Turning a Loss Into a Win
AUGUST 22ND, 2019
One of the traits of both successful founders and successful investors is their ability to turn a loss into a win. On the investor front, something I was told in the early days of Brightstone's first fund is that the difference between a good investor and a great investor lies in the middle of the portfolio. A typical VC portfolio consists of 15-30% of investments that shoot to the moon and investors never need to touch them and 15-30% of investments that tank hard and are nearly impossible to save. What differentiates great VCs from good VCs is how they work with the portfolio companies in the middle of that range to keep them from becoming zeros. Power laws dominate VC returns- i.e. most of a fund's returns will come from its top three portfolio companies- but the difference between letting the so/so investments falter to zero or rolling up your sleeves to preserve a 2-6x win is how you go from a top quartile (good) fund to a top decile (great) fund.
Part of being able to prevent future losses, is learning from the losses you've taken and analyzing the processes that led to those losses. Annie Duke's book Thinking in Bets does a wonderful job of both explaining the importance of this, and laying out a practical framework for putting it into action. Here's a link to an a16z podcast with Annie, in which she summarizes some of the most important themes of her book:
You lose out on a hotly contested sales opportunity and you do a postmortem with the customer and learn that you have a huge hole in your product and you fill it and start wining business.
You whiff on financing effort and so you cut your burn, execute for three more months, and go back and get term sheets from everyone you talk to because you've made your company stronger and more appealing to investors.
My point is that losses are opportunities to win. You just have to see them as such and use them as an opportunity to evaluate processes. This is all about self reflection, resilience, optimism, and tenacity. The most successful founders and investors have it in spades.
And it can be a learned skill. But you have to get your head in that space to learn it. Reading Annie's book is a good start.
