime returns when investing against the flow/without social proof: either a brilliant insight, or enormous luck

  • http://bothsidesofthetable.com msuster

    Yes, group think is a problem and a natural consequence of social proof. I call it “the lemming effect” and I try to avoid it.

  • http://bothsidesofthetable.com msuster

    I'm totally for investing “against the flow”

  • http://derrickshields.com Derrick Shields

    I agree with you 110% here, and I can personally attest that angel social proof is immensely powerful. In mid-Feb we were talking to a single angel investor for a modest amount. In March, due to “social evangelism” we had a few angels on board, with great terms for us. By April, we were turning down angel money, mostly because we didn't want to give so much of the company away right out of the gates.

    The problem I've found is that Angels often don't understand the business in its entirety, and don't necessarily have strategic relationships in place to (help) move the company forward and facilitate big partnerships & opportunities. That said,I'm probably looking at traditional VC for our first formal round, not because we can't raise (Angel) money elsewhere, but because we want a partner who truly gets what we do, and can serve as a resource to promote our value.

  • http://bothsidesofthetable.com msuster

    Make sure to check out Fred Wilson's great post on the topic of Angel vs. VC: http://www.avc.com/a_vc/2010/07/angel-vs-vc.html

  • http://www.hypedsound.com jonathanjaeger

    I smelled a little bit too much self-promotion in your two posts.. but on the other hand, I'm a music person so I clicked anyway, haha!

  • http://www.hypedsound.com jonathanjaeger

    Jason Calacanis openly committed to funding Storkbrokers on This Week in Startups (pending due diligence). He got a significant piece of the company for a very small amount of seed capital, but who knows, it could be the social proof that can help gain some interest in the company. After some design brushing up and some PR, in combination with the social proof, maybe the company has a better chance of success.

  • Johnmgreathouse


    Thanks for the props here. No wonder my blog traffic spiked today!!! Most appreciated.


  • http://www.gorankem.com adamwexler

    jonathan – i've commented a number of times on mark's posts, but almost always i've kept a reference to my startup out of the picture. when mark touches on social proof's first cousin, crowdsourcing, it's pretty hard not to drop a mention considering it's at our core…as it is, hope you liked what you saw!

  • http://www.therisetothetop.com David Siteman Garland

    Mark – Thanks again for coming on RISE. It was awesome learning so much about venture capital from you.

  • http://www.victusspiritus.com/ Mark Essel

    There is so much win in this post. Mark you've outdone yourself, this is precisely the information I've been looking for in a frame I can completely understand. Ok enough ass kissing and down to business.

    The money shot:
    “I’ve often recommended to people who don’t have a track record is to carve out a very small amount of seed investment (say $50,000) and offer 5 people to invest at $10,000 each at a $500,000 post-money valuation (which means you give up 10% of your company for very little money. The key to this strategy is getting 5 people who form the social proof”

    I've been contemplating something like this as a first timer. It started out with an idea to get 10 people on at 1% but 5 at 2% makes more sense with the cascading angel round. But I'm not ready to raise yet.

    “Having the right angels in a round that is cheap won’t help you succeed if your product or strategy sucks.”
    When the product and strategy are sound I'll be ready to try the 10% dilution to Key seed angels. I'm counting on user/consumer interest as a primary measure. Warm bodies (and eyes) trump all the view graphs in the world.

    Finally with respect to decision making, I'm fascinated by cognitive biases and understanding how folks make rapid decisions (pardon the sideways video I was new to my phone at that time) . The area of decision making is where most people make their money. We all make bad calls, but that doesn't stop us from counting on our judgment and trust networks.

  • Mark Barbieri

    Based on your comment in your update, I am sure you will really enjoy Cialdini's other book “Influence”. I read it last summer and found it to certainly be worth my time. He touches on social proof, as well as a number of other decision biases that we as individuals use both consciously and subconsciously.

    The real value though, is that he gets into ways to be cognizant of the impact, how to recognize when they are at play and how to counteract them when appropriate.

  • http://twitter.com/shuba_s Shuba S.

    I wrote this post from a customer’s POV after being sold to by a master salesman applying the Cialdini techniques:

    Thanks for the link to the Nivi episode, I missed this one for some reason.

  • http://twitter.com/markgoines mark goines

    Nice post and thanks for the compliments. To me the only deals worth doing are referred by someone who actually knows the founders well. Crowd-sourcing implies a lemming reaction, which I see too many times. Getting in early only works when the team can execute…markgoines

  • http://bothsidesofthetable.com msuster

    re: when to raise angel money … if you have a sound strategy you should be able to raise angel money before having all of the customer proof. That's where angels invest. If you have tons of customer validation you'd go straight to VCs. I'd go get the 5 for 10 now.

  • http://bothsidesofthetable.com msuster

    Thanks, Mark. I plan to read it for sure. Have to get through “The Big Short” and “Predictably Irrational” first.

  • Lateefivy

    Just wondering, is it a waste of time to apply to AngelList if you don't have name-brand angels on board already? (Side note: Didn't know you're a fellow former Salesforcer).

  • http://bothsidesofthetable.com msuster

    Agreed. Knowing the founders intimately is crucial and forms the basis of almost all of my investments to date. I try to avoid the group think and lemming effect that sometimes happens in the investment world.

    And re: Mark Goines – if you have the opportunity make sure to get your early-stage business in front of him. Anyone who's taken money from Mark will back that up.

  • http://twitter.com/jpmorgan Josh Morgan


    Good post and I agree. I have been meaning to read Mr. Cialdini's books.

    What are your thoughts on this Warren Buffet quote: “You pay a very high price in the stock market for a cheery consensus.”

    You could probably articulate the difference in investor types and how it impacts the consensus in either case better than I could. Thoughts?


  • Jon Katzur

    This is a really interesting post- definitely useful advice. I think that this idea can also be expanded to the role of customer acquisition, especially in enterprise software. The various people who are in play when a big company decides whether to purchase or use a particular piece of software definitely follow into this social proof pattern. The easiest way for them to convince others (and to have a way out if things don't work out) is to show that their top competitor, or the industry leader also use the same piece of software. This can be the positive signal just like having other top Angels invest in an earlier round.

  • http://bothsidesofthetable.com msuster

    The irony of investing is that people like to invest when markets are booming and like to sell when the crash. The opposite is how you make money. So I agree that “cheery consensus” is bad.

  • http://bothsidesofthetable.com msuster

    Ha – you obviously didn't get to the bottom of the post 😉 I said exactly that and have already written the post, which goes live tonight or tomorrow.

  • http://www.mattsmedia.ca MattsMedia

    Great post!

    I've read both Robert Cialdini books. I enjoyed Influence a lot, I read it at a young age (20ish). As much as he repeatedly wrote 'DO NOT to take advantage of people with the techniques' I kept testing the theory's on my friends and families. They worked every time! I got people to say and do all sorts of random things (on a small scale). Later I'd tell them what I did and they wouldn't believe me.

    I must second your opinion Mark, everyone should read these two books!

  • http://www.hypedsound.com jonathanjaeger

    That's fine, just messing around a bit. You added something to the conversation, so it's not like it's spam. Always be promoting, I suppose.

  • http://blog.beerfingers.com/ citadelgrad


    It might be good to publish a list of books you recommend or list them on a service like http://readernaut.com

    Thanks for the suggestions and the article!

  • Jon Katzur

    Ha- wow, I apparently completely missed the last line! Sorry for that- I am now going to read the other bost that seemed to flow so logical from the end of this one.

  • http://twitter.com/vsagarv Vijaya Sagar

    Guys who read the entire post and miss the last paragraph ('UPDATE: don't be a lemming'), go home thinking they have found the fund-raising/fund-investing silver bullet.

    There is a saying in Indian philosophy: The teacher removes the (complex-) ignorance of the pupil by teaching (simple-) ignorance. Mark, you seem to be a master of this method :) Good post again.

  • http://avc.com fredwilson

    great post mark. you really amplified the message i started with my post. thank you for doing that.

  • http://twitter.com/jeffcohn jeffcohn

    Keep in mind there are lots of sheep investors who require social proof validation but the best investors in my opinion are contrarian investors. I have witnessed dozens of examples over the last 10 years of great investments that were turned down by the “herd” of the Tech Coast Angels. The most successful angels didn't listen to the false objections from the herd and went on their own intuition. “Me too” early stage investing only works with ponzi schemes (a bigger fund steps up the valuation) and invests at a higher price.

  • http://hdemott.wordpress.com Harry DeMott

    Influence is indeed an excellent book. But if you want to go deep – start reading Gary Becker. He's a Nobel prize winning behavioral economist – who pretty much invented the field out of the University of Chicago.

    Also, a great bunch of comments can be had by looking up speech's given by Warren Buffet's older partner charlie Munger. He talks at great length about behavioral influences and how you can often predict a result just by looking at the incentives for the participants involved.

    Investing is full of examples of social proof. I think you have to make a real distinction between social proof and true expertise.

    I know more about broadcasting than 99.99% of the U.S. population given my history – and understood the value that Chad and Ryan Steelberg were trying to create with dMarc Broadcasting – yet in the VC world, my involvement carried no social proof. It was still very very difficult to raise money for that company. No one jumped into Pandora when I lead a round there 4 or so years ago – but add Greylock (and of course massive success by the company) and all of a sudden it is Hot hot hot!

    I may have expertise, but David Sze has social currency – and today – social currency is worth far more in terms of financing.

  • http://shanacarp.com/essays ShanaC

    Anything in particular by Becker that you are thinking about? He is a superb writer and author- cf the Becker-Posner blog.

  • http://twitter.com/hgadhia Hemang Gadhia

    Mark, I think one of the really interesting strategies that this raises is for the entrepreneur to focus heavily on getting that first angel investor and making sure it's the right person. From all the evidence I've been hearing lately, it seems like getting the right first angel might be more important than just about anything else you do at the early stages. What I worry about is if this is going to create a situation (if it already hasn't) where these super angels are in a position to essentially take equity for their assistance in fundraising and nothing else. Not sure interests align very well for anyone in that scenario.

  • http://twitter.com/m3tucker Mike Tucker

    Great post!

  • Aaron colman

    A great read, thank you.
    I can use this today as we sit down and complete our list on who to approach for our Advisory Board – maybe we can start the whole process a step before the first seed investor…
    I now look forward to reading todays post.

  • http://www.vistageknowledgecenter.com Katie Reynolds

    It’s very important what others are saying about you – which is why it’s so crucial that you listen to their conversations using different social media tools. Until this Friday, we are actually giving away a free social media assessment here: http://su.pr/87MYOp It will show you which social media vehicles are best for your company, so you can start listening without feeling overwhelmed by the information.
    Katie Reynolds

  • http://twitter.com/AndrewDarlow Andrew Darlow

    Fantastic post with a lot of real-life examples.

  • http://twitter.com/andreehuk andree huk

    I read “influence” 18 months ago. Liked it a lot, however, I suppose the new one picks up on “influence”, curious what additional insight the author may provide. Please keep me posted when you read both 😉