Signal and Noise in the Reputation Economy

When I was in college, I first learned about this concept in VC called “signal risk” from the firm that I was working for. They’re a Series A firm and had experimented with a pre-seed/seed angel program to try to source companies from their network. They ended up shutting it down for a few reasons - it took a lot of time from the partners, the returns didn’t make a different to the overall fund etc. Most importantly, and understated, was the signal risk for entrepreneurs who took their angel money and didn’t get a Series A lead check.

In venture in particular, where decisions around millions of dollars are made in a few meetings, reputation, and signal, are of critical importance. This matters for VCs, but for entrepreneurs it matters considerably less. VCs are paid to have access and make many bets where 1-2 will work out. Their posture is by-default neutral - they don’t want to miss the next big win. Entrepreneurs on the other hand are paid to be contrarian and to figure out how systems work before other people and then use that information to build products and companies that grow, really fast.

For a VC - if you’re reputation is to be combative, unhelpful or worse negatively impact companies - in a matter of years no one will take your seriously - you’ll lose your access. The opposite is true for entrepreneurs. If you’re building companies and have a 1/3-1/5 hit rate on successful products, you are so extremely successful that your hits by far pay for any misses, even if the reputation generation from a miss hurts short-term reputation.

The other dynamic is that what someone says about you can be extremely painful for someone who relies on consistent access to invest in things, but for someone who’s entire success depends on building a good product it’s not that big of a deal - you are allowed to be more direct and opinionated when it counts. The only time it could effectively hurt is when raising money, but money is a market just like any other, and the price is often set on the product.

VCs tend to have large egos and attribute the success of products to their own skills. Maybe true case by case, I can’t judge, but overwhelmingly this ego effectively puts them in the “popular kid in high school“ bucket where they try to exert control on certain situations. In the past couple of years, I’ve even seen forms of reputational violence either between VCs or from VCs towards entrepreneurs — remember this next time you see Founders Fund tweeting about Benchmark. Or a VC shitting on a founder — there’s a lot of smoke, and sometimes lies spun to build one reputation and tear down another — it never lasts though.

Folks who are sophisticated read through it — and that’s a huge win. In a system where reputation matters so much, just remember as an entrepreneur you are the value along with the insights you have and the products you build — no amount of money can do that, and most VCs that provide the money couldn’t do it if they tried. Having been around for a few years and both seeing success and failure from myself and others, these days when I have something good I find myself turning down offers much more than I find myself thinking about taking them