Entrepreneurial Signaling: The Art of Collecting Peacock Feathers


19 May 2005

Kevin Laws suggests that, as a startup company looking for funding, you should be collecting peacock feathers:

[The peacock’s tail] makes the peacock pretty easy for predators to spot and catch. It takes a clever, fast, healthy peacock to have such a ridiculous disadvantage and still survive. The bigger the tail, the bigger the disadvantage and the better the peacock has to be to survive. Though not useful by itself, it is useful in instantly communicating something that would normally take a long time to observe. […]

Are you really worth $2 million more the day your first two customers write $10,000 checks? No, you’re worth $20,000 more. However, both a bad company and a good company can claim that they will sign up two paying customers in the next month. Only the good company can actually show you the checks a month later.

In other words, it is not the value of the two orders that makes you valuable. Rather, these two orders signal that you can generate orders, and it is the signal that is valued. The order isn’t any more valuable to your investor than the peacock’s tail is to the peahen.

In economics, this is known as “overcoming the problem of asymmetric information through signaling mechanisms.” That’s why it’s much easier to understanding in terms of mating birds, but either way, a few peacock feathers will help you a great deal in raising funds from venture investors.

There is is a bit more about Entrepreneurial Signaling on Google, especially a study from Switzerland that looks at signalling in the labor and credit markets with some empirical data from Germany.

It is an interesting topic.