Season 1,

23: How to Lose Money in Venture Capital Investing with Greg Feldmann

February 06, 2017

Greg Feldmann is the President of Skyline Capital Strategies in Roanoke, VA. He has over 35 years of executive banking and strategic adviser experience. He is an acknowledged expert in strategic planning, executive and board leadership and business management in financial services. He is a strategic thinker with the ability to turn plans into action.

Hear how Greg overcame a challenging setback when a brilliant new technology investment did not turn out as he had hoped. In the process he also learned some incredible lessons about how to be successful with venture capital investing, and investing in general.

Green Flag: High Expectations

In the late 1980’s while working in Venture Investing, a well vetted entrepreneur came to me with what looked like a brilliant new technology investment. There was a large, growing market at the time for this type of technology and there were already some big recognizable names involved in the field. All the existing reports stated that it was expected to double it’s value in the next couple of years, and we had a high quality team assembled to make it happen.

Everything we had to go on made it seem like with little capital and a good marketing plan this company could launch and go a long way. So I invested money and hired and trained a sales team. I felt that the investment was as safe as any Venture Capital can be!

Red Flag: Bad Timing

We spent around 6 or 7 months in the field trying to market the product, expecting to see some fair returns but not seeing the sales materialize that we had anticipated. I was going to board meetings and reading the reports from the sales people who were still very optimistic, but also noticing that the time lines for the sales goals had been moved out. The sales team was saying the technology was good and that it was just the timing. There wasn’t one particular symptom that could be given as evidence of a big problem at that point, but I began to feel some concern.

A few months after that, the talk on the team soon became about how to squeeze the budget to make the $ last. We only had around 6 months of cash left to support the business. By the end of the first year our target was to see $5-10 million coming in and instead there was less than 25% of that.

Black Flag: Time’s Up

The management team was losing credibility. We tried to use the remaining cash to generate more sales and had managed to make some cuts so that we had a little more time for the sales to materialize. Then the conversations outside the boardroom were discussions on who could or would be willing to put out more money to keep this thing going longer. We looked at other companies in the same market and began to ask ourselves if our widget was really as right for the market as we had initially thought.

We considered several options for keeping things going, such as bringing in new management, or refining the product to be more competitive, but in the final analysis it was more than the investors wanted to bite off. By this time we were also beginning to see that perhaps the technology itself had some glaring faults and no one wanted to risk putting more money in to do a restart. More capital was not going to solve the problem.

White Flag: Winding Back

By month fifteen we had run out options and decided we were going to wind the company back. It was simply not the winning technology we had thought and the entire investment was a bust. Crossing your fingers and hoping more money will solve the problem doesn’t usually work out.

Bottom line we just did not have the deep vein customer discovery that is so crucial for marketing new technology. We had also perhaps been led astray by others in the market who were buying up all kinds of new technology trying to see if they could enter the market. It is somewhat like poker: You have to know when to fold your hand and stay in the game so you can hopefully get a better hand next time. The final price tag on this lesson was about $1.5 million.

Checkered Flag: Forward Investing

We learned that no matter how good your sales pipeline is, customer discovery of the product is the most critical element of a successful investment. It is also noteworthy to remember that management always trumps technology. No matter how good the technology is, if you don’t have someone who can execute a business plan and effectively sell it, you’re just going to be funding expenses.

Your first loss is your best loss. The early stages of Venture Investing are the highest risk. And you know going in that every time you come to the plate you are not going to hit a home run. You obviously need to minimize these bad situations, but you have to move on. These kinds of experiences hopefully make you a better investor as you move forward into the future. 

Failing Forward

In each episode of How to Lose Money, we ask our guests to answer a few questions about failure. Here’s what came out of this episode:

  • Why did this failure experience happen to you?

I think the biggest single factor was that in spite of due diligence we did not uncover the deep vein customer market. Perhaps a little better management and a more experienced sales team might have helped avoid the failure as well….but not necessarily.

  • What’s the single most important lesson you’ve learned from this?

I think there were two important lessons:

First, the intense customer discovery that needs to be done on the front end.

Second is that if you are going to fail, fail fast and move on. Take that first loss and don’t get bogged down or distracted in something that can really consume your resources, financially and otherwise.

  • How do you protect yourself from failing in this way again?

I am a believer that Venture Capital should be done in partnership with a variety of investors. They bring different lenses and strengths to the table that can help with the decision-making process.

Secondly, I think we need to always ask what is the least amount of money we can invest and what baby steps can we take; feeding a little in at a time so you are not just dropping a big check into a bank account and letting someone go off and burn cash.

  • Who do you turn to when you need help?

Over time I have developed a network of folks who have done this kind of investment and technology; people whose judgement I trust. I’ve got friends in the venture industries and some other firms that I rely on. The better informed a person can be; the more perspectives they can have, the better….especially from the Nay-sayers. Find out as many problems as you can ahead of time and do what you can to mitigate them.

  • What advice would you give to someone in a similar position to yours?

Don’t be afraid to take that first loss! As hard as it is to admit failure to yourself and your investors, stop while you can. That is the best path.

This episode is based on an interview with Greg Feldmann. To hear this episode, and many more like it, you can subscribe to How to Lose Money.

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