As Venture Capitalists “VCs” screen through potential startups to invest in, sitting behind a financial model and a suit sometimes sends the wrong signal to entrepreneurs on how much value-add can be extracted from VCs. I’m sure there are plenty of investors that tag-along with the lead investor in funding rounds with minimal contribution besides capital, tier one lead investors will always have direct positive impact on startups. Unlike Private Equity transactions, primarily leverage buyouts, where leverage accounts to most of the value General Partners “GPs” create to their Limited Partners “LPs”, Venture Capital as an asset class that invests in high-growth/risky startups with the potential of typically making a 20x return on investment driven by equity instruments or the equivalent; As investors go up the value chain and de-risk their investments, returns start looking more modest relative to the 20x multiples.
In mature ecosystems, funding rounds take a huge slot of the entrepreneurs’ day as they compete for their best funding source however, VCs also compete on the best transactions too. Term sheets typically reflect how much value-add your lead investor brings; the more value-add the better terms for the investor. VC value-add standards are constantly being upgraded, setting the expectations from founders to anticipate more from their investors aside from their financial backing. Funding rounds in venture are very structured as an asset class; Depending on the startup’s size and maturity, the required value-add varies.
So what should startup teams expect from VCs besides deep pockets and strategic/technical business insights?
VCs’ value-add typically comes in the form of services that vary around the following areas:
– Partners/Clients: With experienced general partners and access to a great pool of companies in different parts of the value chain, the introduction to partners and clients is an important feature VCs bring to their startups. Consider your VC backer as your strategic business development division; they will contribute directly to your startup’s top line and make the necessary introductions in building strategic/equity alliances. This is quite common practice and usually comes across all VC fund sizes.
– Marketing/PR: Despite marketing being an important block within the “build-measure-learn” cycle, some venture capitalists dedicate marketing professionals to assist backed companies that aren’t ready to hire a marketing team of their own yet. An example of the same is currently available with Fly Bridge Capital Partners.
– Recruitment/Talent: As investors engage with the startup community early on through startup competitions, events, incubators/accelerators, colleges, deal flow…etc, access to talent is naturally inherent. Coupled with the first hand entrepreneurial experience the investors bring in, VCs attract a lot of industry talent to its portfolio companies. Some examples of enriching funded companies with the right talent include Andreessen Horowitz, which has established a talent agency and college program that attracts developers to assist funded companies. First Round Capital and Kleiner Perkins also both have platform teams to support entrepreneurs in funded companies.
Larger VC funds are standardizing these value-add services and are becoming a common feature to have. Although large funds give great access to the above services, it’s very important to sense a level of comfort working with the deal leader. The deal leader will be spending a lot of time with your startup and would formally have board meetings on monthly basis however, he/she will be dedicating a lot more time, experience, network and strategic/technical insights to your startup than just attending the board meetings. Make sure the chemistry is there.
Unfortunately, I didn’t get a chance to be a VC backed entrepreneur yet and I’m not too sure that the VC attempts in the region provide the above services in a structured format. In early 2009, I was the Managing Partner of 6alabat.com and I recall putting together a pitch book for a funding round that did not materialize. However if I were to make a choice between 2 offers for the round, one from a large institutional VC and another smaller fund, I would focus more on the deal lead for my transaction regardless of the VC size; deal leaders can make or break the success of startups.