

Fred Wilson: Doubling down (in VC/PE) - cwan
http://www.avc.com/a_vc/2009/08/doubling-down.html

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aditya
So, venture capital is usually used to accelerate growth at an early stage
company which works out pretty well for all involved parties: Entrepreneurs
get to build big businesses, VCs enable that and make money off the management
fees and LPs benefit by having a well-performing asset class in their
portfolio.

The point where goals start diverging is when the VC wants to see rapid growth
and a quick sale (say, 4 years into the company timeline).

Fred says:

 _So when an investment is not working, you are faced with walking away,
shutting the company down, or making an additional investment._

I wonder if there is a fourth way, where the company trims itself because it
isn't making much revenue (maybe because it's too early to a market that is
nascent, or organic growth is much slower than expected but is still there)
but keeps going instead of shutting down or trying to accelerate the growth
process by raising more capital.

Is it fundamentally hard for VCs to say, we're going to support this company
for as long as they want (with connections and a bit of capital) and wait for
an eventual exit, if they trimmed down and burned very little capital? Why
would you not want to keep going if you were more or less promised an eventual
exit/return and it didn't require a lot of capital? Why the focus on "quick"
exits and not building big sustainable businesses? Is this something that
comes down from their relationships with the LPs?

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fredwilson
excellent point aditya. that is the fourth choice. i alluded to it later on
where i said "cut costs" but i did not do a good enough job of articulating
this approach. thanks for picking up on that.

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mattmaroon
It's basic human nature to throw good money after bad because humans are twice
as upset about losses as they are happy about wins. It's thusly common among
people who know that to overcompensate for their own fallibility and go the
other way.

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knightinblue
_humans are twice as upset about losses as they are happy about wins_

Any research to back that up? I always thought that was a subjective thing, in
that it varies for everyone.

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mediaman
Yes. Daniel Kahneman and Amos Tversky were the first to demonstrate this
behavior.

Tversky, A., & Kahneman, D. (1981). The framing of decisions and the
psychology of choice. Science, 211, 453-458.

However, I don't know enough to answer your question about in-population
variance of this trait.

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mattmaroon
Is that the one with the coin flips? As I understand it an experiment showed
that if you put people in a situation where one side of the coin loses $100
and the other side wins $x, for most people $x has to be greater than $200 for
them to take the flip.

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rokhayakebe
This is the same reason why people invest up to their last penny, just to
watch all their money being lost. " I already gambled 100 dollars, f&*^% it, I
may as well give this last 10 dollars, which my lunch for tomorrow, a shot".
Then tomorrow you are more likely not to eat.

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petercooper
I'm telling you baby, you always double down on 11.

