I’ve looked at a few deals this year in which a billionaire was already invested. The first few times this happened I got really excited. I wanted to be a part of it.
But the problem with co-investing with billionaires, is that they don’t lend as much social validation as one might imagine.
**Social Validation: An entrepreneur being validated because he/she has already received an endorsement from a well-known source
“we did the deal cause Bill Gates/Mark Cuban/Richard Branson [Insert billionaire name here] was our co-investor.”
That’s a stupid reason to invest. First off, no one should invest just because someone else was in the deal. But I’d at least give far more credence if Shana Fisher, Fred Wilson or Phin Barnes were in the deal—especially if the money invested was through a fund, and composed of a third party’s money (not their own).
Investments made by professional investors have a higher ROI, simply because ROI was the driving force behind the decision.
While having a billionaire in the round proves the founder’s network might be impressive—billionaires tend to do less diligence. They don’t really care if they lose $500,000. Their investments are often driven by ethos rather than pragmatic consideration (this isn’t true for all, but many).
This isn’t a bad thing! If I were a billionaire, I’d do the same thing. But I’m not, so the incentives behind my investment dollars are different.
This doesn’t mean you shouldn’t raise money from a billionaire. They have great networks, and can re-invest later on. The signal effect is definitely positive, and they likely will be a no-friction-type-of-person (never late on their wire transfers etc). But from my perspective, social validation comes more from those whose circumstance and mission are closely aligned with mine. Until I’m a billionaire and am investing recreationally, I’ll keep doing my diligence.
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