A VC on losing money as part of being an investor

Photo credit: cbinsights

I remember back in the mid-90s, I used to say with some pride that I had not lost money on any of my VC investments. Then one day, someone told me, “then you are not taking enough risk.”

I ended that streak of not losing money on VC investments in the late 90s in a series of epic flameouts. I lost somewhere between $25mm and $30mm on a single investment. I am not proud of those mistakes. They were stupid. I am ashamed of them, to be honest. But I learned a lot from them.

Not only was my “winning streak” a case of not taking enough risk, it was also a case of not enough learning. The go-go Internet era of the late 90s fixed both of those things for me. I took more risk and learned a ton.

Out of 21 investments, I made money on 12 and lost on 9

Our first Union Square Ventures (USV) fund, our 2004 vintage, has turned out to be the single best VC fund that I have ever been involved in. We made 21 investments. We made money on twelve of those investments. We lost money on nine of them. And we lost our entire investment on most of those nine failed investments. The reason that fund performed so well has pretty much nothing to do with the losses. It was all about five investments, in which we made 115 times, 82 times, 68 times, 30 times, and 21 times on the investment.

Every single one of those 21 investments seemed like an intelligent investment decision at the time we made it.

It wasn’t like we were swinging for the fences in that fund. Every single one of those 21 investments seemed like an intelligent investment decision at the time we made it. But many of them didn’t work. We lost all or almost all of our money on over 40 percent of our investments in that fund.

The next fund we raised, our 2008 vintage, is now eight years old and we can begin to calculate the win/loss ratio on that one too. We don’t yet know the magnitude of our winners, but there will be a bunch.

It will be one of the better funds I’ve been involved with. I doubt it will be as good as our 2004 fund, but it will be a very good fund. We invested in 22 companies in that 2008 fund. We have already completely written off six companies. Those are complete and total losses. And, I think there will be at least a couple more losses in that fund when it is all said and done. So it looks something like 14 winners and 8 losers. We will likely lose all or almost all of our money on roughly 40 percent of our investments in that fund.

My point on sharing all of this with you is to explain that losing money is part of being an investor. It happens. As Richie, the guy who sat behind me and my friend John at the Nets game, says, “you can’t make ’em all.”

But there are some things you can do with your winners and losers to drive up your performance.

The first and most important thing you can do is minimize the amount of money you invest in your losers. In our 2004 fund, we invested a total of $50mm out of $120mm of total investment in our nine losers. That wasn’t so good. We could have, and should have, recognized our bad investments earlier and cut them off.

In our 2008 fund, I think we will invest roughly $35mm out of roughly $140mm of total investments in failed investments. So even though our loss ratio on “names” is around 40 percent, our loss ratio on dollars will be around 20 percent. We did a good job of not allocating too much of the fund’s capital to losers in our 2008 fund.

And most of those losers were mine by the way.

 Making bad investments is humbling, frustrating, annoying, time sucking, and most of all, a big part of the VC business.