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The Full Ratchet

Investor Stories 458: Anti Portfolio Lessons: Netflix by Mail, Palantir at the Wrong Price, and the Cost of Price Sensitivity (Madera, Bussgang, Orlovski)

9 min episode · 2 min read
·

Episode

9 min

Read time

2 min

Topics

Investing, Startups, Fundraising & VC

AI-Generated Summary

Key Takeaways

  • Price sensitivity kills returns: Madera passed on Palantir four separate times as the company grew from one to two million in revenue because the valuation seemed too high each time, missing what became the highest multiple software company in the market today, demonstrating how price concerns at early stages can eliminate generational investment opportunities.
  • Geographic disadvantage in competitive deals: Flybridge issued a term sheet for Veeva and was told Friday they won the deal, but by Monday lost to Emergence Capital because the company was Valley-based while Flybridge operated from Boston and New York, showing how location creates structural disadvantages when competing for hot deals in concentrated startup ecosystems.
  • Document rejections more thoroughly than acceptances: Orlovsky writes five to six pages of notes when making an investment but ten to fifteen pages when passing, then reviews these rejection notes when companies succeed to identify systematic blind spots in his decision-making process, creating a feedback loop that improves future investment judgment over time.
  • Assess founders not product feasibility: An experienced fintech investor passed on Chime's seed round despite the founding team's track record with Green Dot because he evaluated whether he personally would build that product rather than trusting the team's vision, illustrating how investors substituting their own judgment for founder conviction leads to missing breakthrough companies in early stages.

What It Covers

Three venture capitalists share their anti-portfolio stories: Paul Madera passing on Netflix when it was DVDs by mail and Palantir four times due to price concerns, Jeff Bussgang losing Veeva after winning the term sheet, and Viktor Orlovsky's framework for analyzing missed investments.

Key Questions Answered

  • Price sensitivity kills returns: Madera passed on Palantir four separate times as the company grew from one to two million in revenue because the valuation seemed too high each time, missing what became the highest multiple software company in the market today, demonstrating how price concerns at early stages can eliminate generational investment opportunities.
  • Geographic disadvantage in competitive deals: Flybridge issued a term sheet for Veeva and was told Friday they won the deal, but by Monday lost to Emergence Capital because the company was Valley-based while Flybridge operated from Boston and New York, showing how location creates structural disadvantages when competing for hot deals in concentrated startup ecosystems.
  • Document rejections more thoroughly than acceptances: Orlovsky writes five to six pages of notes when making an investment but ten to fifteen pages when passing, then reviews these rejection notes when companies succeed to identify systematic blind spots in his decision-making process, creating a feedback loop that improves future investment judgment over time.
  • Assess founders not product feasibility: An experienced fintech investor passed on Chime's seed round despite the founding team's track record with Green Dot because he evaluated whether he personally would build that product rather than trusting the team's vision, illustrating how investors substituting their own judgment for founder conviction leads to missing breakthrough companies in early stages.

Notable Moment

Marc Andreessen told Orlovsky that losing invested capital on failed startups causes no regret because venture is high-risk by nature, but reading about a company going public at one hundred billion dollars that you passed on ten years earlier creates genuine pain for investors.

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Episode Transcript

Today's episode of TFR is brought to you by .techdomains. The right .com is usually taken, and adding extra words weakens your signal. I see thousands of decks every year, and a clean domain still matters. That's why founders choose .tech. It's simple, modern, and sends the right signal. Secure your .tech domain early. And this episode of TFR is brought to you by the American Arbitration Association, where smart startups and investors turn for fast, efficient, and cost effective dispute resolution. Visit adr.org/tfr to learn more. Now here's the episode. Welcome to the podcast about venture capital, where investors and founders alike can learn how VCs make decisions and reach conviction. Your host is Nick Moran, and this is the full ratchet. Welcome back to TFR. On today's special segment, we ask guests to discuss their anti portfolio, a startup investment that they passed on. Here's the segment called why I passed. On today's special segment, we have Paul Madera, cofounder and general partner at Meritec. Paul, can you tell us a story about a startup that you passed on? Certainly. Netflix is one that I passed on. I know. And my wife likes to remind me of that one frequently. But in my defense, when we did first look at them Palantir is another one, by the way. When when we first look at Netflix, it really was blockbuster by mail, CDs, DVDs by mail. And there wasn't really great feedback as to how renewable this service was. I mean, intuitively, we thought it was, but it wasn't there wasn't really a lot of data to look at. The Palantir story is probably a little bit better. Peter Thiel introduced me to, Alex Karp, CEO of Ballantir, early on, and they had 1 to 2,000,000 of revenue. And I remember talking to Alex and thinking, you know, it's a pretty cool idea, but, you know, who knows how big that could be and whether or not people really buy it. No, thank you. We looked at it again three more times. Oh. And passed every three times because the price seemed out of line with where it was. And, and, and yes, I really do regret missing the highest multiple software company that exists in the market today. Brutal. Was the services and the labor component on Palantir, was that a hesitation or was it more just the price? It was more the price. At the time, you know, we didn't actually get into it enough to understand the mix of service and so forth. And it was largely military focused. It wasn't really in the commercial world at the time. And, and by the way, you know, Collins here had to sue the US army in order to get traction within the government at the rate that it should have, which is another reminder for all of us, just sometimes the DOD can't make the decisions that are best for it. On today's special segment, we have …

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