TBC: Understanding VC Signals

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Hey guys, welcome to another episode of the back channel today. I want to talk about something. That is incredibly important for founders to understand, especially how you influence them, how they come about. Uh, because it is sort of the name of the game when it comes to fundraising and that topic is VC signaling. The idea that there are signals that venture capitalists and other investors look for either explicitly or implicitly reacting to what does that mean? Why is it important

And how founders should think about these things when it comes to fundraising? Uh, the amazing part about this topic is that I had written down this topic as a headline VC [00:01:00] signals. Had jotted down some notes on what to say. Even before I had the most amazing experience. So, um, given my network and the deal flow that I have and the friends that I keep, I'm often invited to sit in on VC partner meetings sometimes to give. My own opinions on a certain topic that I might know. To weigh in on founders that I might've met before, or just to hang out because venture capital is a social game. And I happened to be able to sit in on a partner meeting. Uh, where we just discussed a bunch of different deals and,

And mostly I just sat and observed. I was kind of a fly on the wall, saying a few words here and there when it made sense. One conversation in particular made my ears perk up.

I didn't say anything, but I certainly took note because of what I'm about to share. One of the partners talked about a deal that he was interested in. That, uh, the company itself and the founder exhibited a lot of [00:02:00] interesting. Elements that he enjoyed. He liked the space. He liked the direction that they were going in. As he started conversations with the founder. It became clear that they were talking to other investors and some of the indications early on from the founder made it seem like they were going for a certain valuation. That's some of the other big name firms would be happy to pay for or would happy to compete around.

And at certain point at a certain point, this partner said, you know what? I like this enough, but, uh, given where it's going to go, I'm not going to be able to compete on price. And so I'm just going to respectfully bail out for now. And not waste either of our times. So interesting, because at that point you could tell he was lightly bummed about the whole things.

Like I don't like paying up these firms are going to bid the price up. Not for me. And he didn't love it, but that's the way the cookie crumbles. Now, this is where things really [00:03:00] changed. Not too long after that the founder comes back and is overly complimentary of the partner and the firm. It gives a bunch of excuses for why he reached back out and why he wanted the firm to keep engaged and consider doing the deal.

Everything from look, your reputation is amazing too. We're not looking for the highest valuation. We're looking for a great partner. And you could hear it in the discussion around how, not only this particular partner's perspective on the company shifted, but the whole firm, as a discussion point to started shifting and started becoming more and more negative. About the deal.

And the most important thing that changed from what I could tell that changed from one second to the next was just that. The founder was chasing them. It just turned them off because it It just seemed that there shouldn't be a reason for the founder to chase. Unless there was something wrong unless other people didn't like the deal. And the whole thing turns [00:04:00] sour. This is one of those amazing things.

These, these examples that you get to see live that really solidify the concepts around VZ signaling and why it's so important. So that's the initial story of the lead into this episode of the back channel. I want to talk a little bit about signaling and why it exists and why that situation happens

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[00:05:00] at a high level.

The biggest thing that people need to understand. Is that. Early stage investing is based on a bunch of assumptions and not hard science. There are things that they hope to see, but at the end of the day, an investor is making a bet on the future.

And that is a bet that no one can give you definitive evidence that it will come true. So in the absence of hard data that can tell you the right answer, you are forced to react to signals. [00:06:00] To fill in the blanks based on what you see and what you feel. And because of that, the way you send off signals to venture capitalists can make or break your fundraise as that initial story. Illustrated.

So what are some of the signals that venture capitalists look for? What are some of the things that help them paint a picture of the future and how can you leverage those things? I've written down a few here. So one is, the opposite. Of what the founder in the initial story gave off, And that is this feeling like there are other options that the founder has.

So if a founder is overly. Excited to talk to a VC and you can't tell why. If a founder is. Following up to too aggressively. And it's just nervous. If the nervous energy is, is felt, if that signal is given off, then that might be a signal that well. They don't have any other options. [00:07:00] Whereas the opposite of someone who might be a little bit harder to get in touch with not in a rude way, just like a little bit harder to get in touch with who is polite, but not overly deferential. This is the signal, or this is the feel of a founder is extremely confident that they're going to get a deal done no matter what you say to them.

And that there are likely other investors at the table. What else? VCs love to see repeat founders. What is, what is the fact that you are a repeat founder show an investor? Well, It seems like there will be less mistakes to make, because someone who has been through the game before has made a bunch of those mistakes and. Presumably won't make those mistakes again. We love seeing teams that have worked together before.

What does that a signal of? Well, that's a signal that the. One of the biggest things that kill early stage teams is co-founder conflict. And if a team has worked together in the past before. [00:08:00] And they're choosing to work together again. Well, Likely it's, it's the case that they understand how to work together.

They understand how to communicate. They understand how to deal with conflict. And that can avoid a big headache for founding teams and investors. Uh, and another signal that I'd like to see is shipping velocity. So. If in the course of talking to a founder, the investor sees that. The company continues to make progress continues to ship new versions of their software continues to land customers at a fast clip.

Well, There's a lot that is said about that company. You can't say for certain. But a company that is able to move fast, ship, new versions of the project. Product close more deals probably means that they worked together really well. Probably means that they understand how they go to market. Probably understands how each person fills a role and how to execute quickly without too much conflict. [00:09:00] Without too much headache and overhead. These are all great signals that VCs look for.

So for you, when you think about everything you do and how it's perceived from an investor's point of view, you want to think to yourself, What is the signal that I'm giving off? What is the impression that an investor might have of me and start really manufacturing, banana. And start really thinking about how to present yourself in the best possible light so that the signals don't get messed up and you turn off a prospective investor. All right.

That's this episode on VC signals. Leave me a note on social media. I'm at J Ja that's J a Y Y E H on almost any platform in case you have any questions about this topic or anything else that you want me to dive into. And a future episode of the back channel. All right, we'll see you next time.

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