On March 4, 2017, Mark Dilfer sat in his office and pondered the fate of one of his venture capital (VC) firm’s portfolio companies, SME Analytics. His fund, DMT Capital, had invested USD 2 million in SME Analytics 15 months prior, and SME Analytics was now on the brink of bankruptcy. SME Analytics had burned through the initial investment quickly and failed to meet their milestones. The company was in bad shape and gained almost no traction in the 15 months since DMT had invested in them. Dilfer had to decide on whether DMT Capital should invest more money in the company. This was a tough decision as it could mean investing more money into a venture that was bound for failure— but on the other hand, SME Analytics was most assuredly going bankrupt if DMT did not invest more money.
This case highlights the challenges that VC firms often face when deciding whether to invest in follow-up rounds of funding for their portfolio companies. The reason DMT invested in SME Analytics is that SME Analytics had multibillion-dollar potential. However, the company has regressed since DMT invested in them. If DMT does not provide additional funding to SME Analytics, the firm will collapse. However, the company needs at least another USD 2 million to stay afloat, and with the little progress SME Analytics has made in the previous 15 months, it seems highly probable that the company will simply burn through the additional USD 2 million investment; thus, DMT Capital will be out USD 4 million, instead of just USD 2 million.