3 Tips For VCs With Struggling Portfolio Companies

By Dmitry Smirnov

With VC investment remaining slow, especially for late-stage investment, we can expect higher than usual startup failure rates, which generally already average 30% of an investment firm’s portfolio.

When this happens, venture investors generally have two tactics to mitigate risk: Developing those portfolio companies with better chances of succeeding or abandoning those that are performing poorly, but helping them if you see they can survive.

In my experience, for a successful return on investment, investors should not only engage with their startups that are successfully growing and increasing their capitalization, but also with those that face huge difficulties but still have the potential to survive.

Sometimes, those struggling startups can be rescued and become profitable, while at other times it still makes more sense to sell them (or the technologies they have developed) to another company with minimal losses.

The likelihood of both scenarios increases when you work in industries where you have expertise and connections. Here are three pieces of advice that will help investors navigate that situation.

Reasonable patience

Be prepared for startup founders to make as many as three pivots on their way to success. Their initial strategy doesn’t always hit the mark on the first attempt. Forty percent of the founders who participated in the CB Insights study stated they had previously pivoted their startups in some way to avoid failure. And 75% of them said that pivoting helped lead to success.

Be ready for this and secure funding for follow-up rounds in advance to give founders more than one chance to try out their idea. (By the way, Twitter, Slack and Netflix all had major pivots in their early years.)

However, it’s essential to take a close look at the founder: is he or she passionate, open to advice, and receptive to your experience? “Shark Tank” investor Kevin O’Leary has said his investments that resulted in losses often involved startup founders who couldn’t — or didn’t want to — make changes when necessary.

If you see that a founder is unreasonably stubborn, it’s worth considering whether it makes sense to save the startup.

Give advice, not money

First, giving a startup more money than is required can tempt founders to make overpriced choices, like hiring more expensive employees.

However, with a strictly set budget, they can actually make smarter choices and be more selective.

Raising additional funds won’t necessarily help startups survive if the problems lie deeper. And while, according to the same CB Insights report, 38% of respondents mention running out of cash or the inability to raise capital, the underlying reasons go deeper, from the essence of the product (no market need, 35%) to an ill-conceived business model (19%).

These are all areas where VCs can provide resources (connections, networks, prominent brands as clients) and consulting (legal, marketing and PR, HR). Startups cannot always afford this, especially when it comes to high-level specialists, but it might help them operate more efficiently.

Consider selling

If the situation is fairly straightforward and there are no other viable options, it’s time to leverage your connections and so on. If you know the industry, you — or even the company’s managers and specialists — should have connections in top-tier corporations, which are often ready to buy the technology.

We managed to do it with some of our projects, helping the founders sell their business to large IT firms.

In any case, allow investors to gain something in return and breathe life into the idea. This is crucial both in terms of return on investment and for the VC’s reputation — you didn’t just write off the money, but fought and achieved the maximum success possible with the resources you had.

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Dmitry Smirnov, with 15-plus years of experience in venture capital investments, is the founder and partner of Flint Capital, a Boston-based VC fund that invests in early-stage tech companies across the U.S., Europe and Israel. The firm has had 20 successful exits, two IPOs and three unicorns.

Illustration: Dom Guzman