Deep Thoughts #2 Foxes and Hedgehogs: how risk profiles determine the roles we play
How to understand the venture eco-system from how we evaluate risk
Introduction
Silicon Valley thrives on risk—a currency more valuable than cash for those daring enough to gamble on the future. But who are the real risk-takers? The founders who bet their lives on a single idea, or the venture capitalists who strategically place their chips across the board? I recently finished reading Nate Silver’s On the Edge: The Art of Risking Everything, a book that reshaped my perspective on Silicon Valley—the people it attracts and the distinct roles they play within the innovation ecosystem. While Silver provides a sharp analysis as an observer, it was a recent conversation with an entrepreneur trying to build an equity pool for Series A+ founders to mitigate founder risk that genuinely prompted me to delve deeper into this topic and explain how risk shapes our roles in the innovation economy. As someone who’s been both a founder and is now more aligned with venture capital, I felt compelled to explore these dynamics from an insider’s viewpoint.
Enter the Foxes and Hedgehogs
This brings me to a classic analogy that resonates deeply in the world of startups: foxes and hedgehogs. The terminology comes from a fragment attributed to the Ancient Greek poet Archilochus: πόλλ' οἶδ' ἀλώπηξ, ἀλλ' ἐχῖνος ἓν μέγα ("a fox knows many things, but a hedgehog knows one big thing"). The analogy used by the political scientist Philip Tetlock came to find one key difference in those who are best at forecasting the future—the way they think. In Tetlock's analysis, Hedgehogs have one grand theory, a Promethean vision (Marxist, Libertarian, whatever), which they are happy to extend into many domains, relishing its parsimony and expressing their views with great confidence. Yet, hedgehogs are pretty terrible at predicting the future and do worse than generalist laymen in predicting outcomes. On the other hand, Foxes know a little about a lot and use the different data points in their knowledge base to predict the future. Nonetheless, Hedgehogs shine in predicting extreme outlier trends, and their single-minded focus on one issue makes them better at seeing a singular major occurrence that the rest do not.
Canva and Melanie Perkins: The Hedgehog
Take, for example, Melanie Perkin of Canva. Perkins' journey exemplifies the relentless determination often seen in founders with a singular vision. Her journey didn’t start in a boardroom or with an MBA; it began with an unwavering vision that would eventually ripple across the world.
Perkins' story began in 2006, when, as a teaching assistant, she couldn’t understand why design software required an entire semester to learn. “Students would take a whole semester just learning where the buttons were and how to design something.” Perkins wanted to enable anyone in the world to create beautiful designs, not just a few who knew how to use complicated software such as Adobe.
She teamed up with her then-boyfriend and now husband, Clifford Obrect, to start Fusion Books, enabling students and teachers to design their own yearbooks. By 2011, Fusion By 2011, Fusion Books became the largest yearbook company in Australia and expanded to New Zealand and France. The co-founders realized that the engine behind Fusion Books had the potential to enable anyone without a design background to design any publication, not just yearbooks.
Perkins and Obrecht sought new funding to realize this new goal. After facing over 100 investor rejections, Perkins visited angel investor Bill Tai in San Francisco. Tai told Perkins he would invest in her company if she could build an engineering team that met his standards. So, Perkins bought a mattress and stayed on the floor of her brother’s San Francisco apartment while she began looking for a technical team to join the company.
Perkins spent the next year attending conferences, handing out flyers, cold-calling engineers, and scouring LinkedIn. Finally, in 2012, she was introduced to Cameron Adams, a UI designer at Google who was trying to raise money for his own startup. Adams soon joined the team as a third cofounder, and shortly after, Perkins made her second engineering hire in Dave Hearnden, a Senior Engineer at Google.’
The Canva engineering team ground between 2012 and August 2013 to get V1 operational. However, for Perkins, it took over seven years of focused attention on her “secret” to turn Canva into an overnight success.
by 2014 they had 1 million users.
By 2015 they had 6 million users.
By 2023 they have over 135 million active users.
Perkins is the quintessential hedgehog. She was motivated by a single secret—design software didn’t have to be hard to use to make great designs. She spent years doggedly following this path, motivated by a zeal to convince others to help shape the world she saw. It's for that reason that Canva is a $50 billion+ company.
VCs—The Ultimate Foxes
In contrast, venture capitalists are the Foxes of the startup world. Where founders like Perkins dive deep into one big idea, VCs spread their bets across multiple startups, each representing a different potential future outcome. Their approach is akin to a seasoned gambler at the roulette wheel, strategically placing bets on the board based on patterns, trends, and signals that may not be immediately apparent. The difference is that, unlike roulette’s negative expected value, the power law in venture capital offers a theoretically unlimited upside on any potential chip they place on a founding team.
Foxes in the venture world recognize they don’t have all the answers, but they know there are hedgehogs out there with outlier visions that can be transformative. Since most Hedgehogs are wrong most of the time, a venture capitalist must invest in multiple Hedgehogs with a “secret” to maximize returns while minimizing the risk of total loss. A venture capitalist is a Fox who gathers hedgehogs to foster and support transformative ideas while generating significant financial returns.
While some venture capitalists may differ, VCs are essentially looking for ideas that are currently contrarian but will rapidly become part of the mainstream consensus. Backing an innovation that is too early or will take too long to take hold inhibits VCs from generating the returns they need to continue funding the innovation cycle. ( Many VCs lost their shirt in the last cleantech wave.) . Ultimately, our job as VCs is to identify people and ideas poised to transform industries and ensure that each bet has the potential to achieve extraordinary results.
Conclusion
In the end, the true genius of Silicon Valley lies not only in the brilliance of its founders but also in the calculated risks taken by the venture capitalists who strategically back them. This delicate dance between foxes and hedgehogs is what drives the relentless pace of innovation. However, for entrepreneurs, the reality is stark: if they aren't prepared to pursue a vision with the understanding that it carries only a slim chance of massive success, they may not be ready to play the game that defines Silicon Valley. To succeed, founders must embrace the hedgehog mindset, persevering with unyielding determination even in the face of overwhelming odds. Anything less simply won’t suffice.