Once I was driving to meet a venture capitalist for lunch when I got a call on my cell phone. While I was flapping my gums, I missed my turnoff. When I finally re-focused, I realized I had been driving down the wrong road for 20 minutes. Doh!
These days, venture capitalists are under so much pressure that it’s easy for them to lose focus of their primary objective: building great companies. Faced with a portfolio that’s bleeding red ink, it’s understandable that a VC might resort to filing a lawsuit over a washout or failed investment. But, as the sage venture capitalist Reid Dennis says in this month’s cover story (page 22,) suing should be a last resort for venture capitalists. “It has always been much more profitable to go and find the next investment than try and find money filing a lawsuit,” he says.
Too simplistic? I don’t think so. Is it really worth your time to sue another investor over the loss of $10 million? Say you’re in the right and you get your $10 million back plus another couple million in punitive damages. That’s pretty good. But what if you spent the same amount of time and money on a new deal that returns 10 times your investment? There’s no question about which scenario your LPs would prefer to see.
It’s often said that litigation costs more than just attorneys’ fees, but no one has been able to quantify what’s lost from “what could have been.” I don’t think that makes the argument any less valid. Anecdotal evidence is pretty convincing. Take the baseball player who gets caught up in a messy lawsuit. I can’t recall a situation where a guy actually started playing better when he was involved in litigation. It stands to reason that no matter how hard you try to focus, your performance is going to suffer because you’re distracted. And when a VC’s performance suffers it has long and lasting ripple effects.