Naval: Social proof can get a bad rap, deservedly so because it can be a herd mentality where one monkey imitates the other.
There are reasons why humans follow social proof. Historically, if a member of the herd yells “lion!” and the rest of the herd starts running, it doesn’t make sense for you to stand there and look around until you see the lion. You follow the herd. That’s where social proof comes from.
If everyone in a movie theater gets up and starts running, you get up and run. You don’t think twice. If you see a crowd near a store, you drift over to see what they’re selling. If you see people waiting in line at a restaurant, you can assume the food is decent. When one person looks at the sky, everybody looks up.
In private market investing, nobody knows everything. Each investor in the startup knows a little bit about the deal, but nobody has a complete picture. One person might evaluate the team well because the team used to work for them. Another investor might know the product well because they worked in the space. Another investor might be good at reading traction metrics. Each of them brings additional information to the table. But the price of the round doesn’t move with each new commitment.
That’s not how it works in the stock market. You can’t follow Warren Buffett into a hot deal because he’ll only tell you a month after he did the investment. The instant he invests, the price of the deal goes up. And when he announces it, the price goes up even more.
However, in private markets the price of the deal stays relatively fixed until the entire round is done. So it’s advantageous to be a late, credible mover.