The Three Mistakes

The loss you fear, the winner you miss, and the one you only learn to fear last.

Ask a first-year VC Analyst what keeps them up at night and they’ll tell you about the deal that might blow up. Ask a General Partner fifteen years in and they’ll tell you about a deal that worked.

The mistakes you fear in venture change as you get better at the job. That progression, what you learn to regret and in what order, is one of the more reliable measures of how far along you actually are.

The first mistake: the loss.

When you start, the error you fear is the obvious one. You back a company and it fails. The product never finds a market, the team comes apart, the round you led marks to zero. It feels like the central risk of the job, so you orient your whole process around not making it: more reference calls, more market sizing, more reasons to be sure. Especially in an early supporting role, nothing feels worse than being the person inside your firm associated with a losing investment.

In a power-law business, though, the loss is the cheapest mistake you can make. You can only lose what you put in. A check that goes to zero costs you one times your money, and you knew the size of that bet the day you wrote it. The downside was capped before you signed.

Much of the diligence aimed at avoiding losses is confirmatory rather than evaluative. It makes you feel more certain without making you more right. The new Investor over-indexes on it because the loss is the only mistake they can see coming, and the only one they feel they can begin to control.

The second mistake: the miss.

Then you advance, and you discover a more expensive error. The company you passed on. The founder who struck you as a little off, the market you thought was too small, the round you were “watching” until it became a star outlier in someone else’s fund.

This one hurts more, and it should, because its downside is uncapped. A loss costs you one times your check. A miss costs you whatever the company became, which in venture can be the entire fund, or, early in your career, the shining halo you’d have earned by catching it. Bessemer famously publishes its “anti-portfolio” of the companies it declined, and the resulting list is a monument to the most instructive mistake in the business.

So most VCs, as they mature, move their fear from the first mistake to the second. They stop optimizing to avoid losses and start optimizing to avoid misses, which means tolerating more apparent risk, weighting upside over downside, learning to say yes to the company that looks wrong in the ways breakout companies always look wrong at the start.

The power law distribution of outcomes is straightforward to wrap your head around conceptually, but much harder to internalize into your actual decision-making.

And so, many stop there. They spend the rest of their careers fixated on avoiding the one that got away.

The third mistake: the size.

There is a level above the miss, which doesn’t get talked about, because you can only make it after you’ve gotten the hard part right.

It’s the winner you did have, and underwrote too small.

This is the most expensive mistake in venture, and it’s easiest to see in fund returners rather than dollars. Picture a breakout that returns a career-defining 100x on the capital you put in. Underwrite it at 0.5% of the fund with a modest initial check and it pays back half the fund. Size it at 2.5%, across your first check and the follow-on rounds, and the same company returns the fund two and a half times over. Same pick, same year, five times the outcome. The only variable is what share of the fund you were willing to put behind a company you were already right about, and that gap is the difference between a good investment and the one that defines the fund.

The reason this mistake comes last is that it requires everything the first two taught you, plus one thing they didn’t. You have to have shed the loss reflex, and beaten the miss, and then, at the moment of maximum uncertainty, before the company is obviously a winner, had the conviction to concentrate. To take your pro-rata or even more when the price feels high. To put more dollars behind your single best idea instead of spreading them across your most defensible ones.

You don’t fully control your whole position at the first check. Ownership targets, valuation constraints, round sizes, and available allocation limits cap the initial bite, both at seed where we play at NextView, and at later entry stages. So the most critical sizing mistakes often show up later, in the follow-on you didn’t fight for, the reserve you spread evenly across the portfolio instead of concentrating into the one company pulling away. In practice that means naming your breakout early and loudly in reserve conversations (assuming your fund model has reserves!), and arguing against the instinct to keep powder for every company once one has clearly separated. The lever you actually hold is whether you double down on conviction or quietly hedge it.

Where you sit.

My Partners and I at NextView have made quite a number of mistakes over the past fifteen years since starting the firm. I can confess which companies we invested in whose logos have now quietly disappeared from our website. I can sigh in exasperation as I list the ones that were right under our noses that we didn’t pursue, passed on, or lost. But it’s the one or two shining stars, thankfully only a few of the many, where I carry the most regret and the sharpest lesson for the future.

You can tell roughly where a VC is in their career evolution by which mistake they’re afraid of. The ones still working to avoid losses are early, whatever their title. The ones haunted by misses are good, and most of the people you respect largely live here. Fear under-sizing your winners and you’ve reached the level where returns come from a portfolio rather than a pick.

All three, though, are mistakes of investing, the errors you make putting capital to work. Generating liquidity is a ladder of its own: when to sell, and when to take some off the table rather than ride a markup back down. That one is just as real, and just as long (and perhaps the subject of a future post).

When it comes to venture investing, the job doesn’t end at finding the company. It ends at having the conviction to back it in the amount it deserves. That’s the mistake you learn to fear last, because it’s the only one you have to earn the right to make.