Not Breaking Rules

When we started OATV we were a very new and unproven team. Neither Mark nor I had managed a fund and, tho I’d been at a venture fund prior, I wasn’t even close to being a Partner there.

To combat the weariness that some potential investors felt about backing first time managers, we set a few rules that would give them some assurances that we would use them to vigilantly combat style drift- which is a common problem LPs have with new managers who sell them one strategy then proceeded to drift every which way chasing deals.

Our rules were pretty simple for a seed stage fund:

1. We would try to own at least 15% of a company for an investment of $1M or less.
2. We would lead or co-lead investments.
3. If we couldn’t lead a round, or get to the level of ownership we’d promised, we could participate in a round IF it were being lead by a top tier fund (this was 2005).

For us, at the time, these were good guide posts that gave investors comfort as to whether we were delivering the product we’d sold them.

But the world is messy, and in the early days of OATV we probably held too closely to these rules which caused us to miss out on some really great investments. 

There were many many conversations about companies we liked that didn’t fit neatly within our rules. Price was too high, or we couldn’t own enough or there wasn’t a top tier firm leading the larger round in a company we liked.

I don’t think those were unhealthy conversations to have. Nor do I think having guide posts around how a firm invests is a bad thing, but I never liked how many of those conversations about our rules ended.

Most of the time they ended with some version of- how could we ever explain this to our investors? This isn’t what we told them we would do? Which was usually where we let our desire to invest derail from our willingness to push forward. Tail tucked firmly between legs, we passed on many great companies that didn’t fit within our rules.

Which was a crummy thing to do.

In several cases we had conviction around companies that we couldn’t justify to our investors, but we didn’t have the confidence to follow those convictions. We let our fear of what our investors would think about us breaking our rules dictate our actions. And that was wrong.

Not wrong that we missed investing in some great companies. Any firm worth their salt has a long list of companies they passed on for one reason or the other. But passing on something out of fear of what your investors will think, what they might say, or how they will act when it comes time to raise your next fund is the kind of wrong that cuts deep and stings longer.

In our second or third year of business we struck a healthier relationship with our rules. We started getting more comfortable with our own instincts. And our fund performance was such that our investors trusted us enough that when we chose to break or bend our rules the results were usually good ones.

We still have rules we follow. I think most should.

But we break them or bend them now in ways we didn’t in our early days. Not all the time. And not just for the sake of it. But we’re not not breaking our rules out of fear anymore and that makes missing the good ones a little less painful.