The importance of social networks for startup investors
The article goes over some of the important considerations a startup founder must think about when bringing in outside investors to their venture. Contrary to what many outside of the startup world may believe, money is not the greatest asset that a potential investor brings to the table. As the article explains, giving up equity is a big deal, so founders have to be cognizant of the various ways an investor can add value to the operation beyond simply funding it. For example, many investors have a specific industry or stage they have expertise in, which can translate into useful guidance for the founders. Another example given is that the right investor has a network of colleagues and other investments he/she can tap into, potentially leading to partnerships or acquisitions. These value-adds aren’t as immediately salient as a dollar amount investment, but they often play a much larger role in the ultimate success of a growing company.
The article connects really well to the concepts of social networks we learned about at the start of the semester. For example: in class, we learned about how a set of two unconnected nodes can become strongly connected via an intermediary node they’re each strongly connected to (i.e. triadic closure). This kind of thinking ties in perfectly with the source article, because it gives us a mathematical lens through which we can view the various social benefits a given investor brings. The world of startups and venture capital is very high-risk-high-reward, so a great deal of importance is placed on relationships and reputations. There are a ton situations in which an investor has acted as the bridge between two previously-unknown companies and/or founders, using his/her strong ties to each to help them form a strong tie with each other as well. In this example, that’s essentially real-world triadic closure. And it extends even further than that! We see many of themes from the class, such as clusters, components, degrees of separation, etc., all play a role in the social capital an investor is judged on when attempting to invest in a new company. This social web between founders and investors becomes more apparent when looking at serial entrepreneurs such as Elon Musk, who are able to increase their likelihood of success because of their access to the right investors, engineers, managers, etc. It’s very cool to be able to analyze those implicit connections through the lens of the course!