Chris Dixon had a great post yesterday about “the importance of investor signaling in venture pricing” that every entrepreneur should read. Leaving aside the classical economics strawman from the first paragraph (does anybody think that classical economics would apply to a small numbers situation with extreme information asymmetry?), the rest of the post is spot on. Here are a couple more reasons why investor signaling plays such a powerful role in the venture market:
Most companies need more than one round of financing. Interest by other VCs in the early round suggest that they might also be interested in subsequent rounds making it easier to finance the company going forward.
Internal partnership dynamics may make it much easier for a partner to get a deal done that other firms are interested in also compared to an idiosyncratic deal.
Chris does a great job laying out some of the implications for entrepreneurs. Here are a few more corollaries:
If there is a sudden interest in your firm due to some external event, you should seriously consider fundraising even if it is ahead of your planned schedule.
Informal fundraising can help avoid the “on the market too long” problem. It’s better to meet with some VCs and tell them the story when you don’t (yet) need additional money.
Focus on lead investors: firms and partners at those firms that either have led investment rounds or are clearly ready to do so. You can tell a lot by whether someone is actively seeking an investment in your area and has clear reasons why they are interested (that don’t involve other investors).
Looking forward to more of Chris’s outstanding posts.
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