I Lost $250,000 on a Bad Deal. Here's the Brutal Lesson I Learned About Follow-on Investing.
I’ve seen a lot in Silicon Valley. I’ve built and sold two companies, one to Gusto and another to Gfycat. I’ve written checks to over 200 startups, including some that have become household names like Anthropic, OpenAI, and Scale AI. People see the wins. They read the headlines about the exits and the unicorn valuations. What they don’t see are the scars. The mistakes. The deals that go south and take a piece of you with them.
Today, I’m going to tell you about one of those scars. A big one. A $250,000 screw-up that taught me more than any of my successes ever could. Everyone wants to tell you how to get 100x returns. No one wants to talk about the times they got a -1x return. We bury our losses, hoping no one will notice. But the truth is, the losses are where the real lessons are. This is the story of how my own ego and a classic venture capital trap cost me a quarter of a million dollars. It’s not pretty, but it’s real. And I’m sharing it so you don’t have to learn this lesson the hard way.
The Seduction of a Perfect Story
It all started with a pitch that was pure magic. The kind that makes the hair on your arms stand up. The founders were brilliant, a perfect blend of technical genius and salesmanship. They had a vision for a market that was not just big, but fundamentally broken and ripe for disruption. Their early traction wasn't just good; it was a vertical line on a graph. I was hooked. Completely.
I remember leaving that first meeting feeling a buzz I hadn’t felt in a long time. This was it. The one. I did my due diligence, of course. I called references. I talked to potential customers. Everything came back glowing. I wrote the first check, a standard seed investment, but in my mind, I was already calculating the multiple on my return. I was so sure, so absolutely convinced this was a can't-miss opportunity, that I broke one of my own rules: I got emotionally invested.
For the first year, my conviction felt like prophecy. The company was on fire. They were hitting every single metric, blowing past their own projections. The team was expanding, they were getting press, and other investors were starting to circle. I’d sit in board meetings feeling like the smartest guy in the room. I had spotted the winner early. I was a kingmaker. I honestly started to believe my own hype.
The Slow Fade to Black
Then, things started to get… quiet. It wasn’t a sudden implosion. It was a slow, creeping rot. The monthly updates, once filled with detailed breakdowns and celebratory GIFs, became sporadic and vague. The numbers, which had been on a tear, suddenly went flat. Then they started to dip. When I’d ask the founders about it, the answers were always plausible, but they had a new, defensive edge to them.
“We’re just hitting a bit of seasonal headwind.”
“The new marketing campaign is taking a little longer to ramp up than we expected.”
I had this nagging feeling in the pit of my stomach. The kind you get when you know you’re being bullshitted, but you can’t quite prove it. But I pushed it down. I wanted to believe the story. I had told everyone this company was the next big thing. My reputation, in my own mind, was on the line. I was too invested, and not just financially. My ego had a massive position in this company.
Then the email landed in my inbox. It was late on a Friday night. The subject line: “Catching up.” The founders were raising a Series A. But it wasn’t the triumphant, up-round I had been expecting. It was a down round. The valuation was a fraction of what we had discussed just six months earlier. And they needed the money. Fast. The follow-on trap was officially set.
The Psychology of the Follow-On Trap
If you’re not in the venture world, “follow-on investing” is just what it sounds like: you invest again in a company you’re already in. When things are going great, it’s how you double down on your winners and drive the big returns. But when a company is struggling, it becomes something else entirely. It becomes a test of discipline over hope. A test I was about to fail spectacularly.
My first thought wasn’t “Is this still a good company?” It was “If I don’t invest, my seed investment is toast.” I was facing the brutal math of dilution. If new money came in at this lower valuation and I didn’t participate, my ownership stake would be crushed into near-irrelevance. The founders knew this. They played on it. They talked about the new investors being “strategic” and how this was the “last little bit of fuel” they needed before taking off.
I was in a psychological vise. On one hand, all the data was telling me to run for the hills. On the other, my ego was screaming at me not to admit defeat. Not to let my first investment go to zero. This is the sunk cost fallacy in its most brutal form. I had already put money in, so I felt like I had to put more money in to protect it. It’s a cognitive bias that has killed more startups and investors than almost any other mistake.
So I did it. I ignored my gut. I ignored the data. I wired them another $250,000. I told myself I was being a supportive, long-term partner. That I was giving them the runway they needed to succeed. But I knew, deep down, I was just buying a lottery ticket. I was hoping. And hope is not an investment strategy.
The Inevitable Crash
It took less than six months for the whole thing to unravel. The new money just disappeared into the ether. The founders, who had been so confident, were suddenly MIA. Then came the final, soul-crushing update. The company was shutting down. All the money was gone.
My initial investment? Vaporized. The $250,000 I had just wired them? Also vaporized. I felt like I had been punched in the gut. It wasn’t just the financial loss, though that stung badly. It was the profound, humiliating feeling of being so utterly wrong. Of letting my own ego and emotions cloud my judgment so completely. I had been played, not just by the founders, but by myself.
Here’s the lesson that cost me a quarter of a million dollars: Your ego is the most dangerous thing in your portfolio. It will make you fall in love with your winners, but more dangerously, it will make you emotionally attached to your losers. It will make you throw good money after bad because you can’t stand the thought of admitting you made a mistake.
My New Rules for Investing
That loss was a painful, expensive, but ultimately transformative education. It forced me to rebuild my entire investment framework from the ground up. It made me a colder, more disciplined, and ultimately, a much better investor. I now live by a few hard and fast rules.
First, and most importantly, is the rule I already mentioned: Before any follow-on investment, I ask myself, “Knowing everything I know today, if I were not already an investor, would I make a first investment in this company at this valuation?” If the answer is anything other than a resounding “hell yes,” I pass. Immediately. No hesitation. This single question cuts through all the emotional baggage and sunk cost bias. It forces you to re-evaluate the company on its current merits, not its past promises.
Second, I now treat my portfolio like a ruthless gardener. You have to be constantly pruning your losers to give your winners more room to grow. That means being okay with taking small losses. It’s better to lose your seed investment than to lose your seed investment and a massive follow-on check. As an angel investor, you have to accept that most of your investments will fail. My friend Jeff who runs a fund of funds once told me that even the top decile VCs have a 50% loss ratio. The game is not about avoiding losses. It’s about making sure your wins are big enough to cover them and then some. For more on this, you can read my post on the math of venture capital.
Third, diversification is not optional. That loss taught me never to get too concentrated in any one deal, especially early on. I’ve now invested in over 200 companies. That’s not because I’m a spray-and-pray investor. It’s because I know that the future is unpredictable. The company you think is a sure thing can implode, and the one you almost passed on can turn into a decacorn. Spreading your bets is the only rational response to an irrational market. It’s how you survive to play another day.
The Real Takeaway
Losing money sucks. There’s no way around it. But losing a lesson is even worse. That $250,000 was the price of my tuition at the school of hard knocks. It taught me that investing is not about being right all the time. It’s about being right when it matters. It’s about having the discipline to cut your losses and the courage to let your winners run.
So, the next time you’re staring down a tough follow-on decision, I want you to stop. Take a breath. Silence your ego. And ask yourself that one simple question. It’s the best shield you have against your own worst instincts. It might just save you a quarter of a million dollars. And that’s a lesson worth learning.
I still think about that company sometimes. Not with anger or regret, but with a strange sense of gratitude. It was a brutal, expensive lesson, but it was a necessary one. It made me the investor I am today. And for that, I’m thankful. Even if my bank account isn’t.
And one more thing. If you’re a founder, be honest with your investors. The truth might be hard, but it’s always better than the alternative. We’re not just investing in your company; we’re investing in you. Don’t make us regret that. If you want to read more about my thoughts on the founder-investor relationship, check out my post on what I look for in a founding team.
Frequently Asked Questions
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.
What's the most common pushback you get on this?
People often push back by citing exceptions or edge cases. And they're usually right that exceptions exist. But building a strategy around exceptions rather than patterns is a losing game for most founders.
How can I apply this thinking to my own situation?
Start by identifying the core principle behind the opinion, not the specific example. Then ask yourself: does this principle apply to my context? If yes, test it in a small, low-risk way before going all in.