The Winding Down of Venture Investments

A certain percentage of companies that venture funds back fail.  Everyone knows this.  Depending on their investment strategy and success, funds lose most of their capital on 25% to 50% of portfolio companies.  Of these, some percent are sold for very little value, but the sale provides a home for the technology, the customers, and often the team and creates a mechanism to take care of creditors and venture lenders.  Of course that soft landing isn’t always possible, as there are some companies that just can’t be sold for any price close to what it would take to address liabilities.

We often sit on the board of directors of our portfolio companies and in that capacity, we have a legal obligation to ensure that employee liabilities are covered.  Salary, accrued vacation, payroll taxes, and, depending on the state, contractual severance are all obligations of the board that ultimately fall on the individual board members personally if the company cannot make payment.  We take these obligations seriously and ensure that there is enough cash to take care of these costs – or we fund this liability.

We work hard with our CEOs to avoid bankruptcy and have been successful as a fund to date.  We guide our management teams to try to negotiate down other creditors to fair payment levels that reflect the state of the business and the fact that often these creditors may have made a decent profit over the life of the relationship.  As board directors, our obligation to these creditors is limited so long as we have not been self-dealing in our role.  As venture investors it is a bit different.  We could walk away as we have no obligation to fund additional dollars into any business, but most often we do not.  We have relationships with the same venture lenders and lawyers and accounting firms and consultants and outsourced developers and marketing firms across many of our portfolio companies.  If we have no regard for them in this investment, will they work with our other portfolio companies as they have, or will it cost us and our portfolio reputationally and economically?  We believe the latter is more likely and thus must think with a long term view, leading us to work to minimize the wind down cost but to treat creditors fairly. 

This whole process is easier when you invest with like-minded investors.  We recently went through a wind-down with two institutional co-investors who funded alongside us on a pro-rata basis.  The larger of these investors is in other deals with us and several are doing quite well.  It is nice to know that if tough decisions need to be made, that they will likely be aligned with us.

It is easy to be an investor when things are smooth and there is little conflict or challenge.  It is harder when things do not go as planned, but that is where reputations are made – both good and bad.  When founders at new potential investments ask us for references, I have them speak to CEOs whose companies are soaring and CEOs who have not succeeded or who have been greatly challenged.  They should hear how we react in bad times and what we do to help.  Osage Venture Partners is committed to making a soft-landing where possible.  It is good for the team, it is good for creditors and partners, and last, we believe it is good for our investors.  The venture and entrepreneurial communities are small, and memories are long.