Growth equity is increasingly being recognized as an investing discipline that is separate and distinct from venture capital. That being the case, how does one distinguish between a venture capitalist and a growth equity investor. In my mind, growth equity investors are hedgehogs; venture capitalists are foxes. Allow me to explain.
Ever since I read Jim Collins’ book Good to Great, I’ve been fond of Isaiah Berlin’s parable of the Hedgehog and the Fox. The story of the Hedgehog and the Fox revolves around a quote fragment attributed to the Greek poet Archilochus:
The fox knows many things, but the hedgehog knows one big thing.
Long-story short… the fox is cunning, sly, creative, etc. and out to get the hedgehog. By contrast, the hedgehog is – on the surface – mundane, plodding, un-inspiring and looks like easy prey. However, every time the fox tries to attack the hedgehog, the hedgehog responds consistently and effectively by turning into an impenetrable ball of quills, rebuffing the fox time and time again. No matter what tactic the fox tries, the hedgehog “wins”. Hedgehogs don’t do a lot of things; they don’t have the broad repertoire of skills that foxes have. However, they do turn into an impenetrable ball of quills really, really well.
Collins applies the parable to a business context, arguing that companies that are Great (as opposed to good) have hedgehogs as their leaders. Those hedgehogs are able to make a complex world simple, by creating a unifying view of the world and driving single-minded execution in their organizations. Long-term success in these hedgehog businesses comes from relentless and effective pursuit of that execution focus.
Venture capitalists are foxes
Venture stage businesses experience significant uncertainty. That uncertainty necessitates frequent strategy shifts and changes in execution focus. Rare is the case where an early stage business gets the formula right the first time. The skill-set and mindset of venture investors must accommodate this reality. I’d make the case that successful in venture investing requires a skill-set and mindset that is more akin to the fox than the hedgehog. It’s all about broad experimentation, trial-and-error, pattern recognition and connecting dots. It is a gut instinct driven process. Act, evaluate, re-calibrate, repeat…
Growth Equity Investors are Hedgehogs
By contrast, growth stage investing is about backing companies that are developing a successful, growth-generating formula and consistently and maniacally pursuing execution of that formula. Growth stage businesses need to do a few things and do them at a world class level. For the sake of capital efficiently, it is equally important for growth stage businesses to know what they are not going to do in order to maintain a narrow focus on the few things that will move the needle. Execute, execute, execute is the mantra. As a result, growth equity investors have to be hedgehogs. Growth equity investing is all about data driven decision-making and focusing management teams on a narrow set of objectives that generate profitable growth. This isn’t to say that growth stage businesses don’t experiment, they do. Their experimentation is just more data driven and graft onto a growth formula that is already working. The experimentation can’t distract from the core execution focus.
Are you a Hedgehog or a Fox?
I’m not suggesting VC and growth equity investors are in an epic battle as in Berlin’s parable. I’m also not suggesting that one is superior to the other. Hedgehogs are not better or worse than foxes, just like growth equity investors are no better or worse than venture capitalists. But, hedgehogs and foxes are different as are growth equity investors and VCs. As with most things in life, it’s all about fit between skills and scenario. Growth stage businesses benefit from hedgehog leaders and hedgehog investors. They are focused, data driven, execution minded and consistent in their pursuit of a growth formula. Venture stage businesses benefit from having fox leaders and fox investors. They are instinctive, opportunistic, and willing to change tactics quickly, frequently and sometimes with little to no data.
None of us are 100% hedgehog or fox; we all have attributes of both. I tend to lean toward the hedgehog mentality in a business context. In part, and over time, this has led me to prefer growth stage investments. Growth stage investing is a better fit with how I frame the world.
Unfortunately, none of this helps answer the timeless and timely question: What does the fox say?