Carey Lai's Corner

A former lemonade stand entrepreneur turned Venture Capitalist

Are You All In?

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.  =

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This entry was posted on September 11, 2012 by in Uncategorized.
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