It’s Hard for Investors to Determine Which Ducklings Can Become Swans

Published in UT San Diego, December 8, 2014

Today we are going to study the fairy tale “The Ugly Duckling” by Hans Christian Andersen.

It is a story about a homely little bird who suffers indignation and abuse from others, until finally, after much travail and loneliness, he finally decides to end it all and throws himself at some birds to be eaten and killed. But much to his surprise, the birds are swans and they embrace him. He is shocked, but when he looks into the lake, he finds that he has matured into a beautiful swan himself, and he is accepted and loved by the flock.

OK, I get it. But the subtext here is that everyone wants to be loved before it is obvious and they become beautiful. I believe this emotion is a driving force in the entrepreneurial adventure. So the question is, “Can the investor/partner/mentor spot the swan before it becomes one?”

I recently funded a startup in the mobile app space (forgive me, I know not what I do), and before the launch, we went looking for some buzz. We got connected through a powerful person to a big-time, New York City, world-class public relations company with a client list to die for.

Now, let’s take a breath here. I am a guy who drives an 8-year-old SUV, and the boys in New York were a McLaren 650S Spider. Our budget was modest and their suggested retail MSRP was more than we could afford. We stretched and countered politely, still within an “almost” range, but they came back and said take it or leave it, no discount. So we left it.

And then, surprise, they called back and said they would agree to the discount, they wanted the account and they promised they would love us. But by then, we had moved on.

Now one view is that we had no business trying to drive a sports car, that we had clearly overreached and should never have entered that showroom. Another view is that perhaps we were a fledgling race car driver, who might become world class, and perhaps they should take a chance on us.

In other words, what are the signposts that might lead someone to bet that the ugly duckling could become a swan? This is the puzzle for all investors, and it is not an easy one. For example, I love the website of Bessemer Ventures because they list the deals they passed on — the very ones that became billion-dollar companies. Imagine telling the world that you are human and make mistakes. I am surprised that they have not been drummed out of the venture capital community by such honesty.

Of course, one of the signposts is the jockey. Can the beginning founder become the swan? There are myriad clues, but at the end of the day, it is still tea leaves and uncertainty. From a deal point of view, if I can invest in the duckling before he becomes a swan, I have definitely improved my return. And not just from a financial standpoint. I believe the real benefit is from an emotional standpoint. Being loved before you “deserve” to be loved brings loyalty and effort disproportionate to the investment. In my own case, like an elephant, I have never forgotten the few people who backed me early when I had no idea what I was doing.

And let’s end with the ugly duckling’s humility. In the story, our hero only sees that he has become a swan at the very end when he is ready to toss in the towel. Andersen himself has stated that the story was “a reflection of my own life.” He was born tall, with a big nose, big feet and he was cruelly teased. But as an adult, he was praised and honored and became world-famous.

The question is simple: Would you have “loved” him before he became what he became?

Rule No. 380

The key word in investing is “before” not “afterwards.”


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