Venture Feedback Loops

A note from our editor, Elizabeth MacBride:

Venture Feedback Loops

It’s hard not to take investors’ or accelerators’ rejections personally. The rejections often come with no explanation – and often, rudely, in the shape of non-responses.

I thought of this after I had a conversation with a woman entrepreneur who’d been personally invited to apply to an accelerator, and then rejected with no explanation. She was understandably hurt and confused with nowhere to turn for an answer.

It’s helpful to remember a key fact about the investment markets today: Signal plays a big and growing role. By signal I mean the clues we have from our environment about what the future will look like.

Signal comes from two places: the human tendency to reference the past and our tendency to feel safer following the herd. Signal is one reason smarter investors are concerned about inflation right now. Most people will make pricing decisions for next year based on what happened this year and what their industry peers are doing  – not based on what smart people in Washington, D.C., say.

Some people believe the only thing that moves public markets anymore are the collective signals about which direction it’s going. Algorithms designed by brains shaped by a herd mentality merely replicate the effect.

How does signal work in the private equity market – i.e. seed investments, venture capital and growth equity? Private investors look closely at the team and the market. But they’re human. They keep a close eye on what other investors are doing, and on ideas that are hot (Can you say Web3). Their work is intensely competitive, so when they find anything remotely resembling a pattern in the signal, it’s a huge relief: AI company? Great! Another take on a winning biotech idea? Fantastic!

Signal is different, obviously, from real value created for the end customers, and from innovation, which comes from insight.

Many investors will tell you all day long it’s about seeking value or innovation, when in fact it’s equally or more about finding investments that somehow make sense within the norms, trends and networks of their peer group(s).

Accelerators exist to help entrepreneurs, and often to source deals for investors. If they see their ultimate customers as the investors, they are as prone to be affected by trends and networks as any other part of the investing ecosystem.

That leaves women and people of color with a handful of choices. You’re not likely to be close enough to the “in” group to figure out what the latest hot trend and thinking is. How will you package yourself to fit the signal in the VC space? For now, you could seek a sponsor (it’ll probably have to be someone in an inner circle, not another woman or POC) to help with introductions and to clue you in on the right language.

Or you could relentlessly emphasize your value or your innovation, seeking the relatively few investors who genuinely emphasize those criteria.

Whatever you do, don’t take the fact that your company doesn’t fit today’s venture feedback loops as a judgment on your company’s worth. They’re not designed to give you a chance – but to protect the power and capital of the people who already have it.