An annoying feature of starting a small company is that one of the biggest step-function changes you can achieve for your future prospects is to get ratified by the right VC as a serious business that's destined for growth and greatness. This is scarce and valuable, and such things usually have a price tag, but if you're paying anything more than airfare and an Uber fare to pitch someone, you're almost certainly getting ripped off.

This isn't the case with every high-value transaction. Large private placements and M&A deals obviously generate fees, as does recruiting. It's not as if it's impossible to put a price tag on these kinds of things. But for some transactions, the default currency is the stream of mutually-beneficial warm intros, which is not a fungible product that can readily be converted back and forth into money.

One reason for this dynamic is that when there's a legible product being bought and sold, it's easier to put a price on it. When a company is in the middle of an M&A process, there are roughly two models that get used:

1. What's the net present value of their future cash flows, perhaps conditional on either synergies with a strategic buyer or operational efficiencies a financial buyer believes they can offer, or

2. What's the net present value of the cash flows the acquirer will lose out on, if e.g. Diapers.com keeps nabbing moms who would otherwise sign up for Prime, or if Instagram becomes the default photo-centric social network?

For hiring, too, the bet is on what's known: third-party recruiters don't spend a lot of time working on entry-level roles, because the people who have impressive pre-career credentials generally go to institutions where there's already active recruiting. There could be a market for this kind of talent, but it wouldn't have the same economics as when a firm hires someone with five years of a specific kind of experience.

Founders, like entry-level workers, are closer to an option than a stock. There's a good chance that the payoff will be negative (not just in the sense that an investment in them could go to zero, but in the sense that sometimes a company going to zero is a process that's a lot more time-consuming to investors than the process by which it goes to infinity).¹ Someone who continuously buys out-of-the-money options will bleed money over time, though if they buy enough they'll eventually have a big win. But it's psychologically hard to wake up a little poorer every morning and then go looking for ways to get poorer still.

At the same time, the entire tech ecosystem is basically one big switchboard that's trying to communicate which companies and founders are hot right now. There's a lot of reflexivity to this, where in startup fundraising outbound is a slog until a critical mass of people get impressed, at which point there's suddenly inbound interest. In that ecosystem, referrals and introductions actually work quite well as currency for staying in the right networks.

It's striking that the asset class responsible for funding some of the biggest and highest-impact companies in the world basically operates through ranked competitive gossip, but in another sense, it couldn't be any other way: companies start out as a people and a narrative and accrete increasingly legible accomplishments over time, so understanding stories is a form of alpha and sharing them is an implicit co-investment. And this gossip is about people, too, rather than institutions: Jordi Hays had a fun tweet describing early-stage investing as a ten-leg parlay; if every one of those events is a coin toss, the odds of an investment working are less than one in a thousand. But every one of those is also impacted by the team, so if any one of them starts to work, the conditional probability of the rest goes up: if the real odds are 60% rather than 50%, and the outcome is constant, the asset is suddenly worth 6.2x as much.

In asset classes backed by real assets or historical cash flows, there's room for a more standardized approach, and there's a lot more rigor around valuations because there's more to be rigorous about. But when neither of those are available, the only questions left to ask are: who do you know? And can you make an intro?

In The Diff, we've talked about both informal social systems and venture many times, including:

• Why it's almost meaningless to look at average valuations ($).

• Venture capital as a media business ($).

• How social status follows the same path as Galbraith's concept of the "bezzle" ($), i.e. the sum of money that two different parties spend as if they have because one's spending money they've stolen and the other is spending from a stockpile of wealth they don't realize is smaller than they thought.

• Academic research suggests that knowing richer people increases social mobility ($), partly through connections and partly through seeing that it's possible to get rich.

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1  Another interesting framing of this is illiquid vs liquid, with founders and new grads that pursue a less legible (non-banking, consulting, or big tech paths), being more illiquid in that they are investments that are harder to evaluate, mark to market, and trade.