After reviewing the additional information, Ritch Ventures decided not to proceed with the investment and terminated the subscription agreement.
That wasn't necessarily the easiest decision.
We were well beyond the preliminary evaluation stage. Terms had been negotiated. Documents had been reviewed. An SPV had already been formed, and funds had been committed to the investment.
Professional time and resources had also been committed to due diligence, structuring and preparing the transaction.
All of that represented real costs.
But neither committed capital nor the time and money already spent preparing the transaction could become the reason to proceed with an investment we were no longer comfortable making.
The costs already incurred were sunk costs. The committed investment capital was a separate matter: until we were satisfied that the investment should proceed, protecting that capital remained more important than completing the transaction.
Continuing with a transaction simply because significant time, money and effort have already been invested—or because investors have already committed capital—can turn a manageable loss into a much larger one.
New information has to be evaluated on its merits.
In this case, our continuing due diligence worked exactly as it was supposed to. We identified information that materially changed our assessment before the committed capital was put at risk.
That is an important distinction.
Getting investors to commit capital is not the finish line. Closing the transaction isn't the finish line either. The responsibility to evaluate risk continues throughout the process.
This experience also illustrates why Ritch Ventures generally requires companies seeking capital to cover a portion of the costs associated with preparing and evaluating a potential transaction.
By the time a transaction reaches this stage, considerable work may already have been performed. Due diligence takes time. Legal and organizational work may be required. An SPV may need to be formed. Offering and corporate documents need to be reviewed. Financial information has to be analyzed. Management backgrounds need to be researched, and investor materials may need to be prepared.
Those costs exist regardless of whether the transaction ultimately closes.
Not every company that enters our process will ultimately receive investment capital.
Sometimes Ritch Ventures decides not to proceed.
Sometimes continuing due diligence uncovers information that changes the risk assessment.
Sometimes investor interest isn't sufficient.
Sometimes circumstances change.
And sometimes the company itself decides not to continue.
That is why we believe companies should have some financial commitment to the process. Requiring companies to cover a portion of the actual costs helps offset the substantial time and resources required to properly evaluate and structure an opportunity.
It does not guarantee that an investment will be made.
In fact, this experience demonstrates why that distinction is important. We had negotiated the transaction, formed the SPV and had investment capital committed—and we still walked away.
Our job isn't to make every transaction close. Our job is to determine which transactions should move forward and to protect investor capital when they shouldn't.