Don’t Confuse Signifiers and Substance

When it comes to startups, its easy to confuse signifiers and substance. The truth is hard to know, especially with early stage companies. If you don’t have a product or customers, it’s hard to have substance.

Yet whether you’re a startup or investor, you’d be wise to focus on substance rather than signifiers. Not because it’s the right thing to do (though it is) but because it delivers better results.

Humans have a weakness for signifiers. We like things to be black and white. We constantly seek confirmation for our beliefs, even when that confirmation is spurious.

Consider the race for the Republican presidential nomination. In extremely short order, we have seen Palin, Bachmann, Perry, and Cain take turns as the “frontrunner” based on the polls. These polls are just signifiers–the real substance consists of state and local organizations that will get the votes to turn out. Anyone who bet on any of them to win the nomination (thanks Intrade) would have lost their shirt.

In the startup world, we make a big deal out of things like social proof and press coverage. But in the end, these are signifiers, not substance. They might reflect the underlying reality, but then again, they might not. The real work consists of making products that users love, then generating profits. That’s a battle that you fight one user at a time. If the product doesn’t cost-effectively solve a problem, endorsements and press won’t help.

I’ll admit that I’m part of the problem. I help startups frame their stories for investors. Some might even call it my specialty. But there’s a difference between getting a spin doctor to help you put your best foot forward and believing your own press.

As an investor, I try to get to the substance of a startup in three main ways.

1) I try the products myself. Sometimes, I like the product so much, I’m comfortable making an investment decision.

2) I talk with experts. This can be dangerous–think of all the great ideas that experts have dismissed. By definition, experts represent the status quo. Otherwise they wouldn’t be known as experts. The key is to use expert opinion to amass hypotheses you can test, rather than simply relying on a “vote” of opinions. I call this “principles, not positions.” Don’t tell me if you’re a Romney man or a Perry woman–tell me which principles you believe in.

3) I talk with customers. Testimonials aren’t enough–I want to dig for details so I can understand why customers adopted or bought the product. Sometimes, they cite unscalable factors like founder attention. Without checking deeper, simply reading a testimonial might result in a false positive. As with the experts, the reasons are as important as the opinions.

All of this takes more work than looking at a few charts and asking, “Who’s in the deal already?” It may not always lead to the right decisions or generate the best returns. But I believe it is the right way to invest. And you know what? If you’re an entrepreneur, getting the substance right is usually going to lead to a successful startup.

If you can build a product that an investor will use and love, wins the endorsement of experts, and gets customers to buy, you’re well on your way to success.

Even more important, even if social proof and press get you your seed round, they won’t help you build a business. All those stock certificates are worthless unless you build an enterprise that either the public or a well-heeled company decides is worth buying. Good luck conducting a sale or IPO without the substance to back it up.

3 thoughts on “Don’t Confuse Signifiers and Substance

  1. Anonymous

    "If you can build a product that an investor will use and love, wins the endorsement of experts, and gets customers to buy, you're well on your way to success."

    Of course if you build a product that an investor cannot understand (as they aren't the target market) nor wins the endorsement of experts who hold firmly in the old paradigm, an entrepreneur or startup has lost on 2/3 of your criteria.

    Funny, would Facebook have passed your test in 2004?

  2. David,

    Traction always trumps all. If you're obviously kicking ass (as Facebook was in 2004), the other things don't matter.

    It's also important to focus on principles rather than positions. If someone raises a question like, "This product is identical to five or six others, why is it different?", the answer should be, "Reasons X, Y, and Z," not "You just don't get it."

  3. the big thing to learn is, how do you tell substance in as short a time as possible? this differentiates a great early stage investor from a bad one.

    also try to become an expert in the area where the startup is working in. then you can better evaluate the startup – so learn while you do your research!

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