Why some corporate leaders continue to invest in losing ventures

Jan. 30, 2 p.m.

I have a long-time friend. He is facing the classic rock and a hard place. Fume date is on the near horizon, and it is likely that the company he is heavily invested in both emotionally and financially is going to die.

I asked him quietly what he thought he might learn from this misadventure. He presciently said, “I stayed with it too long. In too deep, over-extended, too much money, maybe more oversight of the CEO.” He is a smart guy. Why was he blinded? Why did he continue too long toward the dead end?


Wharton professor Marius Guenzel has written on this subject, and he says that many corporate leaders continue to invest in losing ventures, hoping they can turn a profit. “Firms systematically fail to ignore sunk costs and this leads to significant distortions in investment decisions,” he writes. We’ve come this far, it’s right around the next corner. Meanwhile, Waze shows a cliff just around that next corner.

It is in our human nature to not want to give up, throw in the towel, head for the exits, be a loser and a failure. That can put you into therapy, for sure.

Guenzel says, “People tend to stay committed to ventures in which they have invested substantial resources” in direct contradiction to the adage about throwing good money after bad. Resources are as much emotional and psychological as they are financial.

If one feels personally defined by a project or a company or a relationship, then it is our nature to be very reluctant to give it up. You act in a way that attempts to justify the decisions you made in the past. You don’t just blithely get divorced over a burned hamburger. (Eating out more often might save that marriage).

Guenzel’s research paper is deep in the weeds of “floating exchange ratios” and the worlds of mergers and acquisitions. I focused on the problem because I see it frequently in my CEO coaching. The baseline is simple; the leadership team of
any company needs a board of directors or a mentor — who is not invested in the project, who sees it with fresh eyes and brings no baggage or history or preconceived notion to the dilemma, who was not responsible for the decision in the first place.

In the end, unfortunately, we are influenced by what we think others will say about us. It is hard to let go of an image, of who you are or how you are perceived, and admitting a failure is hard to do.

But not so fast. What about the infamous pivot? Should you bag it and call it a day, take the loss and move on, or should you shift 40 degrees, raise a little more money if you can and roll the dice again with what you have learned?

The technology landscape is littered with success stories that pulled rabbits out the hat at the last minute. It is part of what we love about sports, no time left on the clock, the Hail Mary. It’s why if you go to the parking lot to avoid the traffic, you might well miss the game winner.

There is a rule in one of my books, rule No. 3. This rule says you have to go to all the meetings, all the events, all the Zoom calls, in particular the ones that you are sure will be a total waste of time.

I recently had a scheduled Zoom call with an old friend. There was no possible way that he could help our little company. It was a courtesy at best and I figured less than 15 minutes.

Well, it was only 10 minutes, but not only did he understand the deal, but he also happened to be best friends with the one absolutely perfect fellow that we needed to meet, and whom we had no way to get to. He was delighted to call him up for us.

Feb. 7, 4 p.m.

That same friend in paragraph one calls me up. Turns out he found an investor, did some dancing, did a re-cap, and lo and behold, the proverbial rabbit showed up in the hat, right on time, just like it always does in fairy tales.

Rule No. 749: There is still time on the clock.

Senturia is a serial entrepreneur who invests in early stage technology companies. Please email ideas to Neil at neil@blackbirdv.com.