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March 11, 2007

"The Loser's Curse"

Fred Wilson has an interesting post on how a VC who has lost money on a company will never again invest in the sector even though things might work out differently in a new investment (due to the latest market dynamics, a different management, etc.).
The loser's curse is when you fail at something so badly that you never want to try it again even if there are other and better ways to do it that may result in a better outcome.

...At Flatiron we backed a company called Smallworld Sports which was one of the leading fantasy sports services in 1999. The year before we invested they had done something like a million in revenue and made money. We invested a lot of money in them, I can't remember exactly how much but it was between $5mm and $10mm. The year after we invested, they did about the same amount of revenue and lost well over $5mm. Venture capital killed that company and it was sold for pennies on the diollar to The Sporting News.

Never again.

I realize that times have changed. Games and sports on the web are bigger than ever. Social networking brings an important new component to the fantasy sports equation. A different management team and business model might make a big difference.
Arun Natarajan is the Founder & CEO of Venture Intelligence, the leading provider of information and networking services to the private equity and venture capital ecosystem in India. View free samples of Venture Intelligence newsletters and reports.