Why Your Reluctance to Cut Ties Could Be Costing You Big!
ACE Alternatives
Consistently Pushing the Boundaries of How Alternative Asset Vehicles are Operated.
Venture capital is a world of tough decisions choosing which startups to back, when to double down, and, most importantly, when to walk away. ?
But one of the most overlooked cognitive biases in VC is the Inability to Close Doors Bias the tendency to stick with an investment, partnership, or strategy long past the point of diminishing returns simply because of prior commitments or sunk costs. ?
This psychological trap leads to wasted capital, missed opportunities, and, in some cases, complete fund underperformance. ??
The Growing Trend of VC Investments: More Money, More Problems??
The past decade has seen a dramatic rise in VC investments across Europe. ?
While an influx of capital has fueled innovation, it has also led to increased risk-taking and an unwillingness to abandon failing ventures. ?
When funding is abundant, investors often feel less urgency to exit underperforming companies. But as markets tighten, the reality sets in overcommitting to struggling startups can drag down entire portfolios. ?
This is where the Inability to Close Doors Bias becomes most dangerous. ?
When Prior Investments Cloud Judgment?
Imagine You’re Evaluating Two Startups… ?
Despite these realities, many VCs remain committed to Startup A simply because they’ve already invested heavily. The desire to “prove the original investment right” overrides a rational assessment of future potential. ?
This is the essence of Inability to Close Doors Bias a reluctance to admit when an opportunity has run its course. ?
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The Cost of Holding onto Underperforming Assets?
The European VC market shows a surprisingly high proportion of underperforming assets across major countries. ?
Investors, caught in the sunk cost trap, hesitate to cut ties with startups that no longer align with their portfolio strategy. ?
This bias leads to: ?
Follow-on funding misallocations: instead of redirecting capital to high-growth opportunities, investors double down on struggling startups.?
Delayed exits: hoping for a turnaround that rarely materializes.?
Opportunity cost blindness: funds remain locked in low-performing ventures while better deals go untapped. ?
Timing Matters: Exit Late, Lose Big?
Exit strategy timing is crucial to portfolio performance. ?Yet, VCs often delay exits, hoping for an unlikely turnaround. The data is clear: the later the exit, the lower the returns.
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Why does this happen? ?
However, the best-performing funds set clear exit triggers and act decisively when those triggers are met. ?
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How Sunk Costs Influence Follow-On Investment Decisions?
A striking 30% of follow-on funding in Europe still goes to underperforming startups.?
Rather than cutting losses, many funds continue to invest in startups with dwindling prospects. This behavior, rooted in sunk cost fallacy, drains capital from higher-return opportunities. ?
A more rational approach? VCs should consistently evaluate follow-on investments as if they were new deals ignoring past investments and focusing only on future potential. ?
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The Psychological Cost of Not Closing Doors?
Investing isn’t just financial, it’s psychological. Letting go of an underperforming investment feels like admitting failure, which triggers loss aversion. ?
Common justifications for holding on too long: ?
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"They just need more time."?
"Market conditions will shift."?
"We’re already in too deep to pull out now." ?
These rationalizations fuel bad decision-making, compounding financial losses over time. ?
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Breaking Free: How to Avoid the Inability to Close Doors Bias?
Define performance benchmarks that automatically signal when to exit. Without predefined criteria, emotions and sunk costs take over. ?
Ask yourself: If this were a brand-new investment opportunity, would we invest today? ?
Assign someone to challenge assumptions and play devil’s advocate in investment decisions.
Holding on too long not only risks capital but wastes time and opportunity. The best investors know when to cut losses and move on. ?
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Europe vs. US: A Case Study in Strategic Discipline?
One of the most striking comparisons in venture capital is between European and US markets. ?
European funds have a higher proportion of underperforming assets and lower average returns compared to their US counterparts.?
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Why is this happening? ?
Stronger Exit Discipline in the US: US funds tend to cut losses faster, reallocating capital to higher-growth opportunities instead of holding onto stagnating startups. ?
More Aggressive Growth Strategies: European VCs often take a more conservative approach, holding onto investments longer, which may contribute to lower returns. ?
Cultural Differences in Risk Appetite: US investors generally adopt a fail-fast, pivot-faster mentality, while European VCs are sometimes more cautious, leading to prolonged funding of underperforming assets. ?
The takeaway? European VCs may need to rethink their approach to exits and capital allocation. Adopting a more US-style discipline, where underperformance is acknowledged and addressed more swiftly could lead to stronger overall returns. ?
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Conclusion: The Future Belongs to the Adaptable?
The Inability to Close Doors Bias is one of the most dangerous psychological traps in venture capital. It leads investors to overcommit, overextend, and ultimately underperform. ?
By recognizing and counteracting this bias, VCs can make faster, more rational decisions reallocating capital to where it will have the greatest impact. ?
At ACE Alternatives, we emphasize data-driven decision-making and agile capital allocation. Our tools equip investors with real-time insights to make unbiased, high-conviction choices ensuring that when a door needs to be closed, it gets closed at the right time. ?
Matias Collan, CEO of ACE Alternatives, emphasizes:?
“Smart investing isn’t about avoiding losses altogether—it’s about knowing when to walk away.”?
About ACE Alternatives
ACE Alternatives (“ACE”) is a leader in managed services in the Alternative Assets sector like venture capital, private equity, fund of funds, real estate, and more. Leveraging a proprietary tech platform and extensive industry experience, ACE offers 360-degree tailored solutions for fund administration, compliance and regulatory, tax and accounting, investor onboarding and ESG needs.
The fintech was founded in Berlin in 2021 and has since established itself as one of the fastest growing alternative investment fund service providers in Europe. ACE is currently used by over 45 funds. In 2024, ACE received seven-figure funding from Bob Kneip to expand into new markets. ACE’s vision is to redefine fund management by demystifying complexities and promoting transparency.
Media Contact: Rhea Colaso
For more information visit us at https://www.ace-alternatives.com/
Source: Rolf Dobelli, “The Art of Thinking Clearly” (2013)
Journal of Financial Economics?
Kauffman Foundation?