FOMO, or the Mimetic Desire Theory leading to herd behavior in Venture Capital
There is no better way to end the week than to spark your interest in the philosophical concept of mimetic desire. I am hoping to embark you on a journey with French philosopher René Girard who coined this theory. I will elaborate on herd behavior I find particularly interesting to study as a venture capitalist. You will see that Girard’s mimetic theory plays an undeniable role in technology investing.
The father of the Mimetic Desire theory
Born in 1923 in Avignon, France, René Girard is a unique character as he spent most of his life teaching philosophy and literature at Stanford and his remarkable work had a little echo in our country up until he died in 2015. Girard is famous for his ideas of mimetic desire, mimetic violence, and the scapegoat mechanism. These are components of a rather ambitious theory that tries to explain societal dynamics based on anthropological studies and literary analysis of scriptures and classics.
I had a great time reading his first book last summer, Mensonge Romantique et Vérité Romanesque (1961), which is a literary comment on the works of great European novelists such as Cervantes, Stendhal, Flaubert, Dostoyevsky and Proust. Starting from literature as a playground for his philosophical work, he introduced in this book the key concept we are discussing today of mimetic desire, which has been at the backbone of its lifelong work. For anyone interested in philosophy, Girard provides relief to sometimes very arid concepts, through his ability to grasp moments of greatness in literature and his way of always successfully proving his point.
The triangle of desire
“Man is the creature who does not know what to desire, and he turns to others in order to make up his mind. We desire what others desire because we imitate their desires.” writes Girard. This is quite a contrarian take as today’s zeitgeist is all about autonomy and free will. What Girard discovered in literature is quite different.
The subject desires an object through a mediator. The origin of desire stems from the actual or imaginary desire of a third party, or mediator, forming a triangle (“désir triangulaire” in French). This is the mimetic part. At the same time, the subject, object, and mediator form a behavioral triangle of desire.
Conflict or competition for a desired object or person is also a function of the distance between the subject and the mediator. Distance is an important concept referring to how close are the subject and the mediator in terms of “realities”. “External mediation” occurs when a subject mimics a role model far from his or her immediate reality such as a celebrity. “Internal mediation” happens between two subjects living in proximate realities where conflict between both can arise. For Girard, the social distance is a key driver of mimetic desire, and literature serves as a vast field of study.
Girard finds plenty of examples of mimetic desire in literature. This form of third-party-induced desire is well described in Madame Bovary (Gustave Flaubert, 1857) as Emma’s lack of personality stems from her undeterred desire to mimic role models she thinks are important to establish her as part of la bonne société. Similarly, Monsieur de Rênal in Le Rouge et Le Noir hires Julien Sorel as a tutor for his children only because Julien’s father pretends that Valenod, the second richest man in the village, is eager to hire his son as well for his children. Immediately, Monsieur de Rênal matches the price asked on the back of an imaginary desire attributed to his rival Valenot. Girard also shows that the Proustian work is traversed by mimetic desire as quoted by Proust himself in Le Temps Retrouvé (1927): “En amour, notre rival heureux, autant dire notre ennemi, est notre bienfaiteur. À un être qui n’excitait en nous qu’un insignifiant désir physique il ajoute aussitôt une valeur immense mais que nous confondons avec lui.”
FOMO in VC is a good illustration of mimetic desire
Now, to link this article to technology investing, it is fair to say mimetic desire has led to a herd mentality in our industry. It has become such a large part of the culture that venture capital investors sometimes advise founders that it’s crucial to create “FOMO” aka “Fear of Missing Out” to get a commitment from a VC fund. FOMO in VC is nothing more than a Girardian model of mimetic desire. The mediator role needs to be played by another VC fund willingly or supposedly competing to invest in a scarce asset, the next unicorn. Since most funds offer an equivalent product i.e. fresh capital, the distance between them is small. According to Girard, the smaller the distance is, the higher the desire starts to operate at a subconscious level. In our VC game, it leads to a bidding war for investing in a startup as an object of rivalry. A counterintuitive takeaway is that FOMO arises not because we are different, but also because we are the same.
Herd behavior has been largely discussed in the venture capital industry by seasoned investors as this phenomenon may play a larger role in driving value than in other asset classes. It sometimes leads both private and public markets to bounce back in dramatic swings illustrated by the 2000s dot-com bubble burst.
US famous investor Fred Wilson wrote wise words in a 2013 post titled Return and Ridicule about herd mentality in our industry: “So many folks in the venture capital business are sheep that just want to follow the herd. They are momentum investors purchasing highly illiquid investments. That is a recipe for disaster. Momentum investing works in highly liquid markets (sometimes). From what I can tell, it almost never works in private markets.”
Mark Suster from Upfront VC is playing out FOMO in his own words: “Nobody commits, nobody wants to set a price, nobody wants to stick their neck out then BOOM! Reid Hoffman (LinkedIn’s co-founder and an investor at Greylock Partners) is in? I’m in for $500k. Wait, make that $1 million. And please reserve another $1 million for me — I just need to call my LPs to see if they want to do it with us”. In Understanding the Herd Mentality of VCs, Suster thinks of FOMO as “brain outsourcing to the smartest person you know” and no founder can deny having heard from investors to call them back “once you got a lead investor to commit”.
I think for both founders and investors, mimetic desire and herd phenomenon drive poor outcomes, a lack of skin in the game, and a lack of thoughtful thinking. “Unnecessary” cash injections into precarious businesses have driven valuation up while harming the whole market. For instance, Softbank’s Vision Fund goose feeding WeWork or OYO with fresh capital has led to poor realizations to date. Last July, a UK cloud kitchen startup willing to raise £3m went out to investors finally pouring £252m into the company.
At Gaia Capital Partners, we spend our time trying to cut clear from the noise to grasp stronger signals than investors’ interest or existing logos in the capitalization table when investing in a company. Don’t get me wrong, those signals are relevant and sometimes reassuring elements, but we always try to go further in the analysis not to get caught by the flywheel effect of FOMO proper to our industry. Being able to build strong convictions regardless of what most others think is essential both for startups and for technology investors, and is key to build long-lasting relationships and create value.
