Echolocation

I was catching up on MG’s newsletter/blog and came across this opening line, which got me thinking about a concept in investing, specifically in deal sourcing:

To me, all information is about triangulation. Any single source, no matter how close to the situation — and often times because they’re too close to the situation — lacks full clarity.

Triangulation is one way to describe this. Another term to describe this is stolen from nature: echolocation. From Wikipedia:

Echolocating animals emit calls out to the environment and listen to the echoes of those calls that return from various objects near them. They use these echoes to locate and identify the objects. Echolocation is used for navigation and for foraging (or hunting) in various environments.

I’ve been thinking about this concept nonstop and MG’s post finally crystalized the thought in my mind. Nearly all the investments Haystack makes are initiated through a referral by someone we already know well. That’s pretty common practice, given so much of early-stage investing is a people-driven business. Now that there are so many new companies started, so much money in the ecosystem, and new types of funds out there, deal velocity is increasing. To find signal in all the noise of that deal flow stream, “who” the source is certainly matters.

Usually, one introduction is all it takes to trigger a meeting and even light diligence. But, then again, introductions can be a dime a dozen. Just because someone introduces you doesn’t mean you’ll get a meeting in a timely manner or engaged consideration. This is where echolocation comes in. If an investor begins to hear about a specific person, product, or company from various non-overlapping sources, that helps the investor triangulate to find some semblance of a signal in an otherwise noisy and hazy environment.

Early-stage investing is significantly more random than many folks would like to believe. Some investors have theses, some look for specific sectors or markets, others are attracted to metrics, and some look for specific types of business models or people. Whatever those investors end up picking, they all likely use some form of subconscious echolocation (I’m guessing) to prioritize what to pay attention to in an endless stream of early-stage deal flow. What does that mean for founders and early-stage companies? Just getting an introduction doesn’t mean much these days. Rather, having an investor hear about the team or the company through different channels (directly on email, indirectly on social media, casually in-person in conversation at a meet-up, hearing about a portfolio company which loves a new service, etc.) all are logged as data points that help investors triangulate. While full clarity may never be possible, having a better sense of what to focus on does help immensely. It also means that, perhaps, the best way to get the attention of a target is not by directly sending them a signal — but rather — by creating echoes that will bounce off other objects and end up reaching the right targets over time.