You hate the company. Should you invest?

Of course not.

But wait.

It’s more complicated.  You already invested.

You wrote a check with high hopes.  Maybe more than once.  But now the honeymoon is over.  And the company needs more money.

So, should you invest?

But wait.  It’s even more complicated than that.

If you don’t invest, the company will fail.  Or maybe other investors will step up, but you’ll get wiped out in a pay to play.  Either way, you have to write off your position.

Now what?

We look at situations like this all day.  It’s a multivariable problem that defies a one-size-fits-all solution.  But there are the five factors we look at.

  1. The company.  We obviously start with the company.  What isn’t working?  Are they merely caught in a cyclical trend that may turn around?  Or are they on the wrong side of a secular trend that won’t?  Do they have a shot at achieving product/market fit?What about the team?  What do you think of their execution?  Like John McKay, are you in favor of it?  And do you actually know if they’re any good?  They may be magicians at presenting to you in the boardroom but lousy outside of it.  We’ve all seen that movie more than once.

    Evaluating the team is notoriously difficult.  We may use a structured scorecard, but there’s often no choice but to rely in significant part on intuition, qualitative judgement and pattern recognition.

    But evaluating the company is only the beginning of the exercise, not the end in deciding whether to double down.

  2. Levers to pull.  Are there levers to pull that would change the outcome?  Can we dig in and help with a key initiative?  An acquisition?  A capital raise?  Mentoring the CEO?  Bringing in a consultant?

  3. The big picture: Your career (or at least, your next deal).  Here’s where it gets even more qualitative, and even more subjective.  Is there strategic value in proceeding even where you have doubts?  For example, does it help your brand as an investor?  Would it show prospective investees that you remain a loyal partner even when times are tough, thereby improving your access to the most desirable deals?  Would investing forestall a writedown that would jeopardize an investment program and your long-term prospects as an investor?  This isn’t often said out loud.  But it matters.  And it should be a factor.

  4. How much are you protecting?  Yes, sunk cost is a fallacy.  Theoretically, it’s irrelevant whether you’ve invested $1 million or $100 million: if you aren’t a believer in the thesis, you should walk away.But it’s not always that simple.  The reality is that the reputational exposure of a failure, or the public markets exposure from a writedown, is very different if it’s $1 million versus $100 million.

  5. What’s the trajectory of the bad news?  Is there a drip-drip-drip of additional capital calls coming that will erode the relationship capital you have with your money source?  Is there a “take your medicine all at once” option that’s preferable, by taking a single large write down all at once, rather than dribbling out bad news?

So maybe you do in fact hate the company.

Or at the very least, you’re just not that into them.

But sometimes it sucks to be a grownup.

You may still need to write that check.

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.

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