Reflecting on My Investment Mistakes

One of these is not like the others.

"No, you never get any fun out of the things you haven't done." -- Ogden Nash

When I think about the mistakes and regrets over the course of my venture investing career, most prominent of course is when I've lost money. That’s never good obviously. The good news is that if you end up making a lot more than you lose, then the net result is more than fine, but those situations sure still do hurt. And there's certainly a lot to learn in those mistakes, too.

But there are different flavors of losing-money investment mistakes. The one set of circumstances which perhaps counter-intuitively I have few regrets about are the initial investment checks which I've championed. At NextView as a seed stage investor, we make approximately thirty core investments in each fund, and by the venture power law, only a handful of those are going to generate overall fund level-returns. Our quest is the search for the outliers in early stage VC, not the push to improve the median outcome.

My partners and I are backing extremely capable founders going after ideas which we believe had tremendous promise despite the risks. Given the set of facts which we have at the time of a first decision to fund a company, I've built conviction that there has been the possibility that each one could produce tremendous results. So if in the end the risks that I identified (or even those which I did not) overwhelm as inhibitors to success, then failure is a surely mentally painful but not terribly costly mistake, relatively-speaking.

Rather, my truly regrettable investment mistakes are twofold: the companies which we didn't invest in but had the real opportunity to -and- putting good money after bad in existing portfolio companies where we were already investors.

By now, it's cliché for VCs to share their "anti-portfolio." While known storied firm pioneered the practice of sharing their missed opportunities, it's become common practice for social-media prolific VCs to pronounce their near-miss on Twitter whenever a company exists. While I personally don't keep a literal a scorecard of companies which we passed on, I can think of a handful where I recall the company, founder, and the (missed) opportunity so vividly that I still feel a bruise.

I've tried to attempt look back and reflect on what we overlooked. Some are examples where I just clearly didn't see the opportunity from the outset. But on the ones which we got close to, why did we end up passing? Most often it is because we misunderstood the TAM, or better said, how the TAM could expand or be completely redefined if the company came into existence. Or occasionally it is because we faced challenges accepting the valuation price. It's easy to say that valuation shouldn't matter for the exceptional opportunities, but much harder to identify those prospectively of course. After all, by definition an entire portfolio cannot be exceptional!

The second set of mistakes I've made has been investing in a company further after an initial investment despite evidence that it wasn't working or the fact-set had changed since. These are the cases where I feel that negative regret emotion acutely, despite the fact that the errors of omission cited above in actuality likely cost our firm more.

Indeed, there are times when as I've gotten to learn more about the product and addressable market that I've begun to lose my conviction in the ability for this company to develop into a transformative one. Yet, I led our firm to participate in subsequent follow-on financings anyway. Hope springs eternal, and it's human nature (especially when those humans are optimistic VCs!) to think that the situation will improve or change. Even more regrettably, in one or two cases I began to realize that my confidence in the founder to fulfill the promise was misplaced. I should have listened to those doubts, but could easily cite other counter-examples where challenged founders ultimately redeemed themselves. Regardless, these human-centric decisions are the ones that sting the most... and where I've accordingly grown the most, too.

Yes, experience is the teacher of all things. It's been said that it takes seven years and $30 million to train a venture capitalist. For me, luckily it didn't cost nearly that much, but admittedly it likely took longer. Plus, I'm still learning and aim to continue to do so. However, I've certainly painfully learned the good-money-after bad lesson all too well so that that mistake will be minimized going forward, and I continually strive not to miss out on those opportunities underneath my nose which perhaps initially I only partially recognize. And when I do make an initial new investment mistake along the way, it's more than OK, as I've seen the upside of when things do go tremendously right. That experience of outsized winners is a teacher, too… and perhaps the strongest venture capital teacher of all.