When PayPal Holdings Inc. announced last month it was buying online shopping and rewards tool Honey Science Corp. for US$4-billion – its largest acquisition to date – venture capitalist Boris Wertz couldn’t help but wince.
Mr. Wertz’s Vancouver-based Version One Ventures had a chance to invest in Honey’s US$500,000 financing round in 2015 but, at the time, Honey’s US$12-million valuation seemed a bit high.
“We loved the founders, but didn’t have much conviction around the scalability of a browser plug-in and the fact that this was a bridge round,” Mr. Wertz said in a recent blog post.
While the missed opportunity is painful in hindsight, Version One saw it as a good opportunity to launch its “anti-portfolio,” a list of early-stage investment opportunities it passed on over the years but are now valued at more than $1-billion.
The list includes companies such as Canadian technology darling Shopify Inc., e-commerce mattress company Casper and social media platform Hootsuite Media Inc., alongside a few others.
The act of humility goes against the celebratory culture of venture capitalists when their startups become unicorns (surpassing a $1-billion valuation) or are acquired or go public – netting them huge returns.
Instead, Mr. Wertz wanted to show the darker, more humbling side of venture capitalism.
“The reality is that it’s driven by a lot of luck, a lot of randomness and we make a lot of wrong decisions,” says Mr. Wertz, whose firm has invested in more than 50 companies over the past decade, but passed on hundreds of others – with some huge regrets as noted in the anti-portfolio post. “Even if we’re doing really well [with other companies], we made a lot of mistakes.”
The anti-portfolio idea was started in 1999 by David Cowan, managing partner at Redwood City, Calif.-based Bessemer Venture Partners, one of the oldest venture capital firms in the United States.
Bessemer’s anti-portfolio, which is refreshed every year or two, includes misses such as investing in Apple Inc. before its initial public offering when it was valued at US$60-million, or in Airbnb Inc. when it was valued at about US$40-million.
Bessemer’s anti-portfolio also describes how Mr. Cowan passed on an opportunity to meet Google co-founders Larry Page and Sergey Brin when they were Stanford University students writing a search engine in a friend’s garage in 1999 and 2000.
The initial idea was to list companies the firm invested in that failed, not just those that were successful. “But then we realized that would be kind of mean,” Mr. Cowan says, not to mention it would inadvertently implicate other investors who may not want to go public with the information.
Instead, Mr. Cowan decided to make it about startups they didn’t invest in. Some of his partners didn’t love the idea at first, but the strategy has wound up luring entrepreneurs to the firm who are attracted by the openness and honesty behind the anti-portfolio.
While attracting startups is an anti-portfolio benefit, Mr. Cowan also likes that it shows entrepreneurs not to be discouraged by rejection.
“If we say no to you, that doesn’t mean your business won’t work,” Mr. Cowan says. “We say no 99 per cent of the time.”
For Bessemer, publishing the misses also makes the firm more accountable in its investment process and sharpens its focus.
“It makes us much more pro-active,” he says. “It used to be that we’d just talk about the investments we make. Now, when we review our performance, we do talk about the misses. … What’s the likelihood that it could end up in our anti-portfolio?”
Mr. Wertz of Version One says he hopes the transparency of the anti-portfolio can serve as inspiration for entrepreneurs who are constantly having their ideas rejected.
“It’s a nice way to tell entrepreneurs that investors get it wrong all of the time,” says Mr. Wertz, a former entrepreneur whose JustBooks online marketplace for used and out-of-print books was sold in 2001 to AbeBooks.com, a company then sold to Amazon.com Inc. in 2008. “I understand that 39 nos isn’t great but, in the end, you only need one person to believe in you."
Another company Version One passed on was San Francisco-based short-term rentals business Sonder Corp., formerly known as Flatbook until 2016, which this past summer announced a US$225-million series D financing round with a valuation exceeding US$1-billion. Mr. Wertz says his company met with Sonder’s co-founder and chief executive Francis Davidson many times between 2014 and 2016.
“We passed on the opportunity to invest every single time as we were too hung up on their dependency on Airbnb for distribution,” the Version One anti-portfolio post says.
Mr. Davidson isn’t holding any grudges though and has “huge respect” for investors who speak publicly and honestly about why they passed on certain startups.
“It reinforces the idea that if a really great investor passes, it’s by no means an indication that your business won’t succeed,” says Mr. Davidson, who grew up in Gatineau and founded the company while studying at McGill University in Montreal.
“It’s never fun to get a no, especially from investors you think are great,” Mr. Davidson says, adding there are fewer rejections as a startup gets more successful and its valuation increases. “It’s just the normal process of fundraising. … It helps to inform us of what the strategy is going forward.”