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The Winding Down of Venture Investments

A certain percentage of companies that venture funds back fail.  Everyone knows this.  Depending on their investment strategy and success, funds lose most of their capital on 25% to 50% of portfolio companies.  Of these, some percent are sold for very little value, but the sale provides a home for the technology, the customers, and often the team and creates a mechanism to take care of creditors and venture lenders.  Of course that soft landing isn’t always possible, as there are some companies that just can’t be sold for any price close to what it would take to address liabilities.

We often sit on the board of directors of our portfolio companies and in that capacity, we have a legal obligation to ensure that employee liabilities are covered.  Salary, accrued vacation, payroll taxes, and, depending on the state, contractual severance are all obligations of the board that ultimately fall on the individual board members personally if the company cannot make payment.  We take these obligations seriously and ensure that there is enough cash to take care of these costs – or we fund this liability.

We work hard with our CEOs to avoid bankruptcy and have been successful as a fund to date.  We guide our management teams to try to negotiate down other creditors to fair payment levels that reflect the state of the business and the fact that often these creditors may have made a decent profit over the life of the relationship.  As board directors, our obligation to these creditors is limited so long as we have not been self-dealing in our role.  As venture investors it is a bit different.  We could walk away as we have no obligation to fund additional dollars into any business, but most often we do not.  We have relationships with the same venture lenders and lawyers and accounting firms and consultants and outsourced developers and marketing firms across many of our portfolio companies.  If we have no regard for them in this investment, will they work with our other portfolio companies as they have, or will it cost us and our portfolio reputationally and economically?  We believe the latter is more likely and thus must think with a long term view, leading us to work to minimize the wind down cost but to treat creditors fairly. 

This whole process is easier when you invest with like-minded investors.  We recently went through a wind-down with two institutional co-investors who funded alongside us on a pro-rata basis.  The larger of these investors is in other deals with us and several are doing quite well.  It is nice to know that if tough decisions need to be made, that they will likely be aligned with us.

It is easy to be an investor when things are smooth and there is little conflict or challenge.  It is harder when things do not go as planned, but that is where reputations are made – both good and bad.  When founders at new potential investments ask us for references, I have them speak to CEOs whose companies are soaring and CEOs who have not succeeded or who have been greatly challenged.  They should hear how we react in bad times and what we do to help.  Osage Venture Partners is committed to making a soft-landing where possible.  It is good for the team, it is good for creditors and partners, and last, we believe it is good for our investors.  The venture and entrepreneurial communities are small, and memories are long.


OVP Is Hiring for a Paid 6 Month Internship!

We are looking for a recent college graduate – or someone taking a gap year – who wants to learn about the venture industry and is bright, self-starting, hard-working, and has a can-do attitude.  No relevant work experience or specific background required.  You can find more details about the position on our website.  If you are interested, please send an email to with your resume and link to your LinkedIn profile.  Internship runs between mid-September and mid-March. 



Turning Over Another Card Is for Poker, Not Technology Investing

I was with a co-investor recently and we were discussing our mutual investment.  It is a situation where we have been frustrated with progress, both in terms of developing a scalable product and in getting early customer traction (these are certainly correlated).  My colleague made the statement that if one thing or another happened, he was willing to put more money into the business in order to “turn over another card.”  Poker and venture investing may have some analogies: certain pots are outsized; you need to be in the game in order to win; try to lose small but win big; you need patience; you can’t afford to play every hand even when playing loose.

In my opinion, however, poker (and particularly games where you keep paying to see all the cards like Texas Hold’em) and venture investing are very different – at least for us when we invest in business-oriented software.  We invest in leaders and their teams, large potential market opportunities, products that are at least at the minimal viable product stage, and companies with customers and hence early revenue traction.  Our successful portfolio companies build value over time through growth and most often exit at a scale which is 20x to 50x the revenue at the time we invested if not more.  We can be wrong in our investment decisions and that is part of the venture business, but when we are wrong, we should accept it and fold.  A business that is far off track rarely rights itself.  

Two key differences between a poker hand and a venture investment. 

First: In poker, it’s about beating the others versus an absolute hand and even a mediocre hand can win the pot.  In venture, it is generally the case that a mediocre business brings a mediocre return and a great business, sustained over a meaningful period, creates real value.

Second:  In poker, the last card turned can make the difference between a winning and losing hand.  Thus, the logic of waiting to turn over another card can make sense in many scenarios.  In venture, you know pretty early if you aren't playing with a strong hand and you also know that the longer time goes on, the less likely it is that the management team is going to find the card that changes the outcome.

As the song the Gambler says: “you got to know when to hold ‘em, know when to fold ‘em, know when to walk away, and know when to run.”  In B2B venture investing, you just need to fold ‘em earlier and save your money for doubling down on the winning hands.  Paying to see another card is often the sucker bet.

Of course one other critical difference between poker and venture investing is the hard working entrepreneurs and employees, who have overcome long odds to build a compelling product, attract initial customers, and pursue a vision exciting enough to attract investors in the first place.  In situations where it may not make sense to pay to turn over another card, we certainly don’t fold and simply leave the table.  We work closely with management to find a soft landing or a navigate a path to a clean wind down of the business. 


The Compounding Effect of a CEO’s Day-to-Day Decisions

A colleague of mine recently stepped away from his day-to-day role as a partner in a venture fund and into an interim six-month role as Executive Chair in one of our portfolio companies.   It was a necessary move to stabilize what will likely be a very good company and it was a great move for him because it gave him a much deeper experience of being an operator.   This will likely give him a lot more empathy for what our portfolio CEOs are going through and will also likely make him a better investor and director.   One of his observations, which rings so true and so obvious yet non-obvious, is how much happens inside a company that the board never hears about and how many decisions are made that the board never sees.   How you make decisions as a CEO and how you influence how your team makes decisions may be one of the greatest drivers of the ultimate success of your business.

Small decisions matter.  The next hire; the selection of a law firm; the pricing of a major contract; promising a customer functionality that is not on the roadmap; changing the commission plan mid-year; shuffling the organization structure; asking the team to work the day after Thanksgiving.  Each choice both reflects and influences the culture, the economics, the quality of the work, and the overall environment.  It’s hard as an investor to know how such decisions will be made by the CEO, and it’s really hard to screen for future decisions, yet trying to do so is critical.  As a result, many investors and  board directors put much weight on understanding how decisions that are visible to them have been made, because understanding how a few visible decisions are made provides an window into all of the unseen decisions.  It’s all of these small decisions that compound and either become a drag on a business or hopefully enable a company to accelerate.

When I meet CEOs of potential portfolio companies, I focus much more on decisions they have made than on experiences they have had.  Understanding why they made the decisions they did in a number of scenarios provides a window into how future decisions far away from the view of an investor or director will be made, giving some indication of whether the compounding effect of those decisions will accelerate performance or not.


The Fallacy of the Messiah Hire

“There is no Messiah in here!  There’s a mess alright, but no Messiah.”  A memorable line spoken by Brian’s mother in Monty Python’s Life of Brian.  The truth is, I often think of this line when CEOs speak to me of the person they just hired or the new person who just started.

It is always the same – “this person is just what we need to”:

a)      Accelerate growth
b)      Perfect product market fit
c)      Solve our development quality issues
d)      Land the transformative partnership

Don’t get me wrong.  Talent matters and every hire in a small company is critical.  I encourage our leadership teams to focus on consistent hiring practices and to work extra hard to bring A+ talent in the door.  But having too high expectations for a new hire creates a disservice not only for the incoming person but also for the people who are already in the organization.

Why is that?

Messiahs are expected to have almost immediate impact, and if this is not seen, it can be disappointing.  This level of expectation can often be crippling for the new hire.  For most roles in most companies, there is actually much to learn before a new hire can make changes, alter processes, or impact results.  That learning process takes time.  If a “playbook” really existed for the VP Sales or the Chief Product Officer, someone would have published it and made millions.  B2B tech start-ups have similarities, but also have differences and you want to hire people who understand both.  The “to a hammer, everything is a nail” hire can have a huge quick impact if your business is just like the one they came from.  If it’s not, that hammer will not only be hitting nails, but it will also be breaking a lot of glass as well.  Great hires listen, learn, and then adjust.  Their impact grows with time and much of this impact is by making others around them even better at their jobs.

For the team in place, prior to the hiring of the Messiah, the positioning of this new hire can be demotivating.  Was there really so little talent here before?  Was the team just following the wrong “playbook?”  Is this person going to get all the credit for all the good things the team had been doing?  Over positioning the new hire can lead existing team members to either pull back and let the new person figure things out or cause them to undermine the efforts of the would-be Messiah, even making it harder for the new hire to succeed.

CEOs need to be very careful in talking about new members of the senior team and in the expectations that the CEO sets for the new hire.  Strengthening an already strong team is a much better message than bringing in the next savior.  Understanding that change takes time–and more time than one thinks–is a lesson CEOs are constantly relearning and one they must remember when setting new great hires up for success.