Venture capital (VC) is a high-risk, high-reward form of investing that can create or destroy startups. As a VC, you need to be prepared to face failures and learn from them. In this article, you will discover how to analyze VC failures, avoid common pitfalls, and improve your decision-making skills.
VC failures are not only costly, but also informative. They can reveal the flaws in your assumptions, strategies, and execution. They can also help you identify the gaps in your knowledge, skills, and network. By studying VC failures, you can gain valuable insights into the market, the industry, and the customers. You can also learn from the mistakes and successes of other VCs and entrepreneurs.
FAILURES are the BEST teacher's for us even though it's painful. Only when we make mistakes and face reality, we LEARN & GROW. As an Investment Analyst, I have seen so many times when VC invest in a startup, they are very BULLISH thinking it to be a great opportunity. When we Introspect after a failure, then we understand our knowledge gaps, wrong assumptions, traps and many more.
In order to learn from VC failures, you should begin by analyzing them objectively and systematically. Collecting and reviewing the data and evidence related to the failed investment is essential, such as financial reports, pitch decks, market research, and feedback from stakeholders. Additionally, it is important to ask yourself and your team critical questions like: what were the main reasons for the failure? What warning signs or red flags were missed or ignored? What assumptions or biases influenced the decision? What alternatives or options were not considered or pursued? And finally, what lessons or takeaways can be applied to future investments?
A large fund that has been around for a while probably has multiple iterations of pitch decks for many of the companies in the market. When the founder pitches again, VCs at such a fund can check what the company proposed in the previous round and what has been accomplished. If the two do not align ... this can be one datapoint for the VC. From the founder point of view: keep this historical record in mind. A pivot is ok, but explain it at the next round.
Comparing our assumption numbers from the reality for different metrics and then asking WHY leads us to analyse failures. We MUST understand which factors or red flags we missed earlier, discuss with our IC team and with founder. Also, we should LEARN from the failures of other VCs too so that we won't make those mistakes again. Document all the takeaways and make a checklist for future investments.
The second step to learn from VC failures is to avoid repeating the same errors or falling into the same traps. You need to be aware of some common pitfalls that can lead to VC failures, such as overconfidence when you overestimate your own abilities or judgment, herd mentality when you follow the crowd or the trends, FOMO when you fear missing out on a hot opportunity, sunk cost fallacy when you continue to invest in a losing venture, and confirmation bias when you seek or interpret information that confirms your beliefs. All of these pitfalls can cause VC failures if they are not avoided.
FOMO is the biggest reason for BAD Investments as it becomes hard to resist and follow the path less travelled. As Warren Buffet says, "Only when the tide goes out do you learn who has been swimming naked.” Next, one must reduce following things - - biases like confirmation bias, sunk cost fallacy etc - focusing too much on sector reports - betting on founder's from top colleges only - fast investment without thinking deeply
The third step to learn from VC failures is to improve your decision-making skills and processes. To do so, you should diversify your portfolio, conduct thorough due diligence, seek feedback and advice, test and experiment, and learn and adapt. Diversifying your portfolio means investing in a variety of startups or sectors, or balancing risk and return profiles. Doing due diligence requires research and analysis on the startups or markets you are interested in, as well as verifying and validating claims or data. Seeking feedback and advice involves consulting or collaborating with other VCs or experts, or soliciting or listening to different perspectives or opinions. Testing and experimenting allows you to validate or invalidate your assumptions or hypotheses, as well as measure or evaluate the outcomes or impacts of your actions. Finally, learning and adapting requires reflecting or reviewing your decisions or results, as well as adjusting or changing your strategies or plans.
Bad decision -> Failure -> Experience -> Good decision -> Success MUST follow steps for better Investment decisions - - Diversify across different sectors, stage, sex etc - Detailed due diligence especially by talking with stakeholders - Read and learn from the failures of other VC decisions - Ask better questions during pitch deck discussions - Minimize your biases
The final step to learn from VC failures is to cope with them emotionally and psychologically. You need to acknowledge and accept the reality and the consequences of the failure, and avoid blaming yourself or others. You also need to express and release your feelings and emotions, and seek support or help from your peers or mentors. Moreover, you need to maintain a positive and optimistic attitude, and focus on the opportunities or possibilities that lie ahead.
Learning from VC failures is essential, and one of the best ways to do so is to share them with others. This can provide you with feedback and advice, as well as contribute to the learning and growth of the VC community. You can share your VC failures through various channels, such as writing or recording your stories or experiences online or offline, attending or participating in events or forums dedicated to VC failures like FailCon or Fuckup Nights, and mentoring or coaching other VCs or entrepreneurs. By doing so, you can share your insights and lessons with others.