Advertisement

April 22, 2014

The Neglected Art of (Timely) Pruning Lemons: Part 1

I don’t know about real lemons, but they say in the venture capital business that investment lemons ripen early.  That is, deals that are going south tend to reach their destination before deals going north reach theirs.  This makes the timely pruning of investment lemons an important venture capital skill; nourishing a rotting lemon on the vine with more capital and more management time is one of the great resource wasters of the venture capital industry.  It’s not much fun for entrepreneurs either.

So why does it happen so much?  Why do so many angel and venture investors, armed with the knowledge that lemons ripen early, have so much trouble lopping them off the investment vine in a timely manner?

The answer is mostly found in human nature (yes, venture capitalists and even entrepreneurs – well, most of them – are human, just like you and me,).  In fact, in some ways venture capitalists are more human, in terms of their nature, than most other humans.  In particular, they share with most entrepreneurs the trait of being “often wrong, but never in doubt.”  They have a hard time looking at an investment they pulled the trigger on and thinking “that was a crummy shot.”  Also as per entrepreneurs, venture capitalists are generally endowed with an extra dollop of ego, which makes it hard for them, even after they inwardly acknowledge making a bad investment, publicly admitting it by pulling the plug on the deal.

Putting my entrepreneur hat on, you might think that having a venture investor that is not very timely about pruning her lemons is not such a bad thing.  Indeed there are examples out there of seemingly rotten investment lemons miraculously returning to the ripe state, and paying off handsomely.  But that is, frankly, rare.  As often as not, when you do the post mortem on one of these phoenix-like deals, what you find is that it wasn’t the original investor and original team that executed and benefited from the turnaround, but rather a Johnny-come-lately investor and entrepreneur team that salvaged the deal.  Which suggests that, as often as not, the original investor and the initial founders would have done just as well to walk away as to stay in the game only to be, in the investor’s case, washed out, and in the entrepreneur’s case, washed out and redeployed.

The bottom line for venture capitalist and entrepreneur alike is that timely identification, and timely pruning of investment lemons is one of the more important venture investing and entrepreneurial skills.  Cutting losses – avoiding throwing good money and talent after bad – is absolutely critical if you want to succeed in businesses like venture capital and high impact entrepreneurship, where capital and talent are in short supply, and catching the next wave is generally a better strategy than trying to salvage a wave that didn’t turn out to be as good as it first appeared.

Next time, some thoughts on becoming a better lemon pruner.

Read the rest of the series:

The Neglected Art of (Timely) Pruning Lemons: Part 2

© MICHAEL BEST & FRIEDRICH LLP

About the Author

paul a. jones, of counsel, michael best law firm
Of Counsel

Paul Jones is Of Counsel to the Business Practice Group and Co-chair of the Venture BestTM team. Mr. Jones writes a blog found here: http://www.venturebest.com. His practice concentrates on representing emerging technology and life sciences companies in financing and other strategic transactions as well as general corporate matters. He also represents venture capital firms and other investors in emerging technology and other high impact businesses.

608-283-0125

Boost: AJAX core statistics

Legal Disclaimer

You are responsible for reading, understanding and agreeing to the National Law Review's (NLR’s) and the National Law Forum LLC's  Terms of Use and Privacy Policy before using the National Law Review website. The National Law Review is a free to use, no-log in database of legal and business articles. The content and links on www.NatLawReview.com are intended for general information purposes only. Any legal analysis, legislative updates or other content and links should not be construed as legal or professional advice or a substitute for such advice. No attorney-client or confidential relationship is formed by the transmission of information between you and the National Law Review website or any of the law firms, attorneys or other professionals or organizations who include content on the National Law Review website. If you require legal or professional advice, kindly contact an attorney or other suitable professional advisor.  

Some states have laws and ethical rules regarding solicitation and advertisement practices by attorneys and/or other professionals. The National Law Review is not a law firm nor is www.NatLawReview.com  intended to be  a referral service for attorneys and/or other professionals. The NLR does not wish, nor does it intend, to solicit the business of anyone or to refer anyone to an attorney or other professional.  NLR does not answer legal questions nor will we refer you to an attorney or other professional if you request such information from us. 

Under certain state laws the following statements may be required on this website and we have included them in order to be in full compliance with these rules. The choice of a lawyer or other professional is an important decision and should not be based solely upon advertisements. Attorney Advertising Notice: Prior results do not guarantee a similar outcome. Statement in compliance with Texas Rules of Professional Conduct. Unless otherwise noted, attorneys are not certified by the Texas Board of Legal Specialization, nor can NLR attest to the accuracy of any notation of Legal Specialization or other Professional Credentials.

The National Law Review - National Law Forum LLC 4700 Gilbert Ave. Suite 47 #230 Western Springs, IL 60558  Telephone  (708) 357-3317 If you would ike to contact us via email please click here.