It’s great advice for writers: Mercilessly analyze what you’ve written. And be willing to kill your darlings – the prose you fell in love with, but which doesn’t work. Killing it improves the overall product.
Is it great advice for investors?
Should you take a merciless look at your investments and kill your darlings? The ones you fell in love with but which are now non-core, or aren’t performing, to improve the overall portfolio?
Or, do you instead try to turn them around?
It’s a hard question. It’s hard to let go of our darlings. The concern about reputational exposure, or the sunk cost fallacy, may drive us to dig in and try to turn it around, even if the chance of success is remote, or the dollar benefit is small.
We’ve been there ourselves. We made a growth equity investment in a consumer business a decade ago that initially was on fire. (In a good way.) Then, trouble. Management invested heavily in a costly, high-risk new venture, with minimal disclosure to the Board. The new venture soaked up management’s attention. And it soaked up our capital. It quickly pushed what had been a healthy company into a highly distressed state. This was only one company in a larger portfolio.
But we and the other investors quickly found ourselves swamped. Swamped with analysis of a rescue plan. Swamped with underwriting rescue capital. Swamped with late night conversations about whether we should consider insolvency. Swamped with investor discussions about whether to replace the CEO.
Ultimately we righted the ship. But the work was a time vampire. We clawed our way back to a tolerable outcome with that one company. But did our attention on the health companies in the portfolio suffer? Yes. Did our attention on originating new opportunities suffer? Yes again.
A challenged company ends up in the Important and Urgent quadrant. It blots out everything else, including the non-urgent but essential task of managing the healthy companies and originating new opportunities.
What should we have done? Historically, investors have had three choices. But there is a 4th.
- Lean in. That’s what we did on the consumer investment. Was it the right move? If I had it to do over again, probably not. We eked out a base hit. But it probably cost us a lot of at bats. And our existing portfolio was starved for attention.
- Get out. VO2 executes secondary sales. It’s a core part of what we do. But is sale the right thing to do when a company or a portfolio is in the throes of a challenge? Probably not. The valuation haircut on a secondary may be highly punitive. A variant is just to write it off. But that’s even more punitive.
- Look away. Tread water, hope things get better, don’t devote a lot of resources to it. A less charitable description: denial. I’m not sure this has ever worked.
There’s a 4th option: Bring in a force multiplier.
That can be an internal team with expertise and bandwidth, or an outside resource like VO2. Making those assessments, and doing that work, is what we do. For one investee. For a handful of investees. For an entire portfolio.
With decades of experience in VC and PE, we give a candid assessment of your strategic and financial options. Maybe selling a position or a portfolio today, is the best move. Maybe helping the investee to turn things around is the best move. Maybe waiting out a downturn in the M&A market and selling when multiples are more attractive is the best move.
Whether it’s an internal team or an external team, a force multiplier can optimize the outcomes.
It can deliver the confidence that your investment outcomes are optimized.
And it can deliver bandwidth, so you can focus on the deals that matter most, and not be swamped by challenges.
And get back the time to focus on your real darlings.
To learn more, schedule a confidential consultation.
VO2 Partners solves challenges for VC investors.
We enhance reporting and governance; provide liquidity; and manage individual investees or entire portfolios.
We give investors the freedom to focus on the deals that matter most, and the confidence that their outcomes are optimized.
Schedule an intro call here.
Email us for the white paper case study featured in Chief Investment Officer.