Competing uses for capital at RCP
The rationale behind an investment pass
RCP is in the venture capital business, which means that several of the investments we make don't follow the plan we share with the Founder. Sometimes they outright fail, sometimes they pivot into a new direction, but many times they just don't hit an inflection growth point.
In the past, we’ve written about why we’ve made an investment or how we want to see the business grow.
Today, I want to write about a follow-on investment that we passed on. We will keep it anonymous and straightforward.
To set the context: A company we invested in a few years back, was now raising more funding to extend their runway to profitability. The business thesis hadn’t changed over the intervening years, and the company hadn’t developed the traction within its market. So, we began to evaluate this follow-on funding opportunity.
Because of our earlier investment, we understood the technology and management team. We met with CEO and Chair, looking to understand what lessons they had learned over the last few years, how the marketplace had changed, and what their plans were going forward.
And then we declined to follow our original investment in the follow-on round.
Why? Two reasons:
First, the CEO and Chair didn’t convince us that their technology was on the edge of widespread adoption. In our view, the marketplace was making a judgement about their technology relative to the competing technologies, and deciding the competitors held better technology. Generally, it’s better to trust the marketplace over your own view of tech adoption in a situation like this.
Second, and more importantly, we have competing uses for our capital. When we evaluate investments, we need to compare alternative uses for those funds. Should we put funds into a new start-up, back an existing investment or keep our powder dry for a sunny day?
In this instance, the drawbacks outweigh the positives. We kept the powder dry for a future investment.