The importance of signaling for startups: Why signals can help gain resources

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The role of signals in gaining resources

Signals are the visible indicators that can help in determining the livelihood of your success. They convey information – if you have this signal, then you are likely to have the underlying capabilities to actually deliver.

For example, if you have managed to attract a prestigious investor to invest in your company, this can signal that your firm has the underlying setup in place to be a success – someone else that is respected has done the background checks to ascertain that your company is a good bet. Thus, above and beyond the direct value that the investor brings to your firm, others may be more inclined to work with your firm. 

In this manner, signals can help startups gain resources. By conveying that they will likely be a success, startups are able to acquire the needed resources to actually become a success. 

Examples of signals that can help gain resources

Top management

One of the primary signals of likely success that a startup can have is top management that have had prior success (or otherwise strong credentials). Having top managers that have prior experience and prior success is a particularly strong signal that the firm has the experiences needed to be successful. This can be beneficial in obtaining finances from investors that want to ensure that the firm is well run, without having the time to directly manage the day-to-day business decisions of the company. 

Other investors

Another indicator that the firm has a good setup is having other investors, and particularly so from investors that have gone on to invest in other companies that have had success. The investments made by others signify that the firm has in some ways been ‘vetted’ by another company – increasing confidence that other investors may have in its business model and stewardship. 

Patents

Patents can be a visible indication of the company’s leadership in the technology area. Beyond the benefit that they may have in protecting the innovation, the demonstrated ability of the company to obtain a patent can help indicate the underlying technology capability of the company. Saying ‘we are an innovative company’ is easy – getting a patent is more difficult, helping convince others that your firm is actually innovative. 

Existing success

Another particularly valuable signal of possible future success is already having some existing success. Having existing customers can provide confidence both for investors and new customers in the viability of the company and the business model. Thus, some small successes can help drive further successes – with new gains in customers helping to convince other customers to join the company. 

The investor presentation

A final signal of the company is the investor presentation – being prepared, having clearly thought through your business, and able to answer investor questions can be an important signal of your likelihood of success. As much as anything, investor questions are designed to probe your understanding, helping ensure that not only have you thought through the specific issue that the investor aks, but the broader set of questions that they either don’t have a chance to ask, or have not thought about. Stumbling on the questions that are asked indicates there are likely lots of other potholes in your approach – confidently answering those questions that are asked signals that you likely have thought through your business model.  

Stakeholders that may be influenced by signals by startups

  • Investors: One of the primary stakeholders that signals can play a role in is gaining the support of investors. Having a patent can help signal your commitment to technology leadership, and the credentials of the top management team can help illustrate the likelihood that they will be able to overcome issues.
  • Potential customers: Signals play a key role in gaining customers – and particularly customers who are making long-term commitments to work with your firm (such as new distributors of your products). Existing customer contracts may for example help you acquire other customers, who can see your existing contracts as a sign of your ability to fulfill expectations.
  • Employees: Another group of individuals that may be influenced by signals indicating the likelihood of your company’s success is potential employees. When deciding to work for a startup, employees take on a large risk – their fates are intertwined with your company. Signals can help illustrate the likelihood that your firm will be a success, helping persuade potential employees to join your firm. 

Final thoughts: Signals help grow further signals

Having signals that indicate that you will be successful can help obtain further signals that help illustrate your success (which in turn result in it becoming easy to acquire other resources). Success can compound – and gradually make it easy to actually achieve your objectives. Thus, while having prestigious credentials may not in itself result in your company’s success, if it helps gain the necessary resources (which in turn help obtain further needed resources), then it can help grow the firm and ultimately drive improved performance. 

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