💡Insight - Signals
At the outbreak of World War II the RAF needed to make rapid decisions on who to train as fighter pilots. They asked people two simple questions: 1. Have you ever owned a motorbike? 2. Do you own one now? The ideal responses were 1. Yes and 2. No. The recruiters were optimising for candidates who were brave enough to ride a motorbike and smart enough to abandon the habit.
In the early days of Uber there was huge pressure to hire the best engineers rapidly. So Travis and the team came up with a way to shortcut the hiring process. For every engineer that successfully completed their hiring process, they would ask ‘Who are the best 2 engineers that you have ever worked with?’ Uber would then proceed to send those 2 engineers unconditional job offers. No interviews, no tests, just show-up and you’re hired.
In both cases it was imperative for decisions to be made quickly and with a relative paucity of information. When humans lack the necessary information to make decisions, we rely on ‘signals’ or heuristics.
In the funding process investors rely heavily on signals to decide who proceeds to the next phase of the process and even to make investment decisions. Given the funding process is still relatively opaque (particularly for first-time founders), there is still confusion as to what investors are looking for. This leads founders to giving the wrong signals.
Classic examples of this include early stage founders asking to sign an NDA before sharing a basic deck or using an investment bank to raise your seed.
The best investors have a deluge of deal flow. However impressive your startup is, if you’re sending the wrong signals you will struggle to rise above the noise.
Investor database with contact information for 2k+ VCs by Madison Campbell
First-time founders: here’s how to select the best fundraising strategy for your startup by Lolita Taub
Base Templates - Pitch Deck, Financial Model and Fundraising Process Templates from Max Fleitmann
The Deals That Change Your Life - by Rick Zullo
Venture Capital 2.0 — the revolution of Machine Learning & Data-Driven VC - by João Nunes
How To Hire Your First Engineer by Harj Taggar
Compensation at Startups by the team at Homebrew
10 Questions top founders nail down before their pitch - by Jason Chen
The 2005 YouTube investment memo you weren’t meant to see by Sequoia partner Roelof Botha
A Beginner’s Dictionary of Venture Capital by Mattermark
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Thank you for reading. Feedback and suggestions for next week’s edition is welcome. Have an awesome week 🤌
Thanks Alex for the article.
It would be great if you share examples of signals from which the founders (especially the 1st time ones) that the investor or the investment deal is not suitable for the venture.
Signals, as you mentioned, are used where information is lacking. For 1st-time founders, they lack info about the investors of the current round nor the next rounds.