Post-mortem Investment Litmus Test: “Imagine yourself back to when you had to make the investment decision, with the information you had at that time, would you still make that investment again?”
If the answer is yes, stand your ground on the investment thesis as long as: a) the reason that it went sour was for a foreseen risk and accepted at the time, b) it was an unknown unknown.
If the answer is no, recognize what specifically in the investment thesis was flawed: a) the reason that it went sour was a foreseen risk but it was either disregarded or undermined, b) it was a known unknown.
Quantum Investment Thesis: Always have a robust set of reasons backing a “yes” and backing a “no” (simultaneously), and always be questioning yourself if you are weighting them appropriately.
IP Credit: Quantum Thought from Nick Szabo
Falsifiable Investment Hypothesis: Make your investment thesis scientific by making sure your investment thesis is falsifiable. If it is not falsifiable you will be condemned to confirmatory bias, sunk cost fallacy, loss aversion or some other behavioral bias that will always lead you to invest (independently of the investment thesis).
The best way to assure a falsifiable investment thesis/hypothesis is to ask yourself the question:
“What would you need to see in order to change your mind?”
If the answer is “nothing”, then you do not have a falsifiable investment thesis.
If the answer is X, Y or Z, then constantly check on those variables (with quantum thought) to ensure your investment thesis still holds. If not, drop it.
Use in case of emergency: When you structure in a “life vest”, use it when the boat is sinking. Using Conditions Precedent for deploying equity is a life vest rationally installed, when those CPs are not met do not forego or waive using the life vest, emotion (the fear/shame of saying no, overoptimism, etc.) cannot overcome the rationality of using a life vest. You may go against the business, management and/or other stakeholders, but you will properly use the risk mitigating tool you structured into the investment.
Avoid Perpetual Commitments: Don’t give someone infinite time to comply with a condition. When conditioning an investment/disbursement to a CP (e.g. repay or renegotiate current outstanding debt) close the loop by setting up time limits to the CP or disbursement (e.g. up until maturity of the debt or before some date). Otherwise you could be “infinitely” committed to investing/disbursing subject to the company complying with the CP far in the future (e.g. debt matures, but they might be able go renegotiate the defaulted debt at a later date).
Calls are Debt: Calls options held by investors with the company as counter party should be considered debt for valuation purposes. Independently of the options being in or out of the money, the company has an obligation towards those investors that will require either cash or debt to make payment.
“Some people just want to watch to world burn”: Investors are many time driven by non-economical variables, thus it is critical to not under estimate the power of these other variables.
A bad history between investors, between management and investors, or between any other set of stakeholders will never be forgotten. This becomes ever more relevant when a new disagreement appears between stakeholders with a bad history, as there is no reason why the stakeholders would behave as if the bad history did not exist.
You are not the exception: If a stakeholder (investor, founder, management, etc.) has behaved in a certain manner with an investor, rest assure they will behave in the same way with at least the same intensity with you as they did with them. There should never be a reason to believe you are the exception. On the contrary, always assume you are not the exception and that you will get the “lowest common denominator”, meaning that you will likely be treated like the lowest treated investor during some point of your holding period.
