What Every Angel Investor Wants You to Know: An Insider Reveals How to Get Smart Funding for Your Billion Dollar Idea
by Brian Cohen, John Kador
Signaling Effect
The term “signaling effect” is used to describe the problem of VCs making seed investments in startups. The difficulty is that most angels perceive VCs to have access to better information than they themselves do. Angels watch very closely what VCs do. So when a VC makes a seed investment, that’s a signal for angels to jump on board if they are offered the opportunity.
So far, so good. But the signaling effect becomes a problem when a VC makes a seed investment in a startup but then for whatever reason doesn’t follow through with an investment in the next round. Everyone then assumes the VC knows something damaging about the startup and backs off. In other words, investors assume that by declining to make a subsequent investment ...
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