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Investing , Personal Development

Betting On The Running Horse

December 2, 2019
Betting On The Running Horse

Last week we offered a new investment in a company that we have already invested in. So, this will be the second time investing in this company and this time we’re deploying even more capital at a higher valuation.  (This is we.)

There are really only two circumstances where an investor gets to invest in the same company for the second time. The first example is when a company has run out of money and most raise more in order to stay alive. This usually means a down round, or in other words, the original investors get diluted by the new investors – not something you want. 

The second example is when a company is doing so well they need more capital to increase inventory, hire new employees, and/or acquire competitors to grow even faster. When a company raises money for any of these reasons, the original investors typically get first opportunity at ‘follow-on funding’.

Betting On The Running Horse

If you’re an investor who gets this opportunity, it’s usually a very wise thing to invest again. Similar to gambling, when you’ve found something that is working, you double down because that is where you will get your big wins to cover any of your losses. 

With investing, it’s a bit like betting on a horse while it’s running the race. If you were to see a horse out front, beating the rest of the pack, you’d bet on that horse. Investing in private companies is a much, much slower race, but if you see a company that continues to execute successfully, you should start to move your chips behind them. 

Even though this all sounds obvious, many private investors make one of two very big mistakes in this situation. They either believe their original investment is good enough, or they pass because they had passed at a lower valuation (this is called being hard-headed).

Let’s talk about that first mistake of believing their original investment was enough. If you’re a private investor, you should be invested in a variety of companies. The odds of investing in one company and having that same company be a big success is very small. Just like any investing strategy, having diversity is a must-have in order to spread your risk. 

So, if you’ve invested in a variety of private companies, you should strongly consider reinvesting if one of the companies is doing exceptionally well. The odds of a big win go significantly up, which will protect you from the other companies that may fail. 

The second mistake is passing on a deal because you passed on it in the previous funding round. This is just being stubborn. There is some sort of bias inside our heads that makes us want to defend past decisions regardless of new information. 

A quick example: I know a cannabis fund that passed on a deal three separate times. However, they finally invested on the fourth time. Several months later, that deal exited for more than ten times what they had just invested. This was obviously a huge win for the fund and it goes to show that being open-minded and properly analyzing new information can really pay off.

This may sound all so obvious, but I promise you that in the moment it doesn’t feel like that at all. Investing in a company for the first, second, or even third time is a very stressful and unsure process. The more you become invested, the more your success depends on that one big bet. 

But, if you want to win at anything at life, you have to capitalize on the best opportunities when they present themselves. Because you don’t know when the next one will come.