Flock This!
This post is about investors and entrepreneurs. More specifically, it’s about how both exhibit a common phenomenon observed in nature.
My inspiration for this post comes from my hotel room in Harrahs Lake Tahoe as I attended the Tahoe Tech Talk Conference. Looking out the window from my room, I saw approximately ten small sized birds flying around in tight formation, pivoting quickly and moving as one hither and thither. The bird in the front would pivot, and all the others would shift to retain an identical heading and keep the flock formation. This was true even when this meant the entire flock would fly within the same space back and forth what appeared to be aimlessly. Having been engaged the past 36 hours with consistent startup talk, my mind drifted rapidly to think about how this phenomena is relevant to the startup world.
Birds fly in flock formation when migrating in order to be more efficient with their energy, as the lead bird expends up to 20% more energy then those that follow due to aerodynamics of flight. (Awesome explanation of the aerodynamics) They then rotate positions and switch the lead out as necessary. But why do birds fly in flocks when they aren’t migrating? Even when they don’t have a particular destination? Perhaps the behavior can be explained in how people flock.
Lets see how investors flock. Often times deals don’t gain traction till a lead investor, someone willing to put money down on the table under certain terms, is secured. Once this has been achieved, the follow-on syndicates, or the rest of the flock in this example, often pours in to fill the remaining allocation available. Of course this plays out differently depending on what stage of funding being raised.
At the Seed round, this typically means a recognizable and respected super angel or early stage VC becoming the banner from which their bannermen rally to invest alongside. At the A round, early B rounds much like the seed round, you typically have a single recognizable and respected early stage VC become the anchor from which another firm they commonly invest with will follow. At the B and onwards rounds, much like the earlier rounds, you may encounter the flock mentality, but often this is where a key change in behavior occurs. Here is often when the flock falls apart and new investors become directly competitive with one another. The investing flock no longer operates as a group, but instead as a single entity and the company typically has it’s destination in mind and is raging towards it albeit without enough resources/energy.
So why does the flock mentality exist so strongly in investors in the Seed, A and early B rounds? I believe the answer is revealed to be insecurity. Much like the flock, investor’s and the company don’t know for certain the path the company needs to travel, but the investor flock knows if someone makes the decision to go in a certain direction, it’s easier to validate that direction by following then to lead and propose another path. This means, if your first investor “validates” you, and they are “trusted” by other relevant investors then its much more likely they will pile on to be a part of the syndication. Investing at this stage initially always falls victim to group think until one investor or the entrepreneur change the course of the whole flock for right or for wrong with how they decide to pivot. The weakness of flock behavior is also a great strength for the company. For in nature, the flock pivots in different directions as new leads step up to determine the path, it is in these iterations back and forth, that one lead ultimately finds the right direction to the goal; Or doesn’t, in which case the company fails. The better a company adds strong leaders to it’s flock of investors and employees, the quicker the iteration of pivots by the flock and the sooner and likelier the company will find their destination; a functioning business model. This is the strength gained and why you want to leverage strong syndicates for your investment in early stage deals.
This typically changes when you get to series B rounds. Often, by then, through pivoting the course of the flock back and forth, a company has found the path it will take to reach the destination and it’s success. This means the existing flock of investors and entrepreneurs no longer provides pivoting efficiency except to continue traveling with one another and leveraging each other’s resources in getting to the destination, much like the migratory formations. In such a situation, the new investors do not seek to add further leadership and pivoting by the flock and thus find syndication with other investors typically unnecessary and competitive. This is also why term sheets at this stage become highly competitive for companies that have found their destination and the path to get there. The insecurity has been reduced by the iterations of pivots and accomplishments achieved by the company and thus the stakeholders are rewarded with a higher valuation and resources to get there.
So going back to the original question, why do birds flock when not migrating, perhaps like the startup it’s because they’ve discovered the secret to success in achieving whatever goal is ultimately achieved through determination and iteration. I’m convinced the flock theory applies to nearly any kind of societal interactions involving uncertainty and I’d welcome others to tell me about where they’ve seen it apply.
For example, Groupon has created a beast of a market with limited quantity, time and geography based commerce solutions. This was effectively a pivoting of the flock of entrepreneurs looking to start companies, and many in the remaining flock of entrepreneurs reacted by founding companies duplicating the pivoting model, practically over night. Even the entrepreneur is vulnerable to insecurity until the path towards the destination becomes apparent, till then, they too flock.
If there is a clear message here though, the big winners are those that dare to pivot away from the flock, chancing being picked off and possibly dying, for the opportunity to be first to discover the path to success.
[...] This post was mentioned on Twitter by Quest VP, Marcus Ogawa. Marcus Ogawa said: Watching a flock of birds, I was inspired to write this post about flock behavior: Flock this! http://bit.ly/bau5Na [...]