When to double down on winners: a VC's perspective
I recently wrote a post about Brightspark being a VC in the Canadian market for the last 18 years. In our years of experience, one of the issues we have spent a lot of time focusing on is when to “double down” or “make a follow-on investment,” and when not to invest further.
As you probably know, growth companies often go through multiple rounds of financing. These range from raising growth capital, to expanding into new markets, or sometimes funding a pivot (change in strategy). Follow-on investments often represent “good news,” especially in a growth situation and when new “later stage” VCs join the investment group.
The reality of tech early stage investments is that they are marathons and not sprints, and it takes a good few years for our companies to realize meaningful gains. The biggest challenge is to know when to walk away or when to reinvest.
Most of our companies operate on somewhat of a rollercoaster ride: sometimes everything looks amazing, and other times (often on the same day!) everything looks bleak. Since we sit on the board of most companies in our portfolio, we have front-row seats to all these ups and downs. At Brightspark, we invest in teams who can work through the loops and turns. We try to look beyond the immediate issues, and we constantly reevaluate whether the fundamentals are there. Is this the right team with the right culture? Is the market they’re focusing on real and active now? Is there a huge upside to the business? Is the competitive landscape manageable? Could we get a significant return on our investment?
We try to maintain discipline in constantly looking at these criteria. However, sometimes the road for a startup is long and requires a few pivots along the way. It took Hopper eight years to hit its stride, but we always believed the fundamentals were in place. Hopper is now incredibly successful and our investors are thrilled with its performance. Lucky we didn’t falter or listen to the many naysayers along the way!
Just like any other VC, we’re not always right, but we are disciplined in our approach when deciding whether or not to reinvest in a company. We are determined not to “chase bad money with new money.” We are committed to our investment criteria; you won’t see us recommending reinvestment in companies that don’t fit those principles. We are honest with our network of investors and our portfolio companies regarding our support of specific reinvestments (or our decision not to reinvest).
Building a healthy investment portfolio
On its face, it’s solid advice for anyone in the VC industry to “double down on your winners and walk away from your losers.” This is a significant reason we recommend our network of investors hold a portfolio of several tech investments—we all occasionally invest in companies that fail for any number of reasons, but the winners should make up for the losers—especially if they are patient.
When we reinvest in existing companies, they are usually at a later stage, which means there’s less risk involved, and we have the benefit of knowing the companies really well. At the same time, we keep investing in new businesses to ensure we maintain a healthy balance.
Our model of investment keeps us completely aligned with our investors. Not that we are suggesting any traditional VC reinvests in deals for the wrong reason, but having a portfolio where you are “motivated” to never write down the value of your investments has sometimes led to VCs reinvesting in “losers.” That will never happen with us; our model is set up that we are completely aligned with our investors – when they win, we win.
Entrepreneurs running companies often need to make tough decisions - when to grow, when to cut back, when to admit you are wrong and when to find ways to capitalize on opportunity. When it comes time for reinvestment, Brightspark’s job is to make equally tough objective decisions and consistently evaluate reinvestment.
Current investment opportunity: Nudge Rewards
We are currently investing in Nudge Rewards, a proprietary communications platform that is designed to engage, educate and reward frontline managers and employees to improve team performance and increase profitability.
Because this is a follow-on round, it is an opportunity for investors to be part of the next growth phase of the company.