Investor Herd Dynamics
Paul Graham’s essay Investor Herd Dynamics explains how investor opinions heavily influence other investors, creating cascading effects.
The Core Phenomenon
When one investor commits, others follow, potentially leading to exponential interest—what’s known as a “hot deal.”
Success ≠ Stampede
“Lots of startups that cause stampedes end up flaming out” while many extremely successful companies generated only moderate initial investor interest. Stampedes aren’t reliable indicators of startup quality.
Why the Herd Effect Occurs
- Improved Risk Profile: Money raised literally makes your company more valuable
- Founder Confidence: As fundraising progresses, founders project increased confidence
- Mediocre Judgment: “Judging startups is hard even for the best investors” and weaker ones follow the crowd
- Practical Deadlines: Competing offers create urgency
Strategic Guidance
Avoid manipulating these forces but don’t exaggerate competitive interest. Be transparent with preferred investors while protecting confidentiality about rival conversations.
The Initial Challenge
Most startups experience the opposite dynamic initially—investors remain distant. Understanding this external resistance helps founders persist toward that crucial first commitment.
How have you navigated investor dynamics? I’d love to hear at persdre@gmail.com.