I don’t know about real lemons, but they say in the venture capital business that investment lemons ripen early. That is, deals that are going to go south tend to reach their destination before deals going north reach theirs. This makes the timely pruning of investment lemons an important venture capital skill; nourishing a rotting lemon on the vine with more capital and more management time is one of the great resource wasters of the venture capital industry. It’s not much fun for entrepreneurs, either.
So why does it happen so much? Why do so many angel and venture investors, armed with the knowledge that lemons ripen early, have so much trouble lopping them off the investment vine in a timely manner?
The answer, I think, is mostly found in human nature (yes, venture capitalists – well, most of them – are human, just like you and me, and even most entrepreneurs). In fact, in some ways, venture capitalists are more human, in terms of their nature, than most other humans. In particular, they share with most entrepreneurs the trait of being “often wrong, but never in doubt.” They just have a hard time looking at an investment they pulled the trigger on and thinking “that was a crummy shot.” Also as per entrepreneurs, venture capitalists are generally endowed with an extra dollop of ego, which makes it hard for them, even after they inwardly acknowledge making a bad investment, publicly admitting it by pulling the plug on the deal.
Putting my entrepreneur hat on, you might think that having a venture investor that is not very timely about pruning her lemons is not such a bad thing. And, indeed there are examples out there of seemingly rotten investment lemons miraculously returning to the ripe state, and paying off handsomely. But that is, frankly, rare. And as often as not, when you do the post mortem on one of these phoenix-like deals, what you find is that it wasn’t the original investor, and original team, that executed and benefited from the turnaround, but rather a Johnny-come-lately investor and entrepreneur team that salvaged the deal. Which suggests that, as often as not, the original investor – and the initial founders – would have done just as well to walk away as to stay in the game only to be, in the investor’s case, washed out, and in the entrepreneur’s case, washed out and redeployed.
The bottom line, then, for venture capitalist and entrepreneur alike, is that timely identification, and timely pruning, of investment lemons is one of the more important venture investing and entrepreneurial skills. Cutting losses – avoiding throwing good money and talent after bad – is absolutely critical if you want to succeed in businesses like venture capital and high impact entrepreneurship, where capital and talent are in short supply, and catching the next wave is generally a better strategy than trying to salvage a wave that just didn’t turn out to be as good as it first appeared.
Next time, some thoughts on becoming a better lemon pruner.