signaling

Advanced πŸš€ Startup / VC

Definition

The information conveyed to the market by investor actions, such as who leads a round or whether insiders participate in follow-ons. In startup land, subtext is text.

Example Usage

When our Series A lead didn't participate in the Series B, the negative signaling spooked other investors and killed the round.

Origin

Economics theory from Michael Spence's work on market signals (1970s)

Fun Fact

Signaling is so powerful that VCs sometimes invest in follow-on rounds they don't believe in, just to avoid sending negative signals that would doom the company.

Source: Market microstructure and information economics

Related Terms