Spikes and Explainers

There are two major classifications of startups, at least insofar as investor “legibility” is concerned. Knowing which you are will help guide the decision on when to raise, who to raise from, and how quickly to run your process. I call them Attention Spikes and Explainers.

Spikes are companies that generate investor excitement based on one specific, relatively narrow part of their company. The clearest spike is the team. If you previously founded a unicorn, or you and your cofounders were researchers at a frontier AI lab, you will get funded. As we discussed in the previous chapter, investors are doubling down on the centrality of founders and early team to guide bets from seed all the way through early growth rounds. Traction is another classic spike. Massive revenue, extreme growth, incredible technical accomplishments. We’re living through a stretch where the bar for traction is incredibly high. Yet if your growth, or the quality of it, stands out relative to everything else that will catalyze a raise.

Explainers are businesses that can and can and do raise, but that don't have an immediate attention-grabbing signal. These founders have to actually explain what they do and why it's interesting. I find these companies fascinating because they're often the most valuable ones long-term. The pricing is usually lower, there are fewer competitors, and the founders tend to know things other people don't. But they will have a harder time raising because, at first glance, they may not look venture-scale. Explainers have to do the most work ahead of their raises. Specifically, they need to develop deep investor relationships to build the trust and understanding that enables investors to spend enough time with the company.

The paradox, though, is that you can't know which one you are without contact with investors. Your existing investors will have an opinion, but they're wearing rose-colored glasses. The true test is how net new investors react towards you.

If investors are falling over themselves to meet you and flying you places on jets, you're a Spike. Leverage that excitement to secure money while the investor attention lasts. Spikes have a time-dependant nature to them that is surprisingly difficult to predict. If instead you find yourself chasing investors for meetings but you have a core of genuine believers, you're an Explainer. Your job is to demonstrate that the business is getting more interesting by the day. Cultivate investors and give your believers the time and material to build conviction.