Most VC firms (and angels) will claim they add a lot of value to the companies they invest in, and that’s often true for the top investors. But this value-add generally comes in the form of guidance and intros. This has been of great help to many entrepreneurs, mostly in Silicon Valley, where the right VC can really give you a really strong competitive advantage, but in my opinion VCs have the potential, and soon the need, to accelerate their companies in a much more structured way.
“Old School” value-add
Let’s take a look at how VCs have traditionally added value to their companies:
- Brand – A pretty sought-after characteristic in VCs. Brand helps giving a small 5-10 people company the legitimacy it needs to attract customers, press and employees. This is often regarded as more important than it actually is.
- Industry network – This is what most VCs end up helping their portfolio companies with. It’s extremely vague and often ends up meaning “nothing”, but most good investors are usually past entrepreneurs or top executives and have built and developed a massive and very valuable Rolodex which the startups can now access. Contacts are usually extremely useful for business development, sales, recruiting and acquisitions.
- Funding network – Investors know other investors more than anyone else, and will help their companies with subsequent funding rounds. If your VC is well-regarded, has a good funding network and your company is doing fine, you can usually expect to raise a follow-on round without too many problems.
- Expertise – Most VCs will have already started or run a company, hopefully in the same space as yours, and can help you avoid a lot of errors you’d surely make as well as give you insights and tips on strategic decisions for your company.
- Coaching – Being a CEO is a very hard and lonely job. An experienced VC on your side can help you navigate the downs of the emotional roller coaster.
There are a couple of problems with the “network and expertise” value adds:
- It’s not self-serve – You don’t know who the VC knows and the VC doesn’t always know who you need to talk to. Intros need to be actively requested and initiated.
- It’s not scalable – One partner can only handle so many investments and if he starts investing in a high number of companies (eg. multiple seed deals while having 2 A or B rounds a year), he will not have the time nor the energy to pro-actively make intros for all of his portfolio companies. This means that if you’re not a very important company for your VC’s portfolio (eg. a smaller seed bet), it will be very hard for you to get access to the partner’s network.
- It’s not firm-wide – When you receive an investment from a big-name VC, you are only getting access to the network of the partner who invested in your company. Some other partners might know a game-changing person or acquirer but you might never get introduced.
- It’s not measurable – There is no way to measure how big or valuable a partner’s network is.
(article S.Bernardi)
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