Signal vs noise

As investors, we’re faced with a deluge of information. There are communications with the founders we’ve backed, referrals of new investment opportunities, cold pitches, new products to try, articles in the tech press, blogs, textbooks, market research reports, and much more.

Since we can’t process it all, we need to decide what sources of information to pay attention to. We need to separate the signal from the noise.

I get my signal from (a) communicating with the founders we’ve backed, (b) new investment opportunity referrals from select sources, (c) the rare carefully crafted cold pitch, (d) trying new products, (e) select blogs, and (f) select textbooks. These sources of information reflect what entrepreneurs are working on (a, b, and c) and ways in which I can evaluate their work (d, e, and f). That’s the signal.

The other sources of information I highlighted are overwhelmingly noise.

Specifically, most cold pitches are the result of a few days or weeks of excitement which culminate in a funding request. They don’t reflect the deep analysis and execution in the absence of funding necessary to actually get funded.

The same is true for articles in the tech press. Press attention overwhelmingly follows success. It doesn’t precede it. So by the time a startup isĀ featured in the press, it’s almost always too late for seed and early stage investors like ourselves to invest in the company, and often too late for us to invest in the space.

And since private startups only share limited information with the press, articles based on this information can be pretty misleading if used to evaluate the attractiveness of a particular market or how a company is actually doing.

Finally, market research reports are often at too high a level to be practically useful. We all know that mobile penetration is rising, cyber crime and the resulting need for cyber security are growing, and the share of renewable energy within our total energy consumption is rising. What matters is what an entrepreneur is doing in line with these trends.

Also published on Medium.