"Social Leverage" in Venture Capital

I will soon be participating in a panel at Defrag titled "Is Social Leverage the next big thing for VCs?" with my friends Fred Wilson, Howard Lindzon, Brad Feld and Jim Tybur. This is an interesting question that can be interpreted a few different ways, so I thought I'd put a stake in the ground to spur my panel-mates to challenge my perspective.

The venture investing business is, without question, a social business. Working with entrepreneurs. Identifying good co-investors and advisers. Plumbing one's rolodex to help make connections. Cultivating potential business development opportunities. However, there are elements of venture investing that sometimes work against this social nature, e.g., scarce capacity in a "hot" deal, leading VCs to be quite anti-social and to block other participants. While I lack the data to back my thesis, my belief is that in true early-stage venture investing the value creation of an investment syndicate (assuming the co-investors are truly value-added) exceeds the value give-up of sharing scarce investment capacity. This is one aspect of "social leverage," as the non-linear increase in contacts arising from a right-sized syndicate can substantially de-risk an early-stage investment. I have put this into practice in much of my early-stage investing, and it has worked as expected: co-investors with domain expertise and a wealth of industry-specific contacts can drive tremendous value to a start-up, especially in its early, formative, high-risk period. Help with recruiting. Identifying and gaining access to early adopter clients. Different product use cases to help chart strategy. These are just a few ways in which getting a group of super smart people involved with financial skin in the game can help an early-stage venture. Bottom line: social leverage is alive and well in the venture capital business, provided VCs aren't piggy and are focused on what's best for the business, the entrepreneur and, in the long run, themselves.

Another take on social leverage is as an investment theme. Several examples can be found in my portfolio: bit.ly, StockTwits, TLISTS, TweetDeck. Twitter and Facebook are clear examples as well. These are companies whose value is partly driven by community, where the value of the platform increases in a non-linear way as participation goes up (I would posit that this value function looks like an s-curve, where value accelerates during a period of rapid growth, but then flattens out as network effects have largely been exploited). Now, this assumes that this increase in usage is managed well, from both technology and user-experience perspectives (sometimes we bemoan the growth of Twitter because of this, no?). But there can be little doubt that these companies are facilitating the growth of communities, building affiliations, and promoting social leverage through their platforms, I think this is an investment trend that will continue for some time, as more vertical applications of social leverage emerge to drive a richer user experience to those with common interests, e.g., StockTwits and investing. And more tools will emerge to help monetize these communities in contextually-specific ways, e.g., TLISTS.

So this is my story and I'm sticking to it. Now we'll see what Fred, Howard, Brad and Jim have to say...