Passing on a Great Deal Sucks

This week has been a painful one for me from an investment perspective. I had to pass on more than one company that I “know” will be extremely good. Intangible reasons, unquantifiable measurements, incongruent comparisons and divergent opinions litter the trail to the final decision. In the end, it is a simple yes or no.

The Process
At Blumberg Capital, we make decisions as a team. It doesn’t mean that we always have unanimous agreement, but we generally have enthusiastic support from at least part of the team, and acceptance from the rest of the team. When we have everyone lined up behind a deal, that either means we have found something special, or we have a bad case of groupthink. Some level of disagreement or hesitancy is by far the most common scenario, and I have to say that some of our best companies did not have unanimous support at the time of decision. The consensus-driven decision making process has pros and cons, but generally, if you have the right people in the room, it should yield good decisions more often than bad ones.

How Do I “Know” the Company Will Be Great?
Of course, I don’t know for sure that a company will be great. They say that this is a pattern recognition business, and there is at least some truth in that– you will know for sure if I am good at choosing companies in about 10 years. Hopefully a bit sooner if I outperform :-). That said, there are times when the writing is on the wall, the patterns obvious, and the main question is how big can the company become. In a particular case this week, one of the companies is the early market leader in its territory, scaling much faster than the next player, and there isn’t much competition yet. There is operational history demonstrating that this team knows how to build a very sound company. But, it is all relative...

If I KNOW the Company Will Be Success, Why am I Stupid Enough to Pass?
There isn’t a great answer to this question except to say that our decisions are based on making estimates several years out. Not easy. We attempt to understand market evolution, assess company execution, estimate competitive forces, determine capital needs and the ability to raise capital, and project dilution and ultimately exit. Boil it all down to “yes” or “no.” Sometimes there are “maybe” or “wait and see” decisions, but I will cover those in a separate post. Inexact science. We compare apples to oranges, and hope to yield the best fruit crop we can for our investors. Sometimes we get orchards, and sometimes lemons.

Opportunity Costs
The most difficult decisions are between companies where we are quite convinced they will be successful. We have limited capital and team bandwidth, so we simply can’t invest in every company that we believe will be successful. We are trying to determine which will be MORE successful, and will generate the best returns for our investors. And, there are times when we are looking at several companies that we really like, and we simply can’t invest in all of them. This has been one of those weeks. It is a champagne problem as an investor to be choosing between companies we believe will all be very successful, but sometimes the champagne tastes bad.