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.