Know when to hold

A couple of days ago I had a catch-up coffee with a VC friend of mine and he was filling me in on what was happening with his VC firm (one of those small, boutique funds) and their portfolio companies. I knew two of the companies and their founders quite well. One is still in play, with the support of the VC firm, and has become cash-flow positive, though they're yet to take off. The other, inspite of having decent revenue at some point, just couldn't prove a convincing future, and was shut down, another casualty of the dotcom bust.

But the more interesting stories were about the companies that the VCs had given up on, the ones they thought had no future, but the founder CEOs thought otherwise. They were basically given up for dead, but the entrepreneurs did not fold. Somehow they held on, revamped, restructured, did whatever they could to reel in customers and flourish.

This was the question my VC friend posed - how do you know which one would survive? How do you know when to hold? There is no formula for this. It's not just the financial projections, which can be just proof that the management knows which rows and columns show up on the spreadsheet. It's not just the product or the market, which probably need finessing since the company's survival is under doubt. I do believe it has a lot to do with the founder. As Paul Graham says in his Startup Lessons, it is more important to have a founder with determination than one who's super smart. And yes, there's a difference between determination and bull-headedness. Not having been on the other side of the table I don't know what the VC sees, but from my side, it is a very subjective call. If the entrepreneur has passion and commitment, it shows. You need the opposite of the poker face here: you need to see it in the gestures and hear it in the voice, not just go by the words. You need the body language that shows that this entrepreneur is going to make it work. That's how you know when to hold.