Proximity Bias: The Hidden Trap in Venture Capital
November 6, 2023
William Callahan
Software engineer and entrepreneur based in San Francisco.
investingventure-capitalstartups
After being around the venture capital space enough, I've noticed a persistent pattern: investors often overvalue startups simply because of who the founders know or where they worked/studied. This is proximity bias, and it causes real problems.
The Reality of Proximity Bias
When a founder drops "I was early at Stripe" or "I worked closely with [insert famous founder]", investors' ears perk up. I've sat in many meetings where these signals dramatically shifted the conversation - and not always for the better.
Here's what actually happens: A founder's past association with successful companies or people creates an immediate halo effect. Their pitch gets more attention, their valuation creeps higher, and due diligence sometimes gets lighter. I've been guilty of this myself.
Why This Matters
The current market downturn has exposed the flaws in this thinking. I've watched startups with impressive pedigrees struggle while "outsider" founders build profitable businesses. Your time at Google or friendship with a unicorn founder doesn't guarantee you can:
- Find product-market fit
- Build a sustainable business model
- Execute under pressure
- Adapt to market changes
Breaking Free from Proximity Bias
How We're Solving This at aVenture
At aVenture, we're building tools to help investors look beyond surface-level signals. Here's what we've learned matters more:
- Real Traction: Monthly growth, customer retention, and unit economics tell a clearer story than any resume
- Market Understanding: How deeply does the team understand their customer problems and market dynamics?
- Execution Speed: Track record of shipping products and iterating based on feedback
- Capital Efficiency: How much real value are they creating with each dollar invested?
This is why we're building a comprehensive database of venture-backed startups at aVenture. We want investors to make decisions based on data, not degrees of separation.
Want to be part of this change? We're giving early access to our startup research platform at aventure.vc.
A Better Approach to Evaluation
We're seeing a shift in how the best VCs evaluate deals. Instead of relying on network effects, they're:
- Running detailed cohort analyses
- Talking directly with customers
- Testing products themselves
- Analyzing competitive moats beyond network effects
The Path Forward for VCs
The venture capital industry is at a crossroads. While pattern matching and proximity signals have been reliable shortcuts in the past, the democratization of startup creation means we need better evaluation frameworks.
What matters isn't where founders came from, but where they're going. The most successful VCs of the next decade will be those who can look past surface-level signals and dig deeper into the fundamentals that truly drive startup success.