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The Anti-Portfolio — If You Got It, Flaunt It

13 September, 2010

Celebrating success is an understandable and universally practised phenomenon. And it is consistent with the commonly accepted notion of success attracting more success. While failure is equally commonly considered in popular wisdom to be a stepping stone for success, failures are very seldom externally acknowledged by organizations, let alone celebrated!

While every successful organization no doubt, conducts meticulous post-mortems of deals or decisions that have gone wrong and seeks to learn from its mistakes, most organizations, nonetheless, appear to treat these wrong decisions as dirty linen not to be washed or slung out in public. It is a fiercely competitive world in private equity/venture capital these days, and may be most PE/VC firms just don’t think it pays to highlight to the world the misses that one has made, especially when it subsequently turns out that a competitor has profited out of such a miss.

I am not from the PE/VC industry and as such, many would argue that am not qualified to preach to a highly sophisticated industry that am not a part of – and they’d be absolutely right! However, as someone who has spent more than the past decade representing and working closely with a diverse set of PE/VC funds, and as someone who has gone through (and continues to go through) the pains and gains of growing an organization myself, I do wish to take the liberty of seeking to make the case that PE/VC firms could stand to benefit immensely from openly celebrating their “anti-portfolios” (investment opportunities that they passed up, which went on to become blockbusters).

There are barely a handful of funds which flaunt their anti-portfolio, the most notable amongst them being Bessemer Venture Partners. Bessemer’s by-now-legendary anti-portfolio page is filled with an eye-popping list of names, with a great humour-laced story behind each such blockbuster company that Bessemer turned down when those companies were not so well-known (my personal favourite is the story about how David Cowan turned down Google).

Of course, I do not have any empirical or correlative data to establish if flaunting their anti-portfolio benefited Bessemer or any of those other funds in any manner. However, I do believe that a lot more PE/VC funds should consider flaunting their anti-portfolios for the following reasons:

1. Tool of Introspection – First and foremost, the decision to announce an anti-portfolio and the process relating thereto can be a very useful tool of introspection. In an environment where one is constantly chasing more and more deals, one often tends to not spend enough time analyzing why a certain deal did not work out. Several business leaders who, when looking back on their illustrious careers, have observed that there were some decisions that they took which seemed right at the time, but seemed not very well-advised to them upon future reflection.

The whole process of identifying an organization’s anti-portfolio and penning down the circumstances or reasons that led to the decision not to pursue those opportunities and placing it all for public scrutiny on the organization’s website can therefore, be a rather humbling and at the same time, enriching experience. I believe that this process can play a meaningful role in shaping future priorities, strategies and values of a fund.

2. Turn Your Famous Misses into Branding Hits – While publicizing successful investments and exits undoubtedly contributes to building a very strong brand for the fund and aids in future fundraisings and deals, in my view, publicizing the anti-portfolio in the right manner could play as important a part in enhancing a fund’s brand. An impressive anti-portfolio, if appropriately presented to the world, could demonstrate that the fund in question is a very strong player in the premium end of the deal eco-system, and is a natural contender for being given the first look at high-quality deals.

Picture this – You were one of the few funds from whom Google, eBay, Cisco and Apple all tried to raise funding at a time when they were promising start-ups – now, if I were an LP (which, am of course, not!), I’d be very impressed by that. I’d think it says something about your reputation, your brand and your access to top-quality deals. Further, an anti-portfolio that is presented in the appropriate fashion could also communicate a strong message to the market that the fund in question is very secure and confident about its position in the market, not afraid or ashamed to acknowledge its missed opportunities and those, in turn, could be very positive image enhancers in favour of the fund.

3. Mending Bridges – Though this does not always happen, I have seen that on a fair number of occasions, when deals fall through after a lot of discussion, a considerable amount of bad blood gets generated or a breakdown of trust and comfort occurs amongst the parties concerned. In some cases, an entrepreneur can feel slighted by a fund’s decision to turn him/her down. Such instances can often mean that companies that a fund turned down may not consider doing business with such fund in the future, even if perfectly rational economic and business reasons then exist to do so.

Publicizing a well-written anti-portfolio, I think, can contribute in a huge way to mending such broken bridges. This is because, to the entrepreneur in question, the inclusion by the fund of his/her company’s name in such fund’s anti-portfolio could be a very meaningful olive branch from the fund – by the fund admitting that the company in question was a good opportunity missed for the fund. This, in my view, can pave the way for the two organizations to put the past behind and once again objectively and rationally evaluate if it makes sense for them to partner together and if yes, on what terms.

4. The Human Feel – Companies that are looking to raise funds almost always do some basic background checks on the funds that they are considering partnering with, just like funds do background checks on the entrepreneurs in question. In such a circumstance, while finding the fund’s anti-portfolio listed on its website may not necessarily swing the decision in a fund’s favour, it likely will give an entrepreneur a lot of comfort around the “human feel” of the fund in question – these guys are not just an IRR-chasing machine, they have the ability to reflect on and admit to some of the opportunities they failed to see, and they actually have a sense of humour, they might just be a good and supportive partner to work with!

The above may not be a comprehensive list of benefits that a fund could derive from publicizing its anti-portfolio, but these are some key reasons to consider in taking that decision. And needless to say, some of the benefits discussed above will kick in only if the quality of the anti-portfolio is impressive. These benefits will be even more magnified if the quality of the companies on the “Portfolio” and “Exits” lists of a fund is as good as or better than those on the anti-portfolio.

I’ll end by humbly suggesting to many of the successful PE/VC firms out there – if you’ve got an impressive anti-portfolio, just flaunt it!


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The Anti-Portfolio — If You Got It, Flaunt It

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