Dear SaaStr: What Did You Learn From Your Worst Venture Capital Investment?
Reasons I've lost money investing, or had mediocre outcome:
– founder wars
– CEO misled on metrics
– CEO ignored zero cash date
What didn't stop unicorn outcomes:
– one terrible year
– bigger competitors
– taking a long time
— Jason ✨Be Kind✨ Lemkin 🇮🇱 (@jasonlk) October 28, 2021
I’ve learned two simple lessons from my worst investments:
- Break rules — but make sure your key criteria (and playbook) are met.
- Don’t skip on the next-level diligence, even for speed.
The first one took me a while to learn. You can’t keep investing in the same companies, at the exact same stage, same valuations, etc. But all investors basically come up with a playbook. It allows you to move quickly. Be careful when you break it.
My playbook has evolved, but a key part of it today (that I didn’t fully think through in the early days) is super happy customers and super high NPS. High churn is OK in the early days even. But the NPS/CSAT has to be there. When I’ve cut a corner here and invested in startups with customers that aren’t super-happy, it hasn’t worked out as well.
To combat stagnation in the playbook (and also to make sure the pipeline is properly inclusive and broad), I still meet with interesting start-ups that seem close, but not actually in, the sweet spot of the playbook. Oftentimes you then learn they really are in the sweet spot once you meet.
The next one is a tough mistake not to make. You want to move quickly. You can’t do every single bit of diligence. But sometimes, the investment isn’t quite at the stage of maturity you think it is. That extra diligence will uncover that.
Trust — but verify. I’ve had two investments that claimed, for example, certain revenues were recurring revenues that really weren’t. Those companies didn’t fail. But that should have been a flag for me. They haven’t performed as well.
Overall the top reasons investments I’ve made didn’t work out well … even though they had some good things going for them:
- Good CEO, So-So CTO. These ones never keep up with the pace of change in their industry.
- Make Stuff Up. Even If Its Smaller Stuff. They lack the integrity to really do what it takes to scale.
- Hides Anything. A founder that hides anything during the investment process will hide a lot more later.
- Product Doesn’t Really Work. Sometimes, you want to cut founders some slack here in the early days. Don’t. The product by necessity has to be feature-poor in the early days. But what you have shipped — has to work.
History doesn’t repeat. But it definitely rhymes.
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