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What drives a venture capitalist to reinvest in a bankrupt tech company that wiped out his firm's original stake? Norwest Venture Partners' Promod Haque may be a glutton for punishment, but he has no second thoughts about getting back into the game.

When venture capitalists regale each other with yarns of bad tech investments gone bust, Promod Haque has a tale that tops them all.

Haque, a managing partner with Norwest Venture Partners, was lead investor in Ethernet services company Yipes Communications. All told, Norwest invested more than $50 million starting in 1999. But this past March, Yipes filed for Chapter 11 bankruptcy protection, leaving Norwest owning a lot of worthless ownership certificates.

Haque might have closed the books on a bad investment at that point and just walked away. Instead, Norwest led a syndicate of investors in July to acquire Yipes' network operations and other assets through a newly formed company, Yipes Enterprise Services. Norwest, along with the other investors, funded the new company with a $40.8 million infusion.

What would drive a venture capitalist to reinvest in a company that once wiped out its original investment? CNET News.com recently talked with Haque about why he thinks things are going to work out better the second time around and whether there are any lessons he can share with prospective investors in other start-ups.

Q: Some people may look at your reinvestment in a company that once went bankrupt and ask whether you're nuts, a risk taker or just a savvy investor.
A: The easy road would have been just to stay away from this thing. But I had an ability to look back at the past mistakes, the environment, and the correct answer was not to run away from the investment but to structure the deal to go forward. At the end of the day, my job is not about risk-taking, which is inherent in our business, but to look at opportunities and value propositions.

At the end of the day, my job is not about risk-taking, which is inherent in our business, but to look at opportunities and value propositions.
Why did you originally invest in Yipes Communications?
When we invested in Yipes, our understanding of the market was that companies would use Ethernet extensively throughout their operations. But if they needed a seamless increase in bandwidth, there were few choices. Yipes offered instant, seamless increases in bandwidth in 1 (megabit per second). So you could go from 1mbps to 10, 20, 35 or 1 gigabit. The benefit of using Yipes all came true, and the company was growing nicely.

If things were going so well, why did the company hit the financial wall?
Yipes got started during the peak years of the Internet boom. They signed contracts for real estate, fiber, and transit, or co-location space, at a time when demand was high and supply limited. But then the market crashed in 2001 and Yipes was stuck with excess capacity and contracts at high prices. When investors looked at making further investments in Yipes, the stumbling block was the balance sheet. They had long-term contracts under onerous terms and a cost structure that was way out of whack. If a new competitor started up today, they would enjoy the benefits of a lower cost structure since the prices on these types of contracts had come down. So nobody wanted to put more money in Yipes.

As a Yipes board member, what were the options then?
The company looked to sell itself. The problem was it ran into the same reasons--a messy balance sheet and lots of liability--when looking for a buyer. It then said, since I can't raise new money or find a buyer, maybe I can sell pieces of myself. And that is what happened. The company went into bankruptcy to get out of the contracts and attract new capital. There were three or four people that wanted to buy some of the assets.

Is that when Norwest decided to reinvest in the company?

The easiest thing to do if you lost money the first time around would be to play it safe and not to step forward again on the deal.
We got off the board so we could bid on the pieces of the business to create a new company. The company when it filed for bankruptcy had revenues that were growing, but also a lousy cost structure. We thought if we could jettison the old contracts for new ones that would help the cost structure. There were 50 to 60 contracts that would have to be renegotiated, and we researched the willingness by the companies before we put in a bid.

So why did you chose to reinvest in this company, as opposed to taking the same money and investing it in another company? Was there any advantage in going back to Yipes?
This investment, with its new cost structure, was attractive. It also had an existing structure and a management team we already knew.

With your money in the company, once again, what would it take for you to deem this investment as a success or failure?
It would be a success if it makes money on the money we put in. There would need to be some liquidity one day--an IPO or acquisition, it doesn't matter. And a failure would be if we were unable to create the intended outcome--build a large business with lasting value through an IPO or acquisition at a super-high price.

And what would be the lessons learned in either scenario--success or failure from this particular deal?
Success would bring further confirmation and conviction. Time will tell, but we are well on the road to achieving what we thought we would achieve. And failure, the key thing is you don't want to make the same mistake twice. To make it once is experience, to do it twice is a mistake. You learn from your experiences, and you go through and refine your basic assumptions. The easiest thing to do if you lost money the first time around would be to play it safe and not to step forward again on the deal. But in our venture business, we get paid to make the hard decisions.