Why do VCs Keep Giving Failed Founders Money?

"I just saw that a Founder who lost a ton of money in their last startup just got a huge check from a bunch of investors again! How in the hell are these investors putting money into someone who clearly failed them before?"

March 6th, 2024   |    By: Wil Schroter

Failed Founders are some of the best investments because they understand precisely how hard it is to build a startup, and most importantly, are willing to do it again.

Yes, Founders fail. Sometimes, they fail in spectacular fashion (which is harder than it looks), but they do indeed fail. We seem to understand that part well, but what tends to confound many of us is why those same failed Founders can continue to raise more money from investors.

Haven't investors learned their lesson? Don't they understand that the last time they gave that Founder money, they took a monumental loss? Why, with so much evidence that the Founder has practically set their money on fire, would they even think about giving them more?

Well, friends, it turns out there are many good reasons, and as a Founder who has been on the receiving end of failed investments, I can tell you exactly why.

One Failure Isn't "Every Failure"

Why do we think that because a Founder failed once before that, they are incapable of anything but failure? Take a look at yourself. Have you ever had a failed relationship? Yes? Does that mean no one should ever connect with you romantically again? Have you ever had a job that didn't work out? Yes? Does that mean no one should ever hire you again?

To think about a failed Founder in this one-dimensional view that "this moment defines all of their future moments" would be insanely short-sighted. No matter how spectacular the failure, it's still just a single moment in a Founder's life. I've started 9 companies and 4 have failed. But the others generated over a billion dollars of revenue while I was running them. Imagine if we had taken a single failure on my behalf and decided that I was incapable of success. We'd be minus a billion in revenue.

Failures are a part of startup life and most certainly a part of Founder life. The idea of trying to give a Founder a Scarlet Letter over a failure or two would fly directly in the face of why we do what we do. That's why investors are willing to "forgive" a Founder and reinvest, because they are in the business of risk, and they understand every investment is just that.

Investors Value Experience

When it comes to building startups, experience is experience, whether the net total was a good outcome or a bad outcome. Either way, a funded Founder had to raise money, hire staff, develop a product, and weather a storm. Sometimes, that storm turns into blue skies and IPOs, and sometimes, that storm turns into an apocalyptic hellscape. The experience is similar.

What we often overlook is that someone who raised a hundred million dollars and lost it has gained more real-world experience than about 99.9% of other Founders who are all trying to raise money. You may look at Adam Neumann, the Founder of WeWork, and criticize him for "losing" $10 billion of investor money. But how many Founders on the planet have the experience to raise, manage, and deploy that much capital? Like 20.

That's why Adam Neumann raised over $300 million for his first round of capital for his new business. Because love or hate him, he's in a very elite class of Founders with that level of experience. And by the way, do you know what you learned from a bad experience? How to avoid doing it again.

The Devil You Know

One of the hardest parts about being an investor is determining not just what to invest in, but who to invest in. It's like if you had to make your decision on your future spouse to marry with little more than an hour-long date and 12 PowerPoint slides. There's not much to go on, so it's very difficult to know exactly whom you're marrying professionally.

That's why investors who have built a strong relationship with a Founder, even in a bad outcome, are willing to bet on that person again. That's because they know who they are investing in this time. They've spilled the "same blood in the same mud" and lived to tell about it. You learn an awful lot about a person when you've gone through tough times, and while the outcome isn't ideal, the bond you build can be.

We should be thankful that investors are willing to back not just new Founders, but failed ones. It shows an understanding of how hard this game is and an appreciation for what we can do as Founders. We should cheer on our fallen comrades for having the guts to dust themselves off and go at it again. It's hard enough to do it once, anyone willing to suit up twice has my vote.

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About the Author

Wil Schroter

Wil Schroter is the Founder + CEO @ Startups.com, a startup platform that includes BizplanClarity, Fundable, Launchrock, and Zirtual. He started his first company at age 19 which grew to over $700 million in billings within 5 years (despite his involvement). After that he launched 8 more companies, the last 3 venture backed, to refine his learning of what not to do. He's a seasoned expert at starting companies and a total amateur at everything else.

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