Why Homophily Matters in Investing

According to Wikipedia, homophily (i.e., "love of the same") is the tendency of individuals to associate and bond with similar others. The presence of homophily has been discovered in a vast array of network studies. Within their extensive review paper, sociologists McPherson, Smith-Lovin and Cook (2001) cite over one hundred studies that have observed homophily in some form or another. These include age, gender, class, organizational role, and so forth.

Homophily matters for investing in start-ups, too. Women entrepreneurs get 15% of angel investments and also represent 15% of angels. Likewise, women entrepeneurs receive 6-10% of venture investments and represent 7% of venture capital investors.

When I see business plans for products or services that I can't see using, it's harder for me to really believe in its potential for traction.

I went to the Game Developer's Conference a couple weeks ago and met several game developers, who all proudly showed me their latest game on their iphones. The men showed me casual games themed with toy canonns and monsters and the women showed me carbon-eating sprites and earnest children's games. While I loved the energy of each of the game developers that showed me their games, I was more interested in the potential for the games that my niece likes to play. And, in the end, it's women who are the buyers in casual gaming.

Focus on Women Consumers = the New Social Venture Capital

The central reasons to focus on women as your primary consumer are only growing. First, they are the dominant consumer in the US in almost all categories (averaging over 80% across categories). In addition, they are more profitable consumers because women have greater loyalty and a greater tendency to be the source of referrals. This viral benefit is now being amplified by women's larger presence in social networking, as discussed in this article by Aileen Lee.

Another interesting advantage is women's social values. According to Marti Barletta's fabulous book "Marketing to Women" (which I've discussed in earlier posts), women buy into cause marketing at higher rates than men, 77% to 64%. Women care more about a corporate halo, ie, companies that care about the environment, community charities, etc and spend accordingly. And, 85% of women list "Make the world a better place" as their primary aspiration. When companies really listen to the extent of women's altruism, they will, by definition, provide products and services that "make the world a better place."