When do you officially get christened a “VC?” Is it when you successfully raise your first dollar or finish the fundraising? Is it when you write your first check or see your first exit? With Homebrew, Satya and I both consider ourselves a startup in its “product-market fit” phase. Since raising our fund earlier this year, we’ve invested in a number of strong teams but this isn’t an easy business and we’re committed to bringing an operators mentality to what we do: measure and improve, every day, week, month.

The only way to succeed in venture capital is backing wonderful entrepreneurs and working hard on their behalf. Add some good fortune and Homebrew will return sizable gobs money to our investors. As of today, we’ve made nine investments (four listed on our website and five not yet disclosed).

However, measuring the outcome of a fund has a long time horizon so there are several other metrics we keep on our dashboard. One is deals we lost: we wanted to make an investment but the startup chose to take an investment from someone else with terms we would have found acceptable. It’s kind of strange that no one discusses these publicly – market dynamics mean most firms experience these losses (we beat out other firms in almost all of our deals).

In 2013 Homebrew lost two opportunities and each time we learned something about our process and how to improve. Neither of the startups have announced their funding yet so I’ll need to be slightly opaque in the details.

Loss 1: Offered a Substantial Secondary Slot But Passed Since We Seek to Lead/Co-Lead

This opportunity looked juicy: two founders we knew previously, mission-driven, attacking a big market. The product was still evolving but their execution ability and customer development had accelerated nicely during the startup’s first few months. As the fundraising became competitive, there was another seed fund which wanted to take a larger part of the round – essentially function as a single lead. We were offered a substantial second slot but passed because it wouldn’t have achieved our ownership targets or desire to lean in via a board seat [note: why we think Boards at seed stage are important. It’s not about the investors, it’s about the CEO]. They subsequently closed the round with a great group of investors. While we believe our participation would have been long-term additive for them, we’re still rooting for their success.

Two learnings

A. We Let The Round Become Competitive: There were dynamics to the opportunity which suggest we could have led the financing if we moved earlier. At the time we were not ready to offer a termsheet because the founders were working in a new area. I wanted to see how their thinking evolved from the initial hypotheses. Despite the loss, we stand by that decision, but it was a good reminder that as you wait, others lurk, comfortable with the risk.

B. We’re Still the New Guy: The fund which took lead slot has been around longer with a bigger portfolio, so they were able to point evocatively to similar businesses they’ve funded with strong founder testimonials. Homebrew’s portfolio is of course smaller, but we can bring substantial advocacy from not just the founders we’ve backed but across our broader network, and since this deal, we’ve been more aggressive on having other references back us up.

Loss 2: We Need An “It Goes to 11” Playbook

What should we do when we feel a deal moving away from us? Homebrew hadn’t faced this situation before and thus recognized it a bit too late. The deal was always highly competitive and the founder made a reasonable decision to go with a firm possessing deep industry relationships, but still, it was one we wanted. We made an offer and kept up communication with the founder but couldn’t close. Other investors built their case and ultimately the last word.

How’d we react to this? The Homebrew “It Goes to 11” Playbook. Who can we bring to the table to lobby on our behalf when needed? How do we better surface and address any unexpressed, but open, questions? How do we take it to, well, 11. To be clear, this isn’t about variable enthusiasm in the deals we chase – we bust our asses before and after term sheets with every company we invest in. Rather it’s being clear with ourselves as to where the momentum in a negotiation is heading and being more deliberate about keeping it in our favor.

As 2013 winds down, I’m finding it exhilarating to build our new fund. We’ve got clarity in our mission, goals and a simple true north: create the type of early stage fund that we would have wanted to take money from. While it’s fun to high five when everything works out as expected, we also pause to learn from outcomes that went sideways. And then we’re right back at it.