Silicon Valley Tech Venture Capital

VCs in seed rounds: signaling theory

One of the economic theories that I learned during my studies at the University of Leuven and that has always sticked with me is the signaling theory. It’s the bedrock of behavioral economics and it’s the theory that explains a big chunk of all human behavior. In fact, you don’t need a degree in Economics to be confronted with this theory on a daily basis. I still remember, when we were on holidays at the Dalmatian coast with the family, our mother would insist we would dine in the most crowded restaurant. Bonus points if it was crowded with locals. Of course, from a pure rational economic point of view this didn’t make sense at all. All other variables remaining constant, you can expect longer waiting times, slower service and more restrictions on the menu; Yet, this strategy proved to be very successful very fast (and obviously the other variables were no constants). It’s a fair assumption that people -and especially locals- would prefer the best restaurant and thus the most crowded restaurant would be the best one.

Signaling theory wasn’t only useful for our family to find the best Croatian goulash, but is also used by VCs to find the best investment opportunities in the startup landscape. The signal they follow is the investors that covered the seed round and their behavior when the new funding round is announced. Signaling theory is useful in cases where participants in a market have asymmetric information. The theory assumes that when there is asymmetric information, the behavior of the market participants will reflect what they know. When you’re playing poker and your opponent suddenly goes all-in, you know it reflects very favorable odds from his side. You might not be able to see his cards, everything he does will reflect his position.


When you raise your seed round with angel investors, you are largely protected from signaling risk. After all, these investors are not expected to (or able to) lead or even join in on the A-round. It’s a smart move since you keep all options open, however it can also be beneficial to have an investor from the beginning that can lead the A-round as well (signaling can work in your favor too). When a VC looks at a startup, they know that -even with thorough due diligence- they will never have perfect information. The investor that invested in the seed round has worked extensively with the founding team, knows about all the roadblocks and how they handled disappointments early on. He knows the story behind the numbers and knows the vision behind the strategic decisions that have been made. Consequently, when the founders start raising the A-round, every VC will look at the seed investor.

When the seed investor is a VC that is also active in post-seed/A-rounds, whether or not they lead the follow-on round is very important. After all they have the most complete information and can best assess the opportunity. Additionally, how fast you complete raising the round matters as well. The word spreads fast once you start talking with investors. When a house is for sale and it’s not sold after a year, people will get suspicious and assume there are a lot of hidden problems. The same happens with startups. Once you publicly start raising, you better close the round fast. Convincing the seed investor to lead the follow-on round enables you to almost close the round before the fact that you’re raising becomes public knowledge.

The numbers seem to confirm the signaling theory. Research by CBInsights suggests that startups that raise a seed round have a 35% chance of raising an A-round as well. When the seed investor is considered ‘smart money’ (VC) and this investor follows in the A-round, the chance increases to 51%. If this VC doesn’t lead the follow-on round the chance of an A-round drops to 27%.

The reason I decided to write this article is that I meet a lot of founders that don’t really realize the consequences of their decision which investor to work with in the seed stage. With Micro-VC funds popping up left, right and center (more than 200 VC funds have raised > $4bn to be deployed in early stage startups), this has become more relevant than ever. I suspect that with seed-focussed VCs booming and A-round VCs remaining the same, startups not being able to secure a follow-on round from their seed investor will become more common.

Growth Hacking Marketing Tech Venture Capital

NoCode: a gamechanger

This week, I sat down with a founder of a startup that was raising funding and wanted to give my fund allocation. To give you some background, I work for a fund that participates in rounds between €50k and €250k at valuations between €0,5M and €2,5M (pre-seed and seed rounds). I agreed to have a meeting with him because I liked the problem he was working on and the industry size (enterprise software).

Big was my disappointment when he elaborated on the amount of funding he was looking for and -what’s more- the use of funds he had planned. He was looking for a €450k round just to complete his product. Apart from some interviews he had conducted with potential clients, no market research had been done. When challenged on his approach, he told me he felt insecure about going to market with a product that is not perfectly polished and free from glitches. This is completely the wrong mindset to start a business. With the tools out there, it’s so easy to test the market while keeping your burn rate at a minimum.

I actually know great companies that started out as a Whatsapp or Facebook group and worked from there. Was it perfect? Not by a long stretch. Were their customers happy? Happy with the solution but frustrated with the implementation. When the problem you’re solving is a pain point big enough, the pull factor from the market is often so big that an imperfect product doesn’t stop customers. Many startups even prove the market before having a complete product, by building a waiting list and charging customers to sign up. The opposite also holds true. When you’re building something nobody is waiting for, a super polished product won’t save you.

It has never been easier to build
NoCode solutions, where building a landing page or website is as easy as drag-and-dropping whatever it is you need, have completely leveled the playing field and have enabled everyone to start on online business. This has caused a shift in the investor community from looking for people that can build (app and web developers) to looking for people that know how to execute.

Common wisdom states that it takes 10,000 hours of practice to excel at something. This is factually incorrect. Do 10,000 hours of the same thing and you won’t improve a lot. It actually takes 10,000 iterations. With this in mind, it’s impossible to build a startup by relying on third parties for building your product. The time it takes to get customer feedback, communicate it clearly to a web development agency (that has no background information on your industry), wait for a price and time estimate, agree to the proposal and then wait for them to find the capacity to build it is simply too long. Even if you have the financial resources to outsource this development, you should still consider NoCode solutions.

Additionally, a NoCode solution signals to investors that you know how entrepreneurship works and handle your resources strategically. When a founder walks in and tells me he got 1000 customers to signup for his service and charged them already (proving willingness-to-pay), it blows my mind and makes me curious to see what that founder can achieve when he has substantial resources to build his product and launch a marketing offensive.

I could compile a complete list of services that can get you started, but the guys from pretty much nailed it here.

I have seen founding teams pull off some pretty incredible stuff with the following tools:

Webflow for building complete apps
Stacker to build apps based on Google spreadsheets
Bubble for web applications
Voiceflow to build voice apps
Wix, Tilda, Squarespace to create websites

There are plenty of options to integrate payments and social media, find your first users, translate your website to test new markets, etc.

A bit of research can go a long way in creating your MVP in a matter of moments at almost no cost. Combine it with growth hacking tactics and you can go to investors with a lot of valuable data already.