Everyone loves to talk about their wins. The 100x returns, the early bet on a unicorn, the portfolio that looks like a highlight reel. It’s good for the brand. But today, I want to talk about a loss. A big one. I once lit $100,000 on fire in a secondary market deal that went completely sideways. It was a stupid, painful, and incredibly valuable lesson that shaped my entire approach to venture capital.
Before I ever angel invested in companies like Anthropic or Scale AI, I was just another guy in Silicon Valley trying to make a name for myself. I’d had a couple of successful exits with my own companies, so I had some capital to play with. I thought I was smart. The market, however, has a way of humbling you.
The Seduction of the
It was a few years back. A hot pre-IPO company, let’s call them “ConnectSphere,” was the talk of the town. They were in the enterprise social networking space, a hot market at the time, and their growth numbers looked phenomenal. Everyone wanted a piece of it. The problem? They weren’t raising a new round. The only way in was through the secondary market—buying shares from existing employees or early investors.
I got a call from a broker I knew. An early employee at ConnectSphere was looking to sell a small chunk of their vested shares. The price was high, valuing the company at a few billion dollars, but it was still a discount to what everyone expected the IPO price to be. It felt like a sure thing. An easy win. I’d get in, the company would IPO within a year, and I’d make a quick 2-3x. What could go wrong?
Famous last words.
Where I Screwed Up: The Siren Song of Hype
My mistake wasn’t just one thing. It was a cascade of them, all stemming from a single, fatal flaw: I got caught up in the hype. I wanted to be in the deal so badly that I ignored all the red flags.
First, I didn’t do my own diligence on the company. I relied on the broker’s word and the public perception of the company. I read the same tech news articles everyone else was reading and assumed it was all true. I didn’t dig into the financials. I didn’t try to understand the competitive landscape. I just saw a rocket ship and wanted a ticket.
Second, and this is the big one, I completely misunderstood the cap table and the share structure. The shares I was buying were common shares, not preferred shares. That meant they had fewer protections. But the real kicker was a little detail buried in the company’s financing documents: a Right of First Refusal (ROFR). Most startups have this. It gives the company or its existing investors the right to buy the shares at the same price before they can be sold to an outsider. Usually, it’s not a big deal. But ConnectSphere’s ROFR was unusually aggressive.
I put in my $100,000. The deal was papered. I thought I was in. For a few weeks, I was pretty pleased with myself. I was an investor in one of the hottest companies in the Valley.
Then the email landed in my inbox.
ConnectSphere was exercising its ROFR. A big, institutional investor who was already on their cap table had decided they wanted my shares. And they had the right to take them. Just like that, my deal was dead. I got my $100,000 back, but I had lost months of time and a serious chunk of my pride. But the story doesn't end there. The real loss came later.
The Aftermath and the Real Cost
Six months later, ConnectSphere’s growth stalled. The market turned, a competitor ate their lunch, and the much-hyped IPO never happened. The company ended up being acquired for a fraction of its peak valuation in a fire sale. The common shares, the very shares I had tried to buy, were wiped out. They were worth zero.
If the ROFR hadn't been exercised, I would have lost my entire $100,000. The institutional investor who took my spot? They lost it instead. I dodged a bullet, but not because I was smart. I got lucky. And that’s a terrible way to invest.
The experience was a brutal wake-up call. It taught me that in venture, the fear of missing out (FOMO) is your worst enemy. It clouds your judgment and makes you do stupid things. It makes you chase hype instead of substance.
The Lesson: Price is Temporary, Quality is Permanent
Here’s the single most important thing I learned from that expensive mistake: focus on the quality of the company, not the perceived quality of the deal. A cheap price on a bad company is still a bad investment. A high price on a truly great company can still be a bargain.
After that, I changed my entire approach. I stopped chasing secondary deals in overhyped companies. I started focusing on early-stage investing, where I could get in on the ground floor of companies I truly believed in. I started spending my time on deep diligence, not on chasing rumors.
I built a framework for myself. I only invest in founders I know and respect. I need to see a clear, defensible moat. I need to understand the market and the technology inside and out. And I never, ever invest in something just because everyone else is.
This is the approach that led me to invest in companies like OpenAI, Hugging Face, and Anthropic. These weren’t quick flips. They were long-term bets on transformational companies. And they were based on conviction, not hype.
How to Avoid My $100,000 Mistake
So, how can you avoid learning this lesson the hard way? Here are a few rules I now live by:
- Ignore the Hype: If it’s in the headlines, you’re probably too late. The best deals are the ones no one is talking about yet.
- Do Your Own Work: Never trust a broker. Never trust a news article. Dig in and do your own diligence. Talk to customers. Talk to experts. Build your own conviction.
- Understand the Terms: Read the documents. All of them. Understand the cap table, the share structure, the ROFR, the drag-along rights. If you don’t understand it, don’t invest.
- Focus on the Founder: In the early stages, you’re betting on the founder more than anything else. Are they a visionary? Can they execute? Do they have the grit to see it through?
Losing that $100,000 was one of the best things that ever happened to my investment career. It was a painful, expensive, and necessary education. It taught me that there are no shortcuts in this business. You have to do the work. You have to have a thesis. And you have to have the discipline to stick to it, even when everyone else is chasing the next shiny object.
Don’t let FOMO drive your investment decisions. It’s a fast road to an empty bank account. Instead, focus on quality, do your homework, and play the long game. That’s how you win in venture. Not by chasing hype, but by building real, lasting value.
The Psychology of a Bad Deal
It's easy to look back and see the mistakes. It's much harder to see them when you're in the thick of it. The pressure in Silicon Valley to be in the hot deals is immense. Your friends are getting in, Twitter is buzzing, and every signal tells you that you're going to be left behind. This creates a powerful cognitive bias. You start to see what you want to see. You filter out negative information and amplify the positive. You're not making a rational decision; you're making an emotional one.
In my case, I was so focused on the potential upside that I completely ignored the structural risks of the deal. The fact that it was a secondary sale should have been a warning sign in itself. Why was this employee so eager to sell? If the company was really on a rocket ship trajectory, wouldn't they want to hold on for the IPO? I didn't ask those questions. I didn't want to know the answers.
This is a classic case of confirmation bias. I had a preconceived notion that this was a great investment, and I sought out information that confirmed that belief while ignoring anything that contradicted it. The broker, whose incentive is to close the deal, was happy to feed me all the positive reinforcement I needed. It's a dangerous trap, and one that even experienced investors can fall into.
The Power of Your Network
Another crucial lesson from this experience was the importance of having a trusted network. At the time, I was still relatively new to angel investing. I had a network from my time as a founder, but I hadn't yet built a deep network of fellow investors I could turn to for advice. If I had, I might have been able to get a second opinion on the deal. Someone with more experience in secondary markets might have been able to point out the risks I was missing.
Today, my network is one of my most valuable assets. I have a group of fellow investors I talk to regularly. We share deal flow, we debate valuations, and we act as a sounding board for each other. We're not afraid to tell each other when we think an idea is crazy. This kind of honest feedback is invaluable. It's the best antidote to the echo chamber of hype.
Building this network takes time. It's not about just collecting LinkedIn connections. It's about building real relationships based on trust and mutual respect. It's about finding people who are smarter than you in areas where you're weak. It's about creating a community where you can learn from each other's successes and, more importantly, from each other's failures.
Final Thoughts: Scars Make You Stronger
Losing money is never fun. But in venture, your losses are often more educational than your wins. They're what teach you the hard lessons. They're what force you to refine your process and sharpen your thinking. That $100,000 loss was my tuition in the school of hard knocks. It was an expensive lesson, but it paid for itself many times over in the long run.
So don't be afraid of your losses. Don't hide them. Talk about them. Learn from them. Every scar is a story, and every story is a lesson. The goal isn't to never make a mistake. The goal is to never make the same mistake twice. The market will always find new and creative ways to humble you. The key is to get a little bit smarter every time it does.
Frequently Asked Questions
Do all experts agree with this view?
No, and that's fine. The best ideas in business are often contrarian. I share my perspective based on my experience and data, but I encourage you to seek out opposing viewpoints and form your own conclusions.
What experience informs this perspective?
This perspective comes from over a decade of building companies in Silicon Valley, two successful exits (RemoteTeam to Gusto, MovieLaLa to Gfycat), and investing in 200+ startups including Anthropic, OpenAI, and Scale AI. I write about what I've lived.
How has this view evolved over time?
My thinking on most topics has changed significantly over the years. Early in my career, I held many conventional views that experience proved wrong. I try to update my beliefs when the evidence changes.