Many years ago I was debating whether or not to finish my PhD dissertation. One of the people I talked to about this decision was Prof. Thomas Malone, whose office was next to the oversized closet that I shared with one other graduate student. I brought up the sunk cost fallacy and Tom looked deeply at me before saying something to the following effect: “When evaluating life choices don’t treat them on the basis of financial principles. Your time and effort are something deeply personal and not like fungible dollars.” This really stuck with me (thank you, Tom).
Years later, I am reminded of this conversation as I watched a video on quitting that also mentions the sunk cost principle as if it should be applied to life decisions. What then is a better way to make these choices? One talk that I have referred a lot of people to is by the philosopher Ruth Chang and it is called “How to make hard choices.” I highly recommend watching it in its entirety but the upshot is that we should see ourselves as the authors of our lives and ask what do we want this chapter to read like. This turns out to be a powerful framing and one I have applied repeatedly myself.
Now more recently I have heard a lot of investors bring up the sunk cost fallacy when it comes to backing startups. There is of course an old adage in venture “Don’t throw good money after bad” which captures this idea. And in the current crazy hot market it seems more apt than ever. Why back something that isn’t working, if you can put that money into the next rocket ship? 100x and even larger returns seem to be everywhere and $1 million to back a struggling company could turn into a fund returner elsewhere instead.
And yes at USV too, we want each company or crypto project to have the potential to be a fund returner. But does that mean we shouldn’t support struggling companies?
I believe here too there is a responsibility that extends beyond the idea of making the most money for LPs (and by extension for oneself). Startups should not be treated as disposable. Especially ones that have been years in the making and have real products and real revenues.
Why is that? Because here too we are authoring lives and not just our own but also those of others. Anyone who has ever worked on a company is impacted when that company goes under. What they have in many cases worked on hard all of a sudden seizes to exist. A write-off isn’t just some bookkeeping entry. It is also the text at the end of a chapter of people’s lives.
Does that mean investors should never let a company die? Of course not. Some companies simply don’t work. And at that point it is better not just for investors but also for the current team to find more promising alternatives.
Treating startups as disposable though is callous at best and despicable at worst. It is part and parcel of the same thinking behind Milton Friedman’s awful NY Times piece from 1970 that so neatly excuses the excesses of financialized capitalism: The Social Responsibility of Business Is to Increase Its Profits.
It the same impoverished view of responsibility that drives VCs who simply walk away from companies. True leaders and committed investors understand that their responsibility extends beyond profits. That it includes, among other things, care for all those humans who have contributed their time (the most valuable thing we all have) to the effort.
Startups are not disposable.
