Why VC's invest in Pigs not Chickens

http://bostonvcblog.typepad.com/vc/2011/09/why-venture-capitalists-invest-in-pigs-not-chickens.html

by dfriedmn • 15 years ago

13 8 15 years ago

bostonvcblog.typepad.com

atirip• 15 years ago

oh c'mon, money is commodity and i can get it from hundreds of sources. as an entrepreneur i choose, not you, my dear VC.

wccrawford2• 15 years ago

Did anyone really need this explained? I think anyone questioning this is trying to be a chicken and just grousing about the status quo.

I mean, if they aren't willing to commit big-time, why should a VC?

CPlatypus• 15 years ago

As the first paragraph of TFA points out, the VC is always a chicken. They're not "committing big-time" so that appeal falls flat. If someone wants to take a risk because their partner is taking a risk that's fine, but anyone who takes a risk because a VC will be a little put out otherwise is a sucker who has over-delegated responsibility for making strategy decisions about their company. True pigs won't turn chicken around VCs. ;) They'll take the risk of displeasing a VC along with all of the other risks mentioned.

wccrawford2• 15 years ago

A sizable chunk of cash is a big commitment. And if they aren't risking a sizable chunk, they aren't worth dealing with.

trevelyan• 15 years ago

One nice thing about getting revenue positive is that you can tell people like this to fuck off.

NY_Entrepreneur• 15 years ago

If an entrepreneur takes equity funding from a VC, then likely the VC will be a Member of the Board of the entrepreneur with enough power to fire the entrepreneur. So, the entrepreneur, in his trip in a small canoe across rough waters on the way to distant, solid land, needs to be very sure anyone else in that canoe is really good to have along and won't be a nervous Nellie who will break ranks, stand, and scream at the first big waves that rock the canoe.

In particular, in information technology (IT), what fraction of the VCs would an entrepreneur eagerly hire as, say, a co-founder, a CTO, CIO, lead developer, DBA, network administrator? How about listen to in a discussion about a 'pivot'? How about as Chief Scientist to stir up new, powerful, valuable 'secret sauce'? Did I omit Power Point expert? Gee, why would I omit Power Point expert?

Another point: The day before taking the check, the entrepreneur may own 100% of the business. The day after taking the check the VC owns maybe 30% of the business, an additional fraction is set aside for employees, and the rest 'belongs' to the entrepreneur except is in a four year 'vesting' schedule which means the entrepreneur now owns NONE of his business and, if fired by the Board, leaves with NOTHING, zip, zilch, zero, not even the source code he typed in to begin with. Bummer.

Next, now IT VCs don't invest in pigs, chickens, dedicated, driven, devoted founders or any other barnyard or other nonsense. Instead, VCs invest in numerical metrics that correlate well with future financial value. Generally the VCs invest in 'traction', just traction, already significant and growing rapidly.

Then there's now a rub, a big issue: If the traction is significant, say, 10 Web pages served a second with 3 ads per page and $1 CPM, then just why should the entrepreneur take the check?

Or, think of a US Main Street business in anything from a carry out pizza shop to a landscaping service: They don't get venture capital. But a PC server able to deliver 10 Web pages a second costs much less than even an oven for a pizza shop and much less than a truck for a landscaping service. The difference for the IT entrepreneur is that if the project is at all successful, then (1) the entrepreneur can lean back and let the server PC do the work and (2) has a chance of growing rapidly into a significant business to own, sell, or do an IPO. So, an IT entrepreneur can proceed as for a Main Street business until money is coming in and then see if a really good business can result. Nowhere in there is much of a role for a VC Power Point expert.

fedd2• 15 years ago

As VC firms are not about charity, but profit, I can only understand that they think they are able to buy those who invested their last dollars much cheaper.

If I were a VC (or when I become one) I wouldn't trust desperate people, those who bet everything and their arm on a deal. I understood that the article describes these as pigs. Such people could actually be even dangerous.

Why VC's invest in Pigs not Chickens

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