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Investing in Failure?

17 Nov 2020

I was in a meeting, for perhaps the third time, with a normally very confident and bullish CEO, who sheepishly announced:

“There’s something I need to tell you. I’ve had a failure.”

As an investor in growth companies the question of whether a previous failure matters is one I’m asked surprisingly often. Usually, I brush it off with “of course failure doesn’t matter, it’s an acceptable part of growth investing”. However, does it matter? His tone suggested it had certainly counted against him before.

When thinking back to previous investments, I am not sure I had ever given it that much thought, at least consciously. I was sure I had backed founders who had failed, but had I also rejected founders because of a previous failure?

All failures are not the same

I thought hard about when it had mattered. One opportunity stood out. For anonymity I will not mention names. In short, this founder had previously received significant funding for a technology that he was sure would revolutionise an industry. Ultimately it failed. Probably, it was a decade or more too early. He was now looking for £5m for his latest venture. What struck me at the time was how he managed to gloss over his own failings and blame everyone and everything else:

  • It was the investor’s fault for not continuing to back him.
  • It was the suppliers’ fault for not being able to produce the right product.
  • And my personal favourite, it was the customers’ fault for not understanding what he was trying to sell them.

It appeared to me it had more likely been his fault for not understanding the market opportunity or having any control over cash. This was not someone I felt would take good care of our investment.

If this was a founder I couldn’t back, when could I back someone with a failure? Again, one CEO immediately sprung to mind. They had a failure in the first dotcom era, not unsurprising during this period, and it would have been easy for them to blame it all on bad timing. Instead they identified:

  • Their own naivety for managing cash as the company had scaled.
  • Not having an easily scalable business model after the early adopters.
  • A poor selection of partners.

As the CEO’s current business started to scale and they looked to us for the first institutional investment round, they were sure they would not make the same mistakes again. Now, rather than being a negative the failure had shown me that the CEO was someone who was willing to learn and adapt.

Understanding success

Now, something that no investor likes to admit. Not all the investments I have made have been a success. Some have looked like winners yet failed and some initial disappointments have become winners. What I hope I have done is learned from those failures and not tried to make excuses for them or blame others. It would therefore seem unreasonable to never invest in a founder or CEO for a failure they have learned from.

And what about success? Should previous success always be seen as a positive? The truth is that I have known many founders, and investors, that were just in the right place at the right time. As an old boss put it; “no one should ever think of themselves as an alchemist”. It would be as naïve to reject an investment because of a failure as to make one simply due to past success.

Perhaps the best way to conclude this blog is by quoting Rudyard Kipling:

“If you can meet with Triumph and Disaster; and treat those two imposters just the same.”

So whether you’re an entrepreneur with a home run or a failure to your name, we would love to talk to you and understand your current business and how we can help to learn and grow it together.

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Speak to the Development Capital team today

Important information:

For professional advisers only. Not to be relied upon by retail investors. Personal opinions may change and should not be seen as advice or a recommendation. Issued by Octopus Investments Limited, which is authorised and regulated by the Financial Conduct Authority. Registered office: 33 Holborn, London, EC1N 2HT. Registered in England and Wales No. 03942880. Issued: October 2020. CAM010310.