A former lemonade stand entrepreneur turned Venture Capitalist
As I was playing poker with a couple of buddies last weekend and I lost my initial buy-in (don’t worry, it wasn’t the $1M Big ONE tournament (http://bit.ly/tfFdnS), I realized if I didn’t re-buy the maximum amount, I wouldn’t have a chance at getting back my initial buy-in. I didn’t want to be Chamath Palihaptiya and get busted (http://bit.ly/P268Fg) Or, even have a shot at winning. I could’ve easily thrown in the towel and called it a night, but I was the host. =) Now, some would say, why take that risk at all? And, where do you draw the line? You can’t keep re-buying until you lose everything. If I did, I would probably need to call Gamblers Anonymous. But, it occurred to me that how much you put at risk is similar to how much you invest in a company and it heavily weighs on the impact of the return. I always hear VCs say, “Man, I wish I had put more money into that company.” They often say that because the return was a huge multiple. This is also one of the reasons why more and more firms continue to “re-buy” at each round of financing because they want to continue to back their winners. Let’s do some VC math. Say for example you initially invest $1M in a company and it returned 100x your money. For each $1M you invested, it would’ve returned $100M. Likewise, for every $1M you didn’t invest, you wouldn’t have received $100M.
So, you see, continuing to back your winners is equally important, if not more important than cutting off your losers because of the multiplier effect. Andreesen Horowitz recently got a lot of flak for not continuing to back one of their winners, Instagram (http://bit.ly/JnOUOt). So, how did I do that night? Well, I have to admit I had to re-buy 1.5x that night because I lost a monster hand, but in the end, I was victorious because I also took home the most money that night. No risk, no reward. =