Monday, May 19, 2014

Prepare For Losses

A good friend of mine, Malose Kekana sent me this today. It was a timely reminder to always focus your efforts to things you can make work, and learn to walk away from those you can no longer make work.

"A good portfolio manager knows which companies to keep and which ones to let go. Many a General Partner (GP)/ Fund Manager has struggled with portfolio companies that cannot meet their value-creation milestones, or raise additional follow-on rounds of capital, or generate target returns in a time span of, say, five to seven years. The faster you recognize those losses, the better it is.

In constructing the portfolio, GPs often fall in love with their own cooking and ignore obvious signs of a downward trajectory. A number of factors—ego, saving face, good capital following bad—can stall this process and become a sinkhole. As David Cowan says, “Just focus on your top five—the rest is distraction.” The harder part of the investor's discipline is to know when to quit.

A seasoned practitioner, Seth Rudnick of Canaan Partners, points out that risk is inherent in this business and calls for disciplined balance that any Limited Partner / Investor would expect. “Despite all the foresight and hindsight that you can muster, you can still go wrong. And that is the difficulty of being in this business. The environment can get you, markets can get you, technology can get you, regulatory agencies can get you. You have to constantly scan all of those things and be willing to adjust your own sense of what's a reasonable outcome and move the company into a position where it has the maximum chance to succeed. And that is a lot of work.

If you see a portfolio company consistently struggle and stumble, as a board member you may feel compelled to continue to work on that company. But as a venture investor you may ponder ‘I can't make this work anymore and should let it die. I should rather turn my efforts to something I can make work.’ And that's hard for practitioners. The intrinsic belief to throw a little more energy and a little more time into it may not necessarily save the company.”

Source: Insights from Leading Practitioners on the Art of Value Creation and Exit Strategies

1 comment: