The Intersection Of Information Theory, Networks, And Investing

In this post, I’m going to oversimplify decades of academic research to make a more colloquial point. I’ll also ad-lib a bit, so even though these thoughts below are not mine, they’re my own interpretation, for better or worse. In this post, I’ll try to weave together two lines of thought.

The first concerns information theory, where one believes that often the most valuable information to an individual sits on the edge of their own networks (work, personal). The everyday example I would use here is a site like Craigslist — every time I’ve had to move, I’ve been able to get free moving boxes or get rid of them within minutes of checking or posting to Craigslist. While I don’t have connections with these people, in that moment, our interests are aligned and what’s most valuable to us for this use case lies at the very edge of our networks, helped out by Craigslist’s ability to route supply and demand. (Rohit’s blog post here gives an interesting take on information theory and networks as it applies to venture capital.)

The second is about the strength of weak ties, which I’m sure many have been exposed through in Adam Grant’s “Give And Take,” which features a living master of this art, Adam Rifkin. The idea is pretty straight-forward: There is enormous value in the weak ties we have with acquaintances, people we sort of know but don’t really know or may never know. You’ve probably heard many stories (or experienced it first-hand) where someone meets their significant other, or finds a job, or a great apartment in NYC simply by intensely connecting with a “weak tie” in their network — the value did not arise from the people they know best.

In early-stage investing, it’s important to gather, sort, and process information that other people do not have (yet). While many groups try to figure out how to see every deal or opportunity that exists, I do not believe that’s possible. Rather, I believe investors can see more opportunities the more they work the very edges of their network (and their partners’ networks), and this is why professional investors are always in meetings, including when pitches where investors carry little to no intention of ever funding that particular company. (One classic investor trick is for him/her to ask someone about the companies or apps they like, a continuous hunt for actionable information on the edge of their networks.)

In a game where information isn’t evenly distributed and knowing pieces of information even hours before others can be critical, information theory applied to early-stage investing is, indeed, critical — and I have experienced this myself, first-hand.

For someone like me, I haven’t been around for too long. I don’t have deep networks. Most people build their networks through traditional jobs, collecting trusted people as they move from one to another. Today, people (like me, for instance) also have the opportunity to compress time and build new networks around online interest graphs (like Twitter), which in turn helps someone share their thoughts (as I blog) and have those thoughts distributed to others who may have valuable information to add to that canon (distribution, following, asymmetry). While these types of networks aren’t defined by depth of relationship (which carries its own value), they can be defined more consistent relevance and immediacy.

All this said, none of this works unless a person creates and maintains good relationships with others. This is where the strength of weak ties come into play. A person who is savvy at collecting information on the edge of their networks also has to make sure they are able to act on it in an actionable way, and quickly. Put another way, simply learning that a new team is forming or that a product is growing well only informs — it does not translate into access. What can translate into access, however, are the ties — even if weak — people can form with others. Those ties can be forged quickly by things like shared interests (especially through online networks like Twitter, Quora, Disqus, Facebook, and others), the precedence of a person’s reputation, and offering to help others (and following through on those overtures). In those moments, what is considered a weak tie can be — for even a few minutes — a very strong tie, one strong enough to help overcome the problem of sitting on inactionable but valuable information.

I have been thinking about the intersection of information theory, networks, and weak ties for some time, probably because I spend time thinking about investing and meet lots of new people. There is definitely a science to explain how all of this happens, but there is also art involved in making the theories come to life in the real world, and it is that art which interests me most — and which I’ll write about more as I continue to share the stories behind the investments I make.

Haystack is written by Semil Shah, and is published under a Creative Commons BY-NC-SA license. Copyright © 2017 Semil Shah.

“I write this not for the many, but for you; each of us is enough of an audience for the other.”— Epicurus