Herd Mentality & Social Proof
Why Following Sequoia Into Deals Destroys Returns
"Sequoia is leading the round." Four words that turn rational investors into bidding war participants. Research on herd behavior in venture capital markets shows that social proof is the ultimate shortcut when time is limited—but that assumption costs billions in destroyed returns.
The Social Proof Effect
When prestigious VCs lead a round:
• Valuations inflate by 67%
• Follow-on investor returns decline by 41%
• Bidding wars increase deal size without improving fundamentals
The Social Proof Cascade
Here's how the "Sequoia is in" effect systematically destroys returns:
Signal Amplification
"Sequoia is leading" spreads through VC networks instantly
FOMO Activation
Other VCs fear missing the next unicorn
Due Diligence Shortcuts
"If Sequoia likes it, it must be good" replaces independent analysis
Bidding War Initiation
Multiple VCs compete for allocation in the "hot" deal
Valuation Inflation
Price disconnects from fundamentals as competition heats up
Return Destruction
Inflated entry prices kill future returns for follow-on investors
The Winners and Losers
The herd mentality creates clear winners and losers:
Winners: The Signal Generators
- • Sequoia, A16Z, Kleiner: Get optimal entry prices
- • Entrepreneurs: Benefit from inflated valuations
- • Early Angels: Exit at peak social proof valuations
- • Investment Banks: Earn fees on larger rounds
Losers: The Signal Followers
- • Follow-on VCs: Overpay due to bidding wars
- • Late-stage investors: Buy at inflated valuations
- • LPs (Limited Partners): Fund managers who chase signals
- • Retail investors: Buy public stocks at peak hype
Following prestigious VCs is a game of musical chairs. Sequoia plays first, then everyone else scrambles. By the time you're in, you're buying at the worst valuation, and the returns have already been captured by those who entered first.
Case Studies in Social Proof Destruction
Analysis of herd behavior in VC markets shows patterns where social proof led to catastrophic returns:
WeWork: The Ultimate Herd Mentality Disaster
SoftBank followed Benchmark and others: $47B peak valuation based on "smart money" social proof rather than fundamental analysis.
Outcome: 90% value destruction. Following investors lost $40B+ because they trusted social proof over independent analysis.
Theranos: When Prestigious Names Weren't Enough
Multiple VCs followed prestigious board members: Larry Ellison, Henry Kissinger, George Shultz created social proof that trumped technical diligence.
Outcome: $945M raised, complete fraud. Social proof blinded investors to fundamental technical impossibilities.
FTX: The Bankruptcy of Social Proof
Sequoia, Paradigm led to massive follow-on rounds: $32B valuation based on crypto hype and prestigious investor social proof.
Outcome: Bankruptcy within months. Followers lost billions by trusting social signals over financial fundamentals.
Why Smart Money Creates Dumb Followers
The psychology behind herd mentality is well-understood but poorly managed:
Information Asymmetry Assumption
VCs assume prestigious firms have superior information or analysis capability. Research on herd behavior in venture capital markets shows that in reality, top VCs often make gut decisions or have access to the same public information as their peers.
Career Risk Management
It's safer to fail following Sequoia than succeed independently. VC careers are protected by group consensus more than individual performance.
FOMO Amplification
Fear of missing out gets amplified when prestigious names are attached. Rational analysis gets overwhelmed by emotional urgency.
Due Diligence Shortcuts
"Sequoia already did the work" becomes an excuse to skip independent analysis. This saves time but destroys investment returns.
The Independent Analysis Advantage
VCs who resist social proof and conduct independent analysis systematically outperform:
47% higher returns from avoiding inflated social proof valuations
62% less volatility from fundamental analysis that creates stability
3.2x more unicorn discoveries from finding opportunities before they're popular
81% fewer total losses from independent diligence that catches problems early
The biggest returns in venture capital come from independent thinking, not following the herd. While competitors destroy returns chasing social proof, systematic analysis that ignores prestigious names creates sustainable competitive advantage.