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September 12, 2011

Why Venture Capitalists Invest In Pigs, Not Chickens

ham eggs

There is an old parable about the concept of commitment when it comes to breakfast. The story goes that when looking at a plate of the traditional fare of ham and eggs, it's obvious that the chicken is an interested party, but the pig is truly committed.

When I tell this story to entrepreneurs, my point is usually to contrast the approach VCs have to start-ups as compared to entrepreneurs. The VC is an interested party, but at the end of the day, if their start-ups live or die, they typically still have their job, their office and their portfolio of other investments. The entrepreneur, on the other hand, is the pig - truly committed to the outcome, with no fallback.

But lately I've been thinking about the parable of the pig and the chicken in the context of the characteristics that make a great entrepreneur - and the kind of entrepreneur that we VCs in general, and my firm Flybridge Capital in particular, like to back. In short, we like to back pigs - entrepreneurs who are truly and completely committed to the outcome of their venture, have a lot of stake, and no fallback.

How do we discern the difference between the two entrepreneurial archetypes? It's usually relatively easy, but sometimes subtle. Here are a few of the top characteristics we see in entrepreneurs who appear to be exhibiting behavior that suggests they're more like "chickens" when it comes to their start-up:

1) Prefer to wait to start their venture only after they receive funding ("We are ready to go, as soon as you give us your money." ...um, does that mean you won't start the company if I don't give you my money?).

2) Don't quit their day jobs before receiving funding. ("This has been a side project for a year, and I can't wait to focus on it full-time" ... um, if you can't wait - why are you waiting?)

3) Don't physically move themselves or their teammates to be in the same geography when starting their venture (think Eduardo Severin in the Social Network spending his summer in NYC).

4) Prefer to play a hands-off chairman role or look to quickly hire a COO/president in the early days rather than operate as the hands-on CEO/president. (I'll leave out the numerous examples to protect the innocent, but as a rule of thumb, companies with fewer than 40 employees don't typically need a COO).

5) Are unwilling to fully leverage their own personal and professional networks to drive recruiting, fundraising and business development.

On the other hand, the top five characteristics we see in "pig" entrepreneurs include:

1) Commit to the new company everything they have - even if that means moving their families, quitting their jobs, or even dropping our of their schools (as much as I don't want to condone or encourage this!).

2) Put themselves "out there" publicly and visibly with the industry, their relationships, family and friends. If the company is a failure, it will not be a quiet one.

3) Have not yet achieved a mega-success already and/or yet achieved wealth beyond the point of needing to work again. (I remember my mentor and boss at Open Market, CEO Gary Eichhorn, congratulating me when I became a first-time homeowner in the mid-1990s and observed: "I hope you got a large mortgage so that you are locked in and highly motivated to create wealth!").

4) Participate in a minimal set of outside interests and hobbies that aren't directly related to their business. Starting a company is a consuming, obsessive, 7x24 endeavor. Raising a family and remaining healthy is enough of a battle. When we see entrepreneurs with long lists of hobbies and outside interests, it's a red flag. One of my partners went so far as to look up the number of times an entrepreneur played golf one summer (which apparently is public information somehow, although I'm not a golfer so still don't know how he figured this out) as a barometer for how hard they were applying themselves to their new venture.

5) There exists a rare breed of entrepreneurs that have already had mega-success are so special and driven that they remain obviously hungry and scrappy. For these entrepreneurs, the key is to watch and see if they're still as hands on as they ever were (e.g., obsessed with the product, knee-deep in the financial model, out in front of the organization in selling). Again, these entrepreneurs are very special.

So what are you - the chicken or the pig? Investors clearly prefer one model over the other, not just in the founder, but in the entire team. As a result, as you are assembling your start-up team, be careful not to hire chickens. In the eyes of prospective investors, you may find it's even less kosher than hiring pigs.

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I prefer impatient entrepreneurs who act with a sense of urgency, yet think things through.  There’s a fine line between patience and imprudent. 

Don't you people see something wrong with this entire viewpoint? You're being told that you have to be willing to do nothing but the business, have no life, be in no way conservative or careful or RESPONSIBLE. You are being told that in order to get their money you have to throw away everything you are and everything you have, not for the assurance of any kind of success, but just for the ability to play the game...all while they aren't risking the same thing at all.

You know who the "investor" is in the pig? The farmer. He raises the pig, fattens it up...then slaughters it and sells it off to the highest bidder. And you people are begging to be the pig! Don't you see this as a bit...self-destructive? Rigged to screw you? In any way unacceptable? Please tell the me the human spirit hasn't degraded to such a degree that you're begging for the opportunity to be someone else's breakfast.

Remember, kids...the pig doesn't benefit from the farmer's investment. He is used up and eaten. Wouldn't it be better to do business with people who see you as (I know this is asking a lot) people?

Jeff, great post. I would expand the concept beyond the founders and try to get as many "pigs" as employees as well. There is nothing like committed people to build a great company and I even think that it is more important that other attributes.

Scott Maxwell
OpenView Venture Partners

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It is possible to be too committed.  That’s why I love entrepreneurs who have had a taste of success so know what it looks like, but are still hungry and are going for the long, long ball. 

I'm a PIG, working the business for almost three years, still need looking for funding, but working it if we get funding or not. Remember the adage, where there is a will there is a rich uncle. Our website is: www.getplugging.com who wants to invest?
Bruce

The entrepreneurial challenge: staying 100% committed to your venture while the VCs faff around for months trying to get you to agree this year's brand of capped reverse multiple preferential double-half-decaff shares. :-(

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To be clear, diverse interests and intellectual breadth and curiosity is a good thing in entrepreneurs.  But I view that to be a discrete trait to commitment. 

Never thought I'd say this, but I am a pig. lol

Sambhav Karnawat
http://sambhav.jewelove.in

@Bruce, as a funding source for micro-cap publicly traded companies, we look for and only fund companies with management "all in". We also acknowledge that "previous success is the best predictor of future success". Fact of life, like it or not...

Chickens make a great dinner.

They also happen to provide one of the most nutritious foods without needing to be slaughtered.

Pigs on the other hand, while extremely tasty, have a lot of personality and are difficult to slaughter.

VC's always want to kill the pig. But there a lot of good people with good ideas out there that get passed over for not being the "next big thing."

A VC who would spy on his business partner, even via golf scores, is not a VC I would want to work with.

Great post and wonderful analogy Jeff! Could it be VC's prefer their potential investment partners to be desperate and running close to the edge so the VC can extract more advantageous deals. It's easier to cram someone down when it's the VC's deal or no deal. I remember my father’s advice the best time to borrow money is when you don’t need any, the deal is always better!

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Fair retort, but perhaps a cynical one. VCs make their money on huge company-building successes, not squeezing a good deal out of a desperate entrepreneur.

This is a fantastic conversation.

Speaking from my own experience with DailyDigital, figuring out when to transform from a chicken to a pig is all about timing. Startup success or failure can hinge upon taking the time make sure your ideas are valid, product market fit exists and the marketplace is ready.

Become a pig too early, without the right pieces in place, is recipe for failure. At the same time, being unwilling to get out of the hen house and dive into the pig pen when the time is right probably means you don't have the confidence or passion to succeed anyways.

Unfortunately there doesn't seem to be a handbook for getting the timing right, but plenty of perspective on chickens and pigs. Thanks for the insights and encouragement to be a pig (never thought I'd say that).

Why should a pig #5 share her plate with a chicken?

Great article. I agree--leveraging the network, but entrepreneurs should also have a substantial portion of their wealth into the company--through not taking a salary or writing checks alongside investors. If one believes in what they're doing, they should be over-committed.

Jeffrey,
Almost half of a year you published this post I read it now and I LOVED IT. My THANK YOU and congratulations for it.

I am looking for venture capital for a project and I would like to talk you - I thought maybe your firm Flybridge Capital could be interested.

Can we have a brief talk on Skype?

I'll wait your reply.

Thanks again and all the best for you.

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Glad you liked it! Feel free to email me any info on your business that you would like me to review.

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