Why do we need handshake deals? Why not just wait till the actual transaction? Because things can happen fast in the startup world.
So both investors and founders need a way to reserve space in a transaction. Founders need it because creating documents and getting them signed would slow down their fundraising, and investors need it because if they had to wait for documents to get created and signed before they could commit, they'd miss out on the hotter deals.
Handshake deals are not unique to Silicon Valley of course. They tend to arise wherever trust is sufficiently high and speed is sufficiently important. Diamond dealers apparently use them a lot.
Unfortunately, things don't work as smoothly in Silicon Valley as among diamond dealers. This is not a closed community of pros who deal with one another day after day. Many participants in the funding market are noobs, and some are dishonest.
Every cycle we get reports of supposed handshake deals that fell through. Without video of the conversation it's hard for us to be sure whether there really was a deal and the investor welched, or there wasn't and the founders are just victims of their own wishful thinking.