Birds and Turtles
I am a very visual thinker, so I like to organize the world into visual paradigms. Conceptually, I bucket two main kinds of venture capital funds, birds and turtles. Both have been around for a long long time, both can point at many examples of gigantic impactful companies they have invested in that shifted the axis of the world. Subtraction Capital is a bird fund. I wrote this post to explore some ideas around the impact of both species of fund. As a founder, which type of fund would you rather have investing in your company?
Birds lay a small number of eggs and dote over all of them. They keep them warm, help them hatch, and individually feed each and every chick to try to help it grow into the strongest and most successful bird possible. A high proportion of their young survive, and the species persists.
Turtles, in contrast, dig a nest on the beach, creating an environment where the eggs can be relatively safe and kept warm by the sun. They then lay dozens of eggs, cover the nest back up, and go back to sea. When the eggs hatch, the hatchlings dig their way out of the nest and race down the beach to try to make their way into the ocean. On their own, they must evade predators and currents and try to find food so they can grow strong while avoiding being eaten. Survival rates are low, but because of the numbers up front, the species lives on.
I do not know the statistics of outcomes at Bird funds vs Turtle funds, would be an interesting one maybe for Anand. Many people argue that it doesn’t matter how much coaching is provided to a company a fund invests in, their outcome will not change significantly enough to affect the return at the fund where the investment came from. There is a counter argument that so many really successful companies have “Near Death Experiences” (I would love to assemble a book about these, but later) or find a “Second Wind” that it is difficult to say in early days which company will provide the outsized return. PayPal almost died in the early days due to fraud losses, but was able to turn around and become a very successful company. Coupons.com grew at a very slow pace for nearly a decade before they hit the big ramp up. And finally, I have heard Marcus Ogawa say “It is always darkest before dawn” when referring to companies hitting their tight spot.
— Subtraction Capital (@SubtractionCap) October 1, 2015
The brand affect of birds and turtles is also interesting. The turtle argument might be that so long as the outsized return company’s logo is on the fund’s website, the fund is associated with the big winner, which will attract the entrepreneurs that are going to produce the next wave of outsized returns. Further, just the act of a top fund investing in a company may lift the company’s probability of success more than anything else the fund might do. There is likely a virtuous cycle in there. And I know I have heard the opinion that the really outsized returns will come from first time entrepreneurs, who might be influenced more by broad PR turtle brand effects more than word of mouth from insiders. Even if that was historically true, will it always be true? Or as our tech industry evolves and matures will the repeat entrepreneur advantage become greater and create proverse selection there? I know that plenty of other investors already say that repeat entrepreneurs have an advantage. I personally have no bias either direction, because my personal sample size is too small to be statistically significant and I don’t care for anecdotes outside of my own context as I fear apples and oranges are being compared.
The bird counter argument on brand might be that by helping to coach every entrepreneur to the best outcome they can have, that entrepreneurs will tell other entrepreneurs which fund was most helpful for their personal return and attract the next wave. It would be interesting to look statistically at whether bird funds attract and invest in repeat entrepreneurs more than turtles, with the thesis that perhaps repeat entrepreneurs know which funds are birds and prefer them. But someone else might make the argument that repeat entrepreneurs need help the least and therefore do not care. That has not been my experience. I feel that often founders that need help the least value it the most. Like Tiger Woods selecting a golf coach. He is destined to be a champion no matter what and by virtue of that he can pick any coach he desires. You better believe he wants the best. This is another virtuous cycle.
Similarly, when I think of old-school VC, I think of fund partners spending as much as a day every week or two physically at the company that they invested in. In order to invest like this, the ratio of companies invested in to partners at the fund needs to be low enough that there is actually some time to spend with the companies.
So as you go out looking for investors, consider wether you want a turtle or a bird, or one of each perhaps? Hedge your bets if you can? Subtraction Capital is a Bird, and we very much like to be available to coach the companies we invest in if they desire it. Useful = happy for us : )