Field Notes: When Things Don't Work

For most VCs who've been investing since The Financial Crisis, the portfolio attrition that comes with investing in high risk enterprises has been absent from the reality of fund management. While we waded into the storm last year, it appears that 2024 will require VCs to navigate choppier waters before finding calmer seas. The sad reality is many startups are likely not going to make it.

Before moving ahead, let me be candid that founders bear the brunt of this burden- not VCs, not LPs, not anybody else. It's difficult to be substantially supportive if a VC cannot have empathy in such a situation. Let's dwell on some of what a founder might experience:

• Questioning where they went wrong/what they could have done differently
• Personal let down because a vision or dream not being achieved
• Stress rooted in financial loss
• A shame/worry over reputation
• Complexities of handling employees, customers, investors, et al

In this context, VCs have an opportunity to build their reputation when things don't work. I see VCs having two duties that are not mutually exclusive in the event of a portfolio company failure: 1) uphold fiduciary duties to LPs and 2) support the founders with a thoughtful wind down. There is a third, if one is on the Board of the startup, to the shareholders of the business - legal counsel can help guide in this regard.

On the first point, the general adage amongst VCs and LPs is to not further invest capital or too much time in supporting a company that's not working out. Founders may not love to hear this but this is the reality of any investment discipline - don't further invest into losses. That said, time is something a VC can and should offer - or else they end up ghosting the founder in their time of need.

On supporting the founders with a thoughtful wind down, a few things to consider:

• Be the rock. Don't emotionally whipsaw to the situation especially if you have an attachment to the investment (which isn't uncommon at pre-seed/seed)
• Pragmatic and realistic outlook is a must. A founder is always optimistic and that can manufacture a false sense of hope. Be the truth teller
• Communicate directly, with kindness. This can be challenging if a founder isn't really listening or being real about the situation. Don't get aggravated but use objectivity as you guide
• Help create an objective plan. This helps navigate the hail mary attempts around a last ditch raise or exit but also sets a path to properly helping staff, notifying customers, and managing investors. I'd note that often founders try to maintain runway by NOT engaging counsel- it's not the time to cut corners. Tap them to help guide the process (especially if you're also on the Board). This goes hand-in-hand with being a truth teller
• Get in a routine. A cadence around communications is important. There's nothing worse than being inconsistent during such a time of high stress. As little as 30 min/week can ensure the founders have the support they need

Failure is a reality of startups and VC alike but doesn't make it any less of a challenge for those navigating it. VCs may not compound returns in these situations but can certainly compound reputation. Venture takes decades, play the long game.