Fred Wilson: Doubling down (in VC/PE) | Hacker News Reader

Fred Wilson: Doubling down (in VC/PE)

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18 pointscwan8 comments

So, venture capital is usually used to accelerate growth at an early stage company which works out pretty well for all involved parties: Entrepreneurs get to build big businesses, VCs enable that and make money off the management fees and LPs benefit by having a well-performing asset class in their portfolio.

The point where goals start diverging is when the VC wants to see rapid growth and a quick sale (say, 4 years into the company timeline).

Fred says:

So when an investment is not working, you are faced with walking away, shutting the company down, or making an additional investment.

I wonder if there is a fourth way, where the company trims itself because it isn't making much revenue (maybe because it's too early to a market that is nascent, or organic growth is much slower than expected but is still there) but keeps going instead of shutting down or trying to accelerate the growth process by raising more capital.

Is it fundamentally hard for VCs to say, we're going to support this company for as long as they want (with connections and a bit of capital) and wait for an eventual exit, if they trimmed down and burned very little capital? Why would you not want to keep going if you were more or less promised an eventual exit/return and it didn't require a lot of capital? Why the focus on "quick" exits and not building big sustainable businesses? Is this something that comes down from their relationships with the LPs?

excellent point aditya. that is the fourth choice. i alluded to it later on where i said "cut costs" but i did not do a good enough job of articulating this approach. thanks for picking up on that.

It's basic human nature to throw good money after bad because humans are twice as upset about losses as they are happy about wins. It's thusly common among people who know that to overcompensate for their own fallibility and go the other way.

humans are twice as upset about losses as they are happy about wins

Any research to back that up? I always thought that was a subjective thing, in that it varies for everyone.

Yes. Daniel Kahneman and Amos Tversky were the first to demonstrate this behavior.

Tversky, A., & Kahneman, D. (1981). The framing of decisions and the psychology of choice. Science, 211, 453-458.

However, I don't know enough to answer your question about in-population variance of this trait.

Is that the one with the coin flips? As I understand it an experiment showed that if you put people in a situation where one side of the coin loses $100 and the other side wins $x, for most people $x has to be greater than $200 for them to take the flip.

This is the same reason why people invest up to their last penny, just to watch all their money being lost. " I already gambled 100 dollars, f&*^% it, I may as well give this last 10 dollars, which my lunch for tomorrow, a shot". Then tomorrow you are more likely not to eat.

I'm telling you baby, you always double down on 11.

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