The Easy Answers Usually Don't Work

When things go wrong in startup companies, the VCs often reach for the easy answers:

– Let's get a "world class CEO"

– Let's sell the company

– Let's fire the VP Sales

But in my experience there are no silver bullets. Fixing a bad investment is really hard. First and foremost, you have to accept you've made a bad investment and then you need to decide if you want to do what it takes to fix it. And you need to accept that even if you do fix it, you will probably be left with a subpar investment from a return perspective. So be prepared to invest additional capital that will not meet your hurdle rates.

The one and only thing that will save you in the end is building a sustainably profitable company. If you think you can get there, do that. If you don't, let it go. The hail mary passes won't be caught, so you shouldn't even try to throw them.

#VC & Technology

Comments (Archived):

  1. David Bloom

    I once went to the doctor with knee pain. He made me walk, bend, flex, jump, hop…but no x-ray, MRI or anything else. After a brief pause he pronounced sagely that I had a misaligned disk in my back. The prescription? Dr. Scholl’s inserts for my shoes. “The inserts will tweak your foot angle, shift the impact spot, improve your running balance and let you naturally straighten your back, letting the disk fall back a millimeter or two. That will reduce pressure on the nerve that runs from your spine to your knee.”The thing, he said, is never really the thing. Never to be forgotten.

    1. fredwilson

      “the thing is never the real thing”wow, that’s going to be my mantra of the day

      1. William Mougayar

        Sounds like cause and effect / means and end. If you’re treating the effect without knowing the cause or if you’re confusing means with end- then these are troubling scenarios. A VC from the outside can sometimes see through the fog, especially if they’ve been to that movie before.

        1. jarid

          If there’s fog at your movies, I’d probably go to a different theater. πŸ™‚

          1. William Mougayar

            lol. They have special fog glasses…

    2. CliffElam

      Ok, that is awesome, but it is awesome because it is rare.-XCPS – It actually sounds like the kind of stuff my chiropractor says right before he works on my left ankle to reduce a pain in my right elbow. I accept that it must not be magic because it always works, but his whole rationale lives in such a black box….

    3. Alex Murphy

      Great story.In a startup, the thing that is rarely the thing is “sales is our problem” … If sales appears to be the problem, it probably has a lot more to do with not understanding the problem that you are trying to solve for your customer. This goes back to product development and more specifically customer discovery. Sales is not about selling ice cubes to eskimos.If an investment looks bad, then it probably means that the company missed the earliest steps of forming a scalable business, which is to make sure that there is truly a market for the product they are developing. This can’t be solved by putting more gas on the fire, but by making sure you have the right core product that is solving a real problem for real people. This is the essence of a pivot. What can the team (mgmt and board) see in the market, see in their customers, etc that is a significant problem that they are uniquely positioned to solve. Go there.

  2. David Semeria

    You didn’t necessarily make a bad investment, maybe your subsequent cards just turned out to be twos and threes….The key thing is to lay down your cards, to NOT give up the Holy Game of Poker, and don’t hold it against anyone.Shit happens.

  3. CliffElam

    Speaking as a non VC but a serial startup guy, I agree. But, man, when you get in that kinda small and desperate smelling room with people who really want it all to work, you can belly up to the kool aid bar before you know it.There must be something very fundamentally human about the desire to pivot, pass, and double-down.-XC

  4. Carl Rahn Griffith

    A bit of humility would address/help fix many such scenarios – ‘Mea Culpa’ – is nothing to be ashamed of but human pride/ego all too frequently prevents this.Shame.

  5. Wells Baum

    It seems to me that when things go right the easy answers do work and ironically, are the same: Let’s bring in a much more equipped CEOLet’s sell the company right now, for much more than what we bought it forLet’s fire the VP of sales (despite his/her success) and bring in someone who can add even more value to the bottom line

  6. Dan Lewis

    Things go wrong for a lot of reasons. Fixing one of those reasons isn’t enough.

    1. Matt A. Myers

      There could be a base cause or leading metric that lead to all those problems though; Analysis would definitely be needed from someone who’s aware enough.

      1. Dan Lewis

        If it’s a product question, sure. If your cost per acquisition is toohigh, maybe the reason is bad UI/UX on your AdWords landing page, e.g. Just fix it.But if it’s a culture question — bigger, different story. Maybe theproblem is the same (bad UI/UX on landing page leads to high cost peracq) but there’s no one who can fix it, culturally: the CEO defers tothe truly visionary chief product officer who is too “busy” perfectinghis genius to worry about small UI fixes. The CMO is not an AdWordstype of guy in the first place, prefering a top-down brand-firstapproach. There’s a dev with, coincidentally, enough UI/UX experienceto fix the issue, but the CEO has hired a new CTO, specificallycharged (and sought after) to maintain 99% uptime, so that dev isn’tallowed to fix it — he’s “busy.”In the second case, no one is doing a bad job or being subversive. Infact, everyone is doing exactly the job they’ve been hired to do.No magic bullet there.

        1. Matt A. Myers

          I would say someone’s doing a bad job if there isn’t someone looking at the big picture on a constant / regular interval.I understand what you’re saying, but that’s something that needs to be watched over. πŸ™‚

  7. kirklove

    You’ve been doing a lot of “public thinking” about letting something go… hmmm…And I wouldn’t tell Doug Flutie hail mary’s don’t work. πŸ˜‰

    1. fredwilson

      Not ablout letting goAbout sticking it out

      1. Matt A. Myers

        Is it usually that situations don’t turn out how you wanted because execution didn’t get the ideas made, or is it the ideas didn’t workout or didn’t reach a point fast enough where you believe they would have taken off so you rethink?

      2. kirklove

        Then I read that incorrectly. My bad.

  8. andyswan

    This is a very clear example of the gulf that always exists between founder and investor interests.Even a VC, like Fred, who is notorious for his commitment to the founders in his portfolio and “seeing investments through”, will see a reason to pull the life-support plug….and it will ALWAYS be before the founder lying on the table thinks the same.Anyone that accepts money needs to understand this. At some point, it is very possible that you’re going to be diluted and have built an unsustainable company. In fact…the very people that are “pulling the plug” on you will be the ones that were most encouraging of you setting up a structure where you “deployed capital quickly and aggressively”. You’ll feel that they shot you out of a cannon and then moved the net to another company while you were in mid-air.It’s the right thing for them to do….they have to protect capital— NOT YOU.The best scenario is to get the model of profitability right before you take investment…..KNOW you can fly before you slide down the barrel of the cannon.

    1. fredwilson

      So true andy

    2. awaldstein

      Very true Andy but very very few understand the business model, let alone profitability before they take funding. But your points speak directly to the importance of having early money and advisors that you trust and can help think this through. I would wager that most first time investors, regardless of the transparency of today’s world are still minnows in a shark tank.

      1. Aaron Klein

        I think the (general) rule has to be: figure out your profitability with seed or angel money if you can. Then take VC money to get to scale (if you need to).

        1. awaldstein

          Yup…that’s the rule and a good one. But building a company from start-up stage is a process that almost always breaks all the rules you started with.

          1. Aaron Klein

            This is very true. But I’d be inclined to go back and do another seed round to figure out the business model before climbing into the cannon, if at all possible…

    3. PhilipSugar

      Yes this is true.His last paragraph shows how the opposite is true as well.If you build a company that is solidly profitable but doesn’t have a big exit, then as Dire Straits says….sometimes your the windshield, sometimes your the bug.

    4. Matt A. Myers

      If the founder didn’t have a very strong argument counter anything I could say then I’d be very angry with him/her/them. I’d hope the founder would be fighting hard to keep things going – not just for more money obviously, but to figure out a brilliant solution or alternative.”….KNOW you can fly before you slide down the barrel of the cannon.”That gave me such a great visual. πŸ˜€

    5. Mark

      That is interesting. I’ve never been funded, but I would have thought that VCs wouldn’t be encouraging putting the pedal-to-the-medal until there was some serious positive feedback going on as a means of protecting their capital. Is this a sign of bad VC, or just something that happens? Maybe excitement led the founder to build and the to VC fund something awesome yet unsustainable? Maybe a confusion between the next round and success?Personally, I’ll happily take the funding before I have a profit model, but as a founder, I am not flooring it unless I know that the wheels are on tight. I mean, unless you deep down don’t believe in your startup, I think you must know it’s to your own advantage too.

    6. Donna Brewington White

      “…the gulf that always exists between founder and investor interests.”Seems like this gulf extends beyond interests to actual mindset.

  9. baba12

    When was the last time you heard a bunch of MBA’s (most VC’s are) want to make decisions that are not easy.In almost all fortune 500 companies when the going gets tough and revenues are falling short of projected numbers, the MBA’s tend to do the easiest thing cut the number of people working. It is easy low hanging fruit with immediate results you lower your costs. What would be sensible is to look at how to reduce waste and costs in other ways without cutting jobs but that is not the easy thing to do.In a culture where instant gratification is the fabric people are draped in it is difficult to see things differently VC or not.Is USV of the other ilk where investments in companies are made with a knowledge that there shall be a long gestation period before the kind of results can be delivered and patience is part of the fabric or do you get jittery and anxious about how things move.Building a company to be profitable and sustainable takes a certain amount of time and effort & as someone stated you need not 1 but a 1000 silver bullets.When you play craps the mathematical odds favor a good hand for the player. If you are at $25 minimum table, and you start with $200 it is possible that you loose everything in the first 8 rounds, if you start with $500 instead the chances are you will come out a winner over the course of 20 rounds. Having that vision and ability to sustain through the tough parts of the startups life and sticking to the plan is not easy, requires a lot of deep breathing.

    1. fredwilson

      Great commentI sure hope we aren’t jitteryThat would be awful

      1. baba12

        When jittery increase the dose of Vitamin B Complex, or more specifically increase dose of Riboflavin.

        1. ShanaC

          Thank you. Never hurts to have some vitamin advice!

  10. rdeichert

    Great post FredI call it unicorn hunting syndrome. The mythical beast will surely solve everything but they aren’t real thus you never find one and waste valuable time.

    1. Matt A. Myers

      I have a unicorn for sale – but it’ll cost ya!But on a serious note, I think if someone is aware enough of everything going on then they have a good chance of figuring out what perhaps one or more leading / base causes were – but I guess you have to assume there will be some unknowns, and would have to try for it until you reach your stop point.

  11. Harry DeMott

    For a blog that is usually focused on the founder/product side of the equation this is a very investor focused postand I’m loving it.What you are dealing with is the economic theory known as sunk costs.Once you invest – that money is gone – and you hope to earn a return on it – but you are not getting it back anytime soon.The issue, when things go sideways, is whether to throw good money after bad (so to speak), or to put it another way – whether to put more in the pot to try and get back some of your bait.I think what you are describing is one of the biggest issues facing VC – and indeed why returns have been sub-par.Sure many VC’s never get the home run that returns the fund – but if you look at the absolute number of zero’s – and realize that a lot of them could have been better outcomes had the VC simply worked the investment and not walked away – or was more realistic early on in realizing that the investment wasn’t gaining traction and salvaged something from it – their returns would improve dramatically.Think of a 10 investment portfolio where 1 returns the fund, 1 returns 50% and 8 flame out and you shut them down. You end up up 5% on the whole fund (1 returns the fund – a 10% position returns 5% – and everything else is a zero = 105%). Now do the same math and assume that you can salvage 25% of your capital in the other 8 investments. All of a sudden your returns on the fund rise to 25% (80% of the capital returns 20% + the original return).That’s a huge gain.The problem – as I see it – is that because VC’s can’t recycle capital the way hedge funds do – the sale of a position at a loss – even when there is even the most infinitesimal chance of success – makes little sense – because once the investment is sold – the capital is gone – and so is any chance of making a return.

    1. baba12

      Hedge funds don’t create anything besides wealth from speculation. They should not be compared with VC’s even though the purpose for both are the same create more wealth for them and their investors. At least VC’s are trying to help build companies that are creating something.VC’s cant recycle capita as you stated earlier cuz they are sunk costs. Hedge funds never have sunk costs it is always a position and they shift their positions on a constant basis.

      1. Harry DeMott

        Philosophically you are correct in terms of what hedge funds create(generally great wealth for successful owners – and not much else other thanhigh paying jobs) – but the hedge fund manager is a professional investor -just as the VC is. Both are in it for profit – and both operate from amanagement fee and incentive structure that is almost completely identical.So it is from the point of view of a risk manager that I am writing thecomment. Because hedge funds can recycle capital, I believe they tend to bebetter risk managers of portfolios than VC’s who, in my estimation, don’talways think properly about risk and return in a given situation. My pointis not that hedge funds are better than VC’s in some sort of social context- it is merely that VC’s can actually learn a lot from their public marketcounterparts about certain aspects of investing that will make them betterVC’s ultimately. The fact that Fred is writing this post today tells me thathe fundamentally understands the issue – which is more than I can say formany people I have spoken to. This makes him a better investor – and thus heshould have higher returns. His higher returns should attract more capital(or as much as he and his partners feel they can successfully invest) andthat should lead to more high quality companies getting funded over time. Agood virtuous circle.

        1. Mark Essel

          So if I understand you Harry, VCs can’t reinvest gains to mitigate risk. Once a company liquidates that money goes into the paybin back to LPs. Where hedge fund investors or traders are free to modify their risk and investments on the fly. This extra degree of freedom is something that could make great VCs even better, at the cost of making bad VCs even worse. I like it.

          1. Harry DeMott

            Close Mark. I would say that VC can’t harvest losses and reinvent thecapital because of their structure – and so harvesting losses is not logicalunder their agreements in most cases because of the optionality of holdingthe investment, even when in most cases they would be better cutting theirlosses far earlier and trying to rescue some of the trapped cash. If I buy astock and it is down 50% and I don’t think it will recover – I just sell itand then try to redeploy the capital before the stock goes down 100%. In VC,if I buy into a company and it goes bad – it makes little sense for the VCto write it off and move on – or to try and sell it down 50% – because theycan’t redeploy. That money is a realized loss and is gone. Yes that degreeof freedom would be fantastic – particularly if you could pull money out oflosing investments to bolster winners – but even rescuing any capital from alosting situation is better than the long ride to zero.

          2. akharris

            Harry, great points. I’d say, though, that even with the advantages that a hedge fund has in some of these areas, the majority of funds of producing negative returns for their investors. Sure, you might have a bunch making money over the long term by riding beta, but alpha is zero sum. It’s being taken from someone by another party.Of course, a lot of the losers are retail investors getting caught on the wrong side by “smart money,” but there are a hell of a lot of hedge funds blowing themselves up despite claims of quick smart movement and comprehensive risk management.

          3. Harry DeMott

            The investment world is the same pretty much all over. Having spent mycareer in the public markets I can tell you that there are extraordinarymanagers at hedge funds, mutual funds, etc… just as there are the USV’s,Sequoias, Benchmarks, etc.. in the VC world. The big difference is that if aVC fund makes a bunch of bad investments – it takes 10 years to go out ofbusiness. If a hedge fund does the same thing, it takes a year – and afterthe initial lock-up – it could take as little as a quarter.and BTW: Don’t kid yourself about alpha and beta in public versus privateinvestments. VC’s certainly help to grow businesses – but their returns areto a very large degree a function of beta. Exits are strategic buyers – whotend to open the pocketbook when their stock is higher – and the IPO market,which is a pure beta market as well. Sure, VC is far more alpha than beta -but it is a huge slug of beta. Private equity is the worst culprit in this -as they take a business, lever the hell out of it, and then sell it back tosomeone – hopefully at a higher price – that’s levered beta. Lots of hedgefunds do the same thing with public securities – but the last 3 places I’vebeen at have all had enviable records in the public markets – without anyleverage whatsoever – and often carrying a large slug of cash as an anchor.Thos last 3 have all been alpha return generators.

          4. akharris

            Couldn’t agree with you more about the levered beta aspect in PE. Just take a look at their returns compared to the S&P over the long term (going to have to do some guessing for smoothing out between exits). It tracks pretty well, last I looked, with a bunch of leverage coming in to make it look “different.”And you’re totally right about there being great managers in the hedge fund space, as there are in VC, as there are in PE and broader business in general. That’s why I think it’s tough to paint any industry as a whole with a stereotype, even though it might be fun and might make our jobs as armchair commentators a bit easier.

          5. Liam

            All true Harry, but a penny saved is a penny earned and potentially available for larger follow-on investments in more successful companies in the portfolio. If a VC decides to pull the plug, in practice it’s often when the troubled company is fundraising.So think about an early stage VC investment as a potential commitment of $10M over the life of a company with $1M invested for the first year of working capital and $9M reserved by the fund. After year 1, the first $1M is gone and $9M left. If there’s no traction at the company, $9 of the $10M are still available and can be redirected elsewhere. Not so different from the hedge fund example.The one restriction many VCs may have vs. hedge funds is they can’t do another new investment with that $9M, have to use it for follow-on financings in existing investments.

          6. Harry DeMott

            Good point. I had been focusing solely on rescuing some of the $1M back – asopposed to the $9M which may have been called but not used.

          7. Liam

            Or ideally not even called yet – which would improve IRR.

          8. ShanaC

            That’s the weird part. There needs to be a better sense of what to do with that money beyond redirect it. Maybe it might be better to invest it elsewhere in certain cases, maybe the other companies don’t need the capital.

          9. Liam

            Yes although if things are going as planned, there’s hopefully another company in the portfolio that needs cash to grow, and the fund can get a bigger piece of that deal than it otherwise could have. There also may be a window where the funds could be invested in a brand new company.

          10. ShanaC

            Hopefully. One of the odd points of this points is that you have to work with the company. Other companies may be growing successfully without the money, then what do you? Adding money may create problems.

        2. ShanaC

          it sounds to me like there needs to be ways for vcs to hedge their risk when they deploy so that they can apply fred’s last line. Part of cutting your losses is knowing how to hedge when you start out.

          1. akharris

            Two real issues there, and both are fundamental to the nature of vc:1) you can’t really hedge out components of your risk as you could in a public equity – where you go long a particular company and short the sector to isolate the things you like about the company. That opportunity doesn’t exist for VC because they are investing in small illiquid companies. I guess they could short the NASDAQ? But the differences between those are more than large enough to make it a terrible comp.2) VCs are concentrated. Best hedging strategy? Diversification (I think there was a big fun chat about that here a while back). VCs can’t diversify all that much because any given VC largely invests along a central thesis which puts them into a particular industry which is only so large and is impacted by the same vicissitudes of the market on any given day.Of course, I could be totally wrong about the second point. You could also argue that startups are so volatile from the start that they’re success or failure has virtually no correlation to one another or the broader market. That’s a question for someone who has studied this a lot more than me.

  12. RapidShare

    Easy answers are usually wrong πŸ™

    1. Donna Brewington White

      …not to be confused with “simple” answers.

  13. jerrycolonna

    I think easy, knee-jerk answers usually stem from fear. My favorite line from the Bible (which I rarely quote, btw)…”be not afraid.”I had a conversation with a client yesterday where his block boiled down to a two-step challenge. The first, he said plaintively, was “it’s a lot of work and I would be willing to do the work if I knew it would succeed.” The second was, “I’m afraid it won’t work.”Yup. So to quote you, Fred, and point out the wider applicability of the statement: “be prepared to invest additional capital that will not meet your hurdle rates.” Indeed, be prepared to invest the additional effort–whether as a CEO, an employee, a VC, or a member of the human race (and I know, some investors who may not be the latter)–even if the extra work won’t meet your personal goal hurdle rates.

    1. JLM

      Never ever ever ever ever ever take counsel of your fears!For $100, who said that?

      1. Simon

        Andrew Jackson!I only know that because I used another quote from him recently for an article I was writing, “I have always been afraid of banks”.

        1. Dan T

          Jackson may have been a little wild, but sure had some great quotes.

      2. Tereza

        Er, JLM…..in this day and age of instant internet search, I’d advise against betting money for someone to come up with a random fact…on a chat board…on the internet.Jus’ sayin’.Cocktail party with a stopwatch? Still OK!

    2. ShanaC

      A) I don’t think many people realize that fear is paralyzing to the point of basically stopping people from doing pretty much anything. It takes large communities of people and a lot of personal strength. Mostly because fear is extremely normal, otherwise we’d all be running of cliffs regularly and dying. Knowing what to be fearful of in measured doses is a complicated proposition for anyone.B)Easy isn’t simple.C)try small steps. If you hate it, or realize you need something bigger and better, try a bigger one. It’s why agile design and development works. it also works well on fear.

  14. Mark Essel

    I can’t help but rain a little sunshine on the “death of startups” post. Rescue it if you can, but dwelling on a failed opportunity too long harms the rest of your work, and the folks who put everything they had into the endeavor. They already got more than many earn in a lifetime of working at bigger companies, in the form of knowledge. They survived, and are much more dangerous for their next go. By the way, my most anticipated book ever just came out, Kevin Kelly’s What Technology Wants, and like a good capitalist I’ve included anaffiliate link in my blog post. May Kevin’s gift feed both my mind and belly :).

    1. Matt A. Myers

      Dwelling is a good learning opportunity though too – slows you down, makes you reflect; It’s healthy, but too long on anything will of course slow productivity in other areas of your life.Clicked your link. I’ve been buying books lately, so I may get this one too. πŸ™‚

      1. akharris

        I think there’s a difference between dwelling and analyzing/learning. Dwelling implies a long time spent second guessing what you did while drinking jack out of the bottle on your couch without showering.Analyzing is sitting down and figuring out where you went wrong, then understanding why you made those decisions, and how to make better ones in the future. You should probably puff on a pipe and concentrate hard while doing so.

        1. CJ

          “Dwelling implies a long time spent second guessing what you did while drinking jack out of the bottle on your couch without showering.” – LOL

        2. Donna Brewington White

          Maybe a short season of dwelling is the prelude to analyzing/learning. Would be better though if the dwelling part was sans “second guessing” and didn’t last too long. Let’s say…a one bottle limit.

      2. Aaron Klein

        “I’ve been buying books lately”Me too…I’ve been thinking I should read more of them. πŸ™‚

        1. Matt A. Myers

          Hehe, very true. That’s the next stage after ownership. πŸ˜›

      3. Mark Essel

        Thanks Matthew, I’m confident you’ll enjoy it as much as myself (10% in this am via kindle phone version). Kevin’s got a wonderful imagination and enjoy’s spinning his hypotheses into allegories about the big questions.

  15. jaredstill

    Fred, specific question; when you refer to your “hurdle rate”, at your firm is that measure by IRR, ROI…some adaptation of WACC? If you’ve addressed it in your MBA Monday sessions, I’ll search for it. Thanks Fred!

  16. jaredstill

    One follow-on thought; I’ve been watching the VC space for 5 years now, and I really feel there’s an opportunity for “world class” operators in the Venture Capital space–especially as firms grow to $1M/yr sales or more. And by world class operators, I mean Lean & Six Sigma experts from high-technology companies that can drive improvements that are aligned to strategy; and deliver measurable returns. With the VC model, if a couple of those ‘singles’ can be stretched to doubles, or a flailing dribbler can be beat out at first base, that’s a great lift to returns, not to mention if expotential value can be created at the high-return end of the spectrum.Just my (completely baised) thoughts.

    1. Donna Brewington White

      I, too, am an observer — a rapt one — and humbly recognize the limitations in perspective that come with looking in from the outside — but I’ve wondered something similar.I see this at work in private equity but realize it’s a different investment model — especially the more operationally oriented firms. Have seen this to some extent in VC firms, but not much (although my sample may be too limited to say this definitively).Will be interesting to see how the configuration within VC firms changes with the shrinking industry and VCs like Fred/USV on the scene who make a more comprehensive investment in the success of the portfolio.

  17. JLM

    Having done more than a few turnarounds, I have some very interesting insights and scars but alas I am in Bean Town getting ready to board my chariot home. More later. Be kind to each other.

    1. Aaron Klein

      Can’t wait to read JLM…

    2. karen_e

      Sorry to miss your Bean Town trip, JLM. We have this BBQ joint …

  18. Seth Lieberman

    No silver bulllets, never are, that’s why you need a bandoleer of bronze bullets.

  19. PhilipSugar

    Great post Fred. I really liked this one.

    1. Morgan Warstler

      +1

  20. J Harken

    I agree that individual investors aren’t buying it. A week or so ago, I was actually reading a piece about well-known investment firm Highfields Capital Management that has investment funds with over $10 Billion in net capital invested all over the world in all kids of private and public companies. Co-founder of the firm is Richard Grubman (http://www.spoke.com/profil

  21. Mike Su

    Fred – out of all of the companies that you’ve invested in, how many have ever gotten to the point where you deemed it was going to most likely be in that bottom bucket of failed investments, and then managed to pull itself out to go sideways (or in the unlikelier event into the homerun category)?And if those can be counted on one hand or less, then does that affect your conviction to figure it out with the company when it’s not looking good? Or do you look past history and have to believe each time that it could work out (definition of insanity, but startups also seem like a good definition of insanity)? Am curious as to your approach as well as the general VC perspective on this.

    1. fredwilson

      i’ve seen this happen a few timesenough to give me the confidence to give entrepreneurs the time andmoney to go for it

  22. Guillermo Ramos Venturatis.com

    In VC investments sometimes you win and many others you learn.

  23. Dave Pinsen

    “The easy answers don’t usually work”Is “Waiting for Superman” an easy answer?

  24. Sammy

    Andy, great comment.Every entrepreneur needs to remember her motivation is different from that of his investor.And so is her risk appetite.You have to be crazy to be an entrepreneur anyway. Fighting incredible odds just to get some traction, belief from customers, investors. And that is why the entrepreneur will still tend to prefer sticking it out when the VC sees “the writing on the wall”. And that’s what amazes me about the VC mind-set – you bet on this person against the odds, you probably bet on them when there was no clear path to profit (not always, but often), and yet, once most of your sunk costs have almost evaporated, you are willing to pull the plug.Why not let the entrepreneur continue their effort as long as they are willing?For the VC, it is one in a portfolio. For the entrepreneur, it is the only company they care about.

    1. Donna Brewington White

      This balance between the mindset of the entrepreneur and that of the investor is pretty fascinating to observe. Seems like this relationship ranges from each thinking the other is a necessary evil to a perfect marriage.Those who’ve sat on both sides of the table (to borrow from Suster) are an enigma.

  25. Donna Brewington White

    Just as there are (private equity) investment firms that specialize in distressed companies and have the managerial/operational as well as financial resources to turn them around, are there firms that invest in (salvage?) distressed startups?

  26. Donna Brewington White

    I can think of any number of situations that this basic wisdom can be applied toward.Especially like:”The one and only thing that will save you in the end is building a sustainably profitable company.””The hail mary passes won’t be caught, so you shouldn’t even try to throw them.” .

    1. Scott Barnett

      I’m not sure I would go so far as to say the hail mary passes shouldn’t be thrown. You just shouldn’t expect them to be caught, so don’t base your strategy on that happening.

      1. Donna Brewington White

        Thanks, that’s a good clarification, Scott. That’s what I took it to mean — or within that framework. I agree that when you have little or nothing to lose, or no other resort — just throw the dang thing. Sometimes you win.

  27. Greg Gentschev

    This post just reinforces the point that investment is just the first of many steps for an entrepreneur, not the finish line.Fred, I know you did a lot of triage and heavy lifting with your portfolio after the bust in 2000. It would be great to hear some war stories and accompanying analysis on how to address issues in portfolio companies that are going sideways, since the easy win trajectories are relatively rare. If a founder’s company is missing targets but still showing potential, for example, what’s the decision tree the founder should be discussing with the board to preempt the pull-the-plug moment?

    1. fredwilson

      it starts with limiting the capital costs to keep going

  28. Jeffrey

    Cash flow is the eighth wonder of the world, with it you can do anything and you get many at bats to take grand slam swings. Drive hard with laser focus to cash flow and the rest falls into place.

  29. ShanaC

    More concerned about 2 since it seems that diversification seems to be oneof those “works in theory” not in practice things. If you don’t understandit, what are you doing investing in it

  30. Vasudev Ram

    Great post, Fred.”The one and only thing that will save you in the end is building a sustainably profitable company.”Totally agree.- Vasudev

  31. fredwilson

    that’s what i was trying to sayso many investors look at the additional investments needed as “options”but they are not, unless the company won’t succeed under any situationwhen you make an investment in a company, you need to be committed toits success

  32. Tereza

    I’ve been thinking that a lot recently. Business is not about home runs…but a lot of singles, day in day out.You win by making decisions earlier and not to put off till later, so they don’t compound into crisis.There are too many opportunities for crisis to present from exogenous factors out of your control.Most of the crises above happened because some decision or action didn’t happen earlier but should have…

  33. Peter Beddows

    Good call Charlie: That book, “Sway: The Irresistible Pull of Irrational Behavior”, looks as if it would be a really good one to read from the preview that Amazon provides: The reference to the horrendous plane accident in Teneriffe and the circumstances that led up to its happening clearly parallel decision processes that typically inevitably lead to ill fated business results.

  34. Matt A. Myers

    Thinking ahead and planning ahead (or at least knowing the options) should prevent most failures I would imagine.If it’s an issue where a key player didn’t pull through somehow then you likely can’t foresee that per se (some options could be evident), but if that’s the case then hopefully there’s be a possibility of spending a bit more .I’d never want to be in that situation though, and I have 5+ years envisioned of where to take things depending on how everything goes; As long as I don’t have to start paying people money to use my product, then I can always just make what I’m creating completely free, and still make some coin.

  35. Mark Essel

    Sounds like we need a post on when to pull the plug for investors. I think founders are predisposed to go down with the ship unless a life raft shows up and everyone else gets out whole.

  36. akharris

    As a founder, I know I could see myself doing that (though hoping I don’t have to). That’s largely an emotional reaction. We tend to ignore the accepted wisdom around sunk cost because it’s more than just time and money that we are investing. It’s the blood, sweat, and tears that you can’t really value. It’s hard to be properly dispassionate about decisions when so much of you is tied up in them.

  37. Tereza

    As the key players manager your job is to help them know, and monitor, what the ‘valleys of death’ are in their job.This is why picking the right key indicators is so important. Leading, not lagging, indicators.If it’s a surprise to you, then you are not doing your job.Which is I think why an investor may be tempted to swap in the “world class” person. That’s a euphemism for a manager who would’ve seen that problem happening earlier.The question is — can the entrepreneur (or VP of sales, or whatever) BECOME the person who anticipates the problems and builds in the buffers and the incentives and rides their people so at least there’s not abject failure and hopefully a lot of success. And can the Investors or coaches have the patience to train/guide the entrepreneur to get there? Sometimes yes, sometimes no.Management does take practice. You learn by doing, you learn by mistakes, and you learn your distinct style.Think about skiing. You don’t learn great technique so you can succeed in great conditions. You do it so you can survive in shitty conditions. You may finish with a bad time, but if you’re the only one who didn’t fall, then you just won.You are in that job to deliver. No two ways about it.