Good Money After Bad

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  • Topic: Venture capital, Private equity, J.H. Whitney & Company
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HBR CASE STUDY AND COMMENTARY

S hould Harbinson
recommend f urther
i nvestment in Seven
Pea ks?

Good Money After
Bad?

Four commentators offer
e xpert advice.

by John W. Mullins


Reprint R0703A
This document is authorized for use only by Zheng Cao in LSU Venture Capital - Spring, 2012 taught by MICHAEL KIRBY from January 2012 to May 2012.

For the exclusive use of Z. CAO

Jack Brandon’s initial idea has not panned out, and the cash is nearly gone. But he’s got a new plan. Will you back him a second time?

HBR CASE STUDY

Good Money After
Bad?

COPYRIGHT © 2007 HARVARD BUSINESS SCHOOL PUBLISHING CORPORATION. ALL RIGHTS RESERVED.

by John W. Mullins

From a rocky perch overlooking the sparkling
lights of San Francisco, Christian Harbinson
gazed across the bay to the hills above Sausalito. “There’s nothing like a vigorous hike,” he thought, “to clear the mind before a crucial
meeting.” It was a mild March evening, and the
35-year-old venture capitalist was reflecting on
the recommendation he would have to make to
his firm’s investment committee the next
morning about Jack Brandon’s young company, Seven Peaks Technologies. Seven Peaks had developed an innovative device for cauterizing blood vessels during electrosurgery, and although the feedback from surgeons had been excellent, sales had been slow. The Palo Alto–based venture capital firm where

Harbinson worked, Scharfstein Weekes, had invested $600,000 in Seven Peaks from its newly raised second fund of $100 million. SW’s current investment strategy focused on early-stage medical technology companies, and Seven

Peaks was a typical investment for the firm,
which liked to get in on promising ideas modestly and then follow with additional rounds of capital after technological and market milestones had been met. The $600,000 was nearly gone; Harbinson and his colleagues had to decide whether to put more into the struggling company.

Seven Peaks was looking for another
$400,000 to develop a second product based on
its proprietary technology, which enabled surgical instruments to do their work without sticking to tissue—a frustrating problem for most electrosurgeons. Brandon still believed in his
technology and in his ability to commercialize
it. Harbinson was impressed both with Brandon
and with the technology’s potential, but some
of the senior partners were not so sure. “Would
we simply be throwing good money after bad?”
SW’s cofounder Joe Scharfstein had asked when
Harbinson told the investment committee of

HBR’s cases, which are fictional, present common managerial dilemmas and offer concrete solutions from experts.

harvard business review • march 2007
This document is authorized for use only by Zheng Cao in LSU Venture Capital - Spring, 2012 taught by MICHAEL KIRBY from January 2012 to May 2012.

page 1

For the exclusive use of Z. CAO
G ood Money After Bad? •• •H BR C A SE S T UDY

The Launch

compare notes and talk to one another about
new developments. To make sure he was on
the right path, Brandon had given his prototype to a few surgeons he knew to learn what they thought of it. “Too large,” one of them
said. “It will block my view of the surgical site.”
Another told him, “I like how it works and
saves me time, but it’s a lot of trouble to take it
apart after each procedure in order to sterilize
it.”
Brandon redesigned his device based on the
feedback, and after several months of diligent
work, he won FDA approval. The redesign was
smaller and thinner for better access to the surgical site and required no disassembly for sterilization. It was time to see how the market would react.
Harbinson was equally impressed by Brandon’s showmanship. The Seven Peaks cauterizer made its debut at a surgical trade show in Atlanta. It was the talk of the fair. Brandon had
bought some fish from a local market, and he
did side-by-side operations...
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