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How Investor Signaling Reduces Info Glut

21 Jun 2010

Separating curiousity from necessity is a topic I've broached here before. There comes a point of data saturation when too many voices shout to be heard, that we reflexively shut them all out. We turn off the computer, throw the phone in our pocket, and switch off the tv/radio*. While this solution is effective, it throws out the proverbial baby with the bathwater. What about the welcome messages that aid our decision making?

Actions a Stronger Signal than Words

I can try to persuade with words only so long. They are a weak hand when compared to focused action and putting money where my mouth is. Investors have been dealing with information overload for far longer than most of the rest of us and have devised a filtering scheme that helps them weed out the signal from noise.

In the realm of startups, every "dreamer with delusions of grandeur" myself included, has an ingenius pitch for a new product that needs just a little starter money to come true. Popular seed investors would drown in unsolicited pitches they recieve had they no other information processing tools at their disposal, an introduction from a trusted source being the primary one. The counter force to simply shutting out univited proposals is projecting a public image of being open. To get the best deals, top investors welcome all potentially profitable new ideas from hungry teams with more than moxy. More on the best way to capture the attention of investors later.

Investor signaling is effective for the best firms, although at risk of instability^. A strong message of approval and support isn't dictated verbally or by a post, it's proven by an investment of dollars and cents. An introduction by itself may be worth very little, but when accompanied by the two words "I invested" takes on a whole new meaning. For detailed analysis of such signals the best source I've come across recently was this recent Venture Hacks phone comversation + slides. For further details on this topic I highly recommend reading Chris Dixon, Mark Suster, and Venture Hacks (Nivi and Naval).

The best way to capture the attention of investors, and filter the noise

The strongest signal founders can send to investors is the social proof of market demand. Instead of an impromptu 10 second rushed pitch or a confusing email, you can signal that your startup is real and already valued by never saying a word. Allow investors to discover your business organically through sources other than yourself. Keep your focus on wildly oversatisfying customers. Word of mouth marketing about product quality from trusted sources is the best way to initiate contact with potential investors.

Can the same filtering system work for non-investors?

To be clear, we are all investors of our most precious resource, time. Giving our attention away to external information sources is a risk we take to learn and discover. How can signaling actions (backed by money**) potentially help us better invest our information consumption time. There is a notion that high quality information will seek us out through recommendations from trusted friends. The requirement is that we have a sufficient network of friends who's opinions we trust to share their most fascinating finds regularly. This is one of the many challenges facing modern web social nets, but one with a high aggregate payoff.

Notes:
*= In more extreme cases of info overload we delete accounts, throw phones out windows, or kick in the tv

^= Much like in financial markets, investors can fall prey to over valuing positive signals of other known investors pledging funds. Best case for all involved is for the signaling to stop with a more critical review of a prospect. Use investments as a screening filter, not blind faith.

**= Imagine getting paid to read, watch and listen to news while discounting stories we find intriguing