Silicon Valley's Real Social Network

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Silicon Valley likes to think it has a nice meritocracy going on, where smarts and ingenuity trump money and social class, but the circle of tech companies, described in today's New York Times proves, yet again, that's not exactly how it works. 

Following the outsider rich kids with famous daddies throwing their money onto the scene, post-Facebook IPO we're about to see a new group of very rich kids, some of whom have already invested their money back into Silicon Valley, enter the investor scene. There's nothing particularly unfair about reinvesting in one's community. It's almost philanthropic. And these millionaires worked for their tech money, learning about the tech biz along the way. But, the way The Times' Somini Sengupta describes this circle, it's very much based on who you know, which does not at all fit that meritocracy image.

The Tech Circle of Life works like this: A tech company goes public, making a bunch of rich kids a ton of money, they invest in the next set of tech start-ups, some of which will get huge and go public, birthing a new group of young millionaires, and so on. "The history of Silicon Valley has always been one generation of companies gives birth to great companies that follow," Matt Cohler, employee number 7 at Facebook told Sengupta."People who learned at one set of companies often go on to start new companies on their own," he continues. On its surface, this fits the Silicon Valley meritocracy theme. It reads like: Nobodies work hard for their money, use that money to make another bunch of nobodies the next it thing. But, a closer look shows that the nobodies aren't nobodies.

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Rather, these newly-minted somebodies are investing in their friends' companies. Cohler, since leaving Facebook, has put money into at least four companies of buddies he met at Facebook: Quora, created in 2010 by former Facebooker Adam D’Angelo and another early Facebook engineer, Charlie Cheever, Asana, created by Dustin Moskovitz, one of the original Facebook founders, Peixe Urbano, a Brazilian commerce website conceived by Julio Vasconcellos, who managed Facebook’s Brazil office in São Paulo and Path, which Dave Morin, also from Facebook, founded. Cohler isn't the only one guilty of this hand-feeding thing: Ruchi Sanghvi, the first woman engineer at Facebook, had her company bought by Dropbox, whose founder "she knew socially," explains Sengupta. This circle has been going on since before Facebook, too, with the PayPal Mafia as "the most famous" of the groups. Peter Thiel, on of its founders, by the way, mentored Cohler. 

With Facebook's IPO coming up in the next couple of weeks, we'll see the birth of a new generation of tech millionaires all ready to   invest in their friends' companies. Cohler and others Sengupta profiles have already cashed out. But New York Magazine also has a rundown of some who look to make millions (or hundreds of millions) come IPO day. 

The rich heirs we learned about last month got shunned for knowing nothing about tech and making it to the top without working hard and knowing nothing about this business. (Of course they all went to Ivy League schools.) The group profiled today know about technology and Silicon Valley and what makes social networks grow and all that important stuff. So, one would hope, they aren't just investing in friends' projects, but friends' projects that also happen to be the future Facebooks. But, that's not clear, as Sengupta explains. "Instagram clearly was a good bet; it is impossible to say whether any of the other investments Mr. Cohler or other Facebookers are making will catch fire or whether the start-ups they found will last," she writes. It also means their money isn't going to the real nobodies. You know, the ones sitting in their dorm rooms creating the real next Facebooks. 

This article is from the archive of our partner The Wire.