Doubling Down

I wrote a post recently called "Double Down, But Only On The Right Hand" that was about Yahoo!'s decision to bail on search and Microsoft's decision to double down on it. It was also about new forms of search, like real time search, that are worth investing in.

Since writing that post, I've been thinking a lot about "doubling down." Conventional investing wisdom is when an investment goes against you, the thing to do is get out and move on to the next one. Most of the great traders I know practice that approach and it works well for them.

But in venture capital and private equity, it is not easy to "get out." These are illiquid investments that you can't simply sell and move on. So when an investment is not working, you are faced with walking away, shutting the company down, or making an additional investment. And these are hard decisions.

Like most VCs, I am guilty of sticking with our investments too long and putting too much money into the ones that are not working. It's an occupational hazard. As I've gotten more experience in the venture business, I've gotten better at this part of the business, but it is still a challenge for me and most VCs I know.

Bliss McCrum, one of the two VCs who taught me the venture business early in my career always said, "if you are going to put more money into a company that is not working, make sure to change the strategy, team, or cost structure, or all three." It's good advice. You will not get a different result doing the same thing.

The important thing to focus on when making a follow-on investment in a company that is not working is to figure out what's wrong with the company and use the financing discussion to fix it. That's when the investors have the most leverage and when change is most easily obtained.

It is also important to recognize that some investments cannot be fixed. And in those cases, painful as it is, the right thing to do is shut the company down or sell it if a buyer can be found. I prefer the latter outcome, even if getting it is more costly to the investors. Finding a "home" for a company and a team has reputation benefits that accrue to the VC investors over a hard shutdown.

The biggest "double down" I ever did in my career was on the Flatiron portfolio in late 2000/early 2001. We had invested $500mm in 60 companies from 1996 to 2000 and had taken out about 3x that number in cash and stock distributions on 24 companies. The remaining 36 companies were all struggling in the wake of the bursting of the Internet bubble and the portfolio was basically worthless on paper.

Our financial partners wanted out, as did we, but there was the little problem of a portfolio of 36 companies. It would have been easier to take our 3x and be done, but that is not what we did.

Our financial partners agreed to invest another $75mm into the portfolio and my partners and I agreed to triage the portfolio and invest the $75mm wisely into the survivors. We shut down roughly a third of the companies and sold off another third over the next year. But on the final third that we thought had real potential, we invested the additional $75mm.

I am not going to get into the full details of that $75mm "double down" but I will say that three of the twelve companies we doubled down on, Bigfoot Interactive, comScore, and Mercado Libre, have produced north of $300mm in combined value for that portfolio. The other nine have produced even more value and we still have four companies left in the portfolio.

I've told this story before on this blog so it may not be new to some of you. But I like to tell it because it was a very formative experience for me. I learned that when times get tough, you can't cut and run. You have to commit yourself to finding a way out. And the way out involves a double down, but it also involves some hard choices, taking some losses, and restructuring the remaining assets so you can go forward.

In times like we are in, most people are living with situations like this. I am as are most of my friends in the VC business and elsewhere. I hope this post helps those of you who are struggling with this process. The ending of the story can be a good one if you do the right thing, are honest with everyone, and double down on both your financial and personal commitment to the investment.

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Comments (Archived):

  1. im2b_dl

    Fred sounds to me (and maybe I am wrong) but really the time and situation effects how and what this story really was. Yes you could have walked away from all of them but wouldn’t you say that in a period like the bubble collapse…doubling down on companies that were not completely imploding was actually doubling down on companies that were actually succeeding in any other context than the bubble collapse? I may be wrong on this but it sounds like you were taking/finding the line of safest bet in a troubled time… …same as what I think is probably going to happen to a lot of start-up investors next year.

    1. fredwilson

      right. the circumstances of that situation were somewhat unique

      1. im2b_dl

        what I meant to say…was yes…unique but unique to a situation that I think we may see similarly over the next year or two. Obviously your post as usual is prescient. Where lots of investment in convergence culture coming up…without understanding what drives convergence. I think many will bail on everything from old investment media (newspapers, TV etc) to new investment like video and audio platforms that were not clearly driven by anything but the newness of the technology…but your point is really good (imo) that you stayed with the ones who looked sketchy but in context they were better than others. So maybe I got the point wrong but I personally think the/your point of doubling down when a company is below flat… is a good one in times like we are about to see..but just not sure you are doubling down on a “failing” company. Sounds a little like you are saying the opposite.

  2. Michael Fidler

    Thanks for sharing this story, even if you’ve told it before. It’s new to me. I have a close friend struggling with a similar decision right now. This is perfect timing, because I’m going to see him later today and I’ll bring a copy of this for him to read. Hopefully it will help him make the right decision!

  3. awaldstein

    Thnx for this post. Wise thinking not only for VCs but for management reevaluating change in the face of unproductive business and marketing strategies. Folklore has it that Hilary told Bill Clinton during the tough days of his presidency that “to wake up every morning and do the same thing and expect a different result, is just stupid.” A bit harsh but captures the same idea.

    1. fredwilson

      everyone needs to hear that advice now and then.

      1. Ed

        I think Hillary borrowed it from Al;”Insanity: doing the same thing over and over again and expecting different results”-Albert Einstein

        1. awaldstein

          Thnx. Been looking for the source for this forever. Sage advice for all of us.

      2. vruz

        while that’s true sometimes, it’s also a quite simplistic and self-centred view.not all variables depend on you, sometimes you only have to continue doing the same, with your eyes wide open for the right window of opportunity. the market changes and the market is bigger than you.

  4. Carl Rahn Griffith

    I’ll forward this on to my bank manager, Fred, lol … 😉

    1. fredwilson

      Saw your sheffield boys twice this past week carl. They still rock and are doing your city proud

      1. Carl Rahn Griffith

        They are certainly the real-deal, Fred – and continue to impress.Can see them delivering a few great albums over the years ahead. They have too much ‘Sheffield Steel’ to split over ‘artistic differences’ – creative pragmatism with lashings of irony and wit. It’s a pleasure to witness their youth and talent. Gits ;-)PS, interesting season-opening match at Sheffield Wednesday on Saturday – where has one year gone? Wow. Scary.

  5. vruz

    the huge exception to the rule being Amazon. they were a sinkhole for quite a while, and they not only doubled-down on investment but also doubled-down doing more of the same, only better.(and only more recently exploring diversification, after they succeeded at their original goal)there’s times when you have the right product, the right strategy, the right everything, but the market is not ready yet.had Amazon changed *anything fundamental* of what they were doing in the beginning, they would have lost themselves, like many others did. (I should complete this later with counterexamples)whether you’re changing strategy, or doubling-down on **the same strategy**, conviction and faith are even more important in rough times, so you put your faith on the winning ticket.

    1. fredwilson

      excellent point. there are times, not many, when the strategy, team, andcost structure are all correct and the opportunity just needs more time. itsrare when companies get the money they need in that case though

      1. vruz

        I think it all comes down to the confidence and trust you have in the team. everything depends on it, and so does strategy. (is this the right team for this strategy?)the entrepreneur should of course have tonnes of self-confidence or she shouldn’t be there at all.the problem arises when some of the other stakeholders don’t, and you start building a Frankenstein monster with legs that don’t walk gracefully and eyes that don’t look in the same direction.I dread that sort of change of direction, there’s good and bad changes of direction.

        1. fredwilson

          Yup. It all comes down to team

  6. Mark Essel

    I’ve heard of the investment story before, but it’s good to get a fresh look at what happened. I’d like to take your lesson and see where else I can apply it to in life when times are tough.Most certainly this concept applies to advertising and marketing. You focus your resources and energies into the channels that have the most potential for producing viral spread of concepts or products.What about a shrinking stock portfolio. If some businesses are in danger of going under it may be an excellent time to cash out, accept your losses and move your funds into great buy businesses that you know will bounce back.Finally what about when we invest our time, our most valued resource, into a failing enterprise? Is it best to discover which areas of the project have the most potential for offshoots and reinvest our energies in a new direction.How can we know when a given business or project isn’t going to make it as is?

  7. Mohit

    Fred- thanks for sharing this. You might find this post interesting: http://randomjunkyramblings…There are 3 aspects to your story- 1> Financial options 2> Your judgement 3> The fight vs. flight response.(Re)Evaluating financial options can be difficult in tough times over investments you have made which count on an expected future value, but that’s par for the course for any investor. The next step is to identify core investments that continue to be strong on performance indicators,and which, in your judgement, will provide strong returns. This too is par for the course for any good investor.The key here is fundraising during tough times and choosing to pump in more money into the newly identified core investments, instead of making new investments. Wouldn’t you do that on a case by case basis? Did you have your core investments list in hand and their follow up round funding needs when you raised funds? That is excellent planning, if you did, even accounting for some iterations to the list.

  8. Mohit

    Apologies for the double post.

    1. fredwilson

      No worries. I nuked the dup

      1. Mohit

        Thanks. The factors you would change “the strategy, team, or cost structure, or all three” are factors you were already evaluating as part of regular board meetings? Would it be fair to say that you would have picked companies that you could have supported with your follow on fundraising, specifically ones that would have fit the risk-return profile of your new “core” portfolio?To rephrase, did you exit companies that went on to make it big that just did not fit the risk reward profile of your new “core” portfolio?If this is true, you are illustrating that a VC’s decision making is, for starters, pretty difficult on the VC as well.

      2. Mohit

        All of my notes only go to show the hard work you put into doubling down- and how wonderfully and simply you communicated the thought!You are on my #followthursday (!) 🙂

  9. johnebbert

    Thanks for this – seems applicable to either side of the investment community whether you’re a VC or entrepreneur. Over the past year, at times I’ve felt like I’ve been doubling down every month. As long as I meet my goals, I should be all right. A recession is not the time to cut and run – as I see it, it’s a rare opportunity if you can stick it out.

  10. SkipSnow

    Fred:As a founder of a business, I have to say that I find your post refreshing and reassuring. The only consistent advice I have been receiving from folks who have founded businesses, some with lots of success and some who have not done so well, is stay away from the VC folks until you have to work with them. They say that the VC community is only interested in the exit, only interested in the short term win, and does not wish to nurture a great idea that might take time and effort to incubate.Your post makes me realize that it is not my job to stay away from the VC community, but to find folks like yourself with a well adjusted compass guiding you to figure out what is the best thing one can do with troubled investments. Of course folks like me, wish that we only would present sunny days to folks who trust us with their hard earned money, but in the course of starting a business, it is inevitable that there will be storms, and finding a team of investors who can look a storm straight in the eye, and make a plan to move forward despite that storm, that is what folks like me want.Thanks for making me believe that we can do so.

    1. fredwilson

      Agreed. Don’t stay away from VCs. Stay away from bad VCs

  11. ShanaC

    Posted to FB, I know a lot of people running panicked with their life, or seeming panicked, or unsure, and are scrambling.Between this (definitely) and a post here or there, you probably could come up with a great speech or book for that 18-22 age group about how to assess oneself and one’s skills and then from that skillset, how to choose what one should do. Are you involved in any schools in the area- I’m tempted to copy this and read it to those applying to college, a bit modified.

    1. fredwilson

      This blog is my book. Its all I can do to keep it fresh

  12. GlennKelman

    Great post Fred; is it possible to use your leverage to change a company’s strategy or cost structure without changing the management team? In other words, will a CEO ever enthusiastically and faithfully execute on an idea that she had previously resisted?I have seen it happen; in fact I’ve been someone who resisted an obvious change myself until an impending financing forced us to think through where exactly we were headed. But the change we went through seemed miraculous and unusual to us when in fact it may be more commonplace than I realized.

    1. fredwilson

      Yes. People do change. But they have to buy into the change

  13. $3236

    Fred – Great post and thanks for the double down. I’ve often thought the double-down situations were analogous to betting your hand in hold ’em. It seems the decision for the VC is often, “will we put more money in to see another card and how much does that card cost?” If the cost is small relative to the amount of money in the pot, you pay to see the card. If the hand isn’t that strong and the cost for another card is high relative to the money already committed, you fold.

  14. Jim Peterson

    Fred:Great post that also applies to stock investing.Doubling down on great companies purchased in the first quarter that sank with everything else in early March would have resulted in nice returns becoming “outsized returns”. I wish I would have doubled down on Apple and Johnson and Johnson (for instance). I will next time.

  15. brianberliner

    Fred: Great post, as is usual for you.This really got me thinking about how VC follow-on investment decisions are made, and reminded me of the time I spent with Sevin Rosen Funds. I learned a ton from observing those guys. In my opinion, it’s not just the status of the company, market, and competition that is taken into account when the “doubling down” decision is made. The VC will always have other factors in the back (and at times forefront) of their mind that will also lead them to double down more often than an outside observer (like myself) would think. I added some commentary on my blog:…Enjoy!-Brian

  16. TDKlein

    Fred, Your post reminded me of another piece of sage Doubling Down advice i received early in my VC career: if you go back into a troubled investment, get to either the top or the bottom of the right side of the balance sheet and make sure you have the capital to stay there. In your case, you had the key ingredient to successfully doubling down, enough additional capital to see the investments all the way through. Congrats to you and your investors for sticking it out.

  17. Donna Brewington White

    So many applications for this advice…not just for VC investment decisions. This is one I’ll save and read over a few times…and of course pass along… Reminds me loosely of a quote I heard recently: “Focus is not about deciding what to do with more intensity. It’s about deciding what not to do at all.” I don’t want to force the comparison, but your doubling down example is about focus when the stakes are high and the potential gain even more so. So a more expanded view is the dual approach…deciding “what not to do at all” AND “what to do with more intensity.” Thanks once again, Fred, for helping to expand my thinking.

    1. fredwilson

      I am going to write a post about focus today

      1. Donna Brewington White

        Very cool! Look forward to that. BTW, Happy Birthday and PLEASE do not say that 48 is old. (I’m mixing comments here for sake of efficiency – that was a different post.)

        1. fredwilson

          I call em as I see em (or feel em in this case)

  18. dmreinke

    Good post for those of us facing the entrepreneurial double-down question. Fred would love to see a post by you talking about the impact of doubling down for entrepreneurs…..when it works, it’s a beautiful thing. But even when it’s the right decision at the time, it doesn’t always lead to success for the entrepreneur. No portfolio for us!

    1. fredwilson

      Good suggestion. I’ll add it to the list

  19. thomasloarie

    I fully agree. Learn what the problem is (internal or external), analyze if the value proposition is still valid (the environment does change increasing/decreasing the value of the opportunity), and determine if the management team is up to the task. I have been in deals where some investors back out and others doubled down. Those who doubled down ended up big winners.