Doubling down on your winners is one of the most important rules in venture.
In fact, it might be just as important as picking the right investments in the first place.
For every dollar we invest, we reserve a dollar to invest in companies as they scale. We don’t always follow on, but if a company is performing well (and communicating well), we will often continue to invest in 4 or 5, or even more, subsequent rounds over a ten year period. That follow-on capital can be just as important to overall fund returns as the initial investment. So you really want to use it wisely.
Yesterday, we announced our lead investment in Phaidra’s $60M Series B. This is the largest check I’ve ever been responsible for. Normally that would result in many sleepless nights; but I believe Phaidra is a winner and so it wasn’t a hard check to write. Since we initially invested in 2022, I have seen the team build new products at a shocking velocity, close marquee customer accounts including NVIDIA, and expand a worldclass team.
In the words of Fred Wilson, “I think the proper allocation of follow on capital into the portfolio and making sure you can follow your winners and defend your position in certain situations is absolutely critical to producing top tier returns.”
Despite the crazy growth numbers we are all seeing in headlines these days, the truth is, it’s very hard to know which companies are going to be “winners” for a long time. Many that break away from the pack early struggle to maintain momentum. And there are plenty of examples of companies with slow starts that turned into household names.
So, for me, identifying the companies to double down in comes down to three things:
Execution: Is the team executing to plan? Do they ship with high velocity? How quickly do they adjust to market conditions?
Commercial progress: Revenue isn’t always the golden metric. Is there evidence customers want to buy what the company is selling? And continue to buy it?
Communication: Is communication clear, transparent, and consistent? This is one metric that we emphasize a lot at Collaborative Fund.
This idea of doubling down in your winners is more important than ever. We are seeing megafunds do this on steroids. Today, the same fund might lead a Series A, Series B, and even beyond.
But you really have to be confident you’re backing the right company to do this. If you double or triple down on a company that doesn’t succeed, you can quickly waste a lot of capital that could have been used on more promising companies. Take, for example, a16z leading the Series A, Series B, and Series C of Clubhouse in 2020-2022 (a company that never found sustainable growth beyond its pandemic spike).
The truth is, it’s not enough to pick the winners. You have to keep betting on them, again and again. That’s how outsized outcomes are made.
I like this idea and the framework. It would be interesting to see more about how Phaidra hit these three areas for you to know it’s a winner to double down on, and how Clubhouse may have not have. I also wonder where it might apply outside the world of investing