I'm always amazed to hear VCs describe themselves as "value added investors." Not because I am skeptical about their ability to add value. More because I think all investors need to be "value added." If the only thing you do as an investor is hand out money, you are in big trouble. There's a lot of money out there. And it isn't that hard to hand it out. If all you are as a venture investor is a money dispensary, you are as fungible as the money that you are handing out.
I know that in some entrepreneurial circles there is a reasonable amount of skepticism about the idea that investors can add value. While that may be a fair criticism in some circumstances (there are investors out there who have been known to add a little bit too much value, if you know what I mean), after attending the tail end of First Round Capital's CEO Summit last night, I was reminded that Great investors can add significant value to their portfolio companies (Congratulations to the FRC team).
In light of that, I thought it would be worth sharing some thoughts on the sorts of things that venture investors can do to help their portfolio companies be successful. Few investors are able to provide value on all these fronts. But great VCs will help where they can be helpful and staying out of the way the rest of the time.
So, in no particular order, here are some ways in which VCs can be helpful? I'm hopeful that this is not a comprehensive list -- but it is a good starting point.
I think this is one of the most important ways in which VCs can be helpful to their portfolio companies. Companies are only as good as the collection of entrepreneurs that populate them. So it really matters who you're able to recruit. VCs should be able to help in that process. We can explain why it is that of the hundreds of companies we see every year, we funded this particular company. We should also be able to help put our portfolio companies in the context of the larger marketplace, which is helpful when trying to convince a fantastic engineer or sales person to join your company over some other opportunity.
Frankly, companies under-utilize their investors when it comes to recruiting. We are occasionally called in to have dinner with a hot prospect for VP of something-or-other. But we are rarely asked to put in a quick call to a young engineer or hotshot SEO magician. We should be. In an industry where nothing matters more than the people, helping bring in the very best people should be a top priority for all VCs. And we can often really be of help here.
If an early stage VC can't be helpful to you in raising future rounds of capital, don't take his money. The vast majority of companies will need to raise more than one round of capital over their lifetime. So having a VC who can assist in the fundraising process will be of real value. I recently spent time with a very smart young guy who's done a ton of research over the last year looking into what makes a successful venture firm. He concluded that you could measure the likely success of VC firms by the folks with whom they co-invested. It is really not that surprising that good venture firms tend to invest along side other good venture firms. It is also not surprising that the best venture investors tend to have a broad set of relationships that make the fundraising process easier for their portfolio companies. In fact, the very best VCs tend to have later stage firms that are willing to follow them into practically any deal they've done. As you can imagine, that's pretty valuable to a startup (few things are as distracting and unpleasant for an entrepreneur as fundraising).
After completing an equity financing, entrepreneurs often decide to raise debt to further support their company (be it equipment financing or venture debt). While debt providers certainly will assess a company on its own merits, the company's backers will play a big role in that assessment. A lender's capacity to get repaid will rest largely on that company's ability to raise future rounds of funding (debt is rarely paid off before a company needs to raise additional capital). Given that, the company will be assessed in the context of its backers and their ability to 1) assist in future fundraising and 2) continue to support the company. It is very rare that a debt financing gets done without the lender spending a chunk of time on the phone with the company's backers. So a VCs enthusiasm for his portfolio companies can translate into additional dollars in the bank. And like later stage financings, there are lenders who are willing to follow certain VCs into nearly any deal about which that VC is excited.
Introductions, Introductions, Introductions
If there is one thing that VCs should be good at, it is helping companies build relationships. VCs are connectors. It is what we do for a living. I don't know how many emails a year I send that go something like this: "X meet Y. Y is awesome. Y meet X. X is awesome. Talk amongst yourselves." While it is a relatively simple thing, don't underestimate its power. Great VCs can help facilitate partnerships. Great VCs can help you engage the best analysts. Great VCs can help sell your product. And, as I said above, Great VCs can help you recruiting. Those introductions can prove invaluable.
VCs sit in a very interesting position when it comes to technology and markets. All day, every day, we meet with a host of entrepreneurs pursuing new ideas, chasing new market segments, building new products or services. Those entrepreneurs are the experts on the markets they are pursuing and they work hard to educate even the densest of VCs on those markets. As a result, any VC who spends time with a sufficiently large number of emerging companies -- as a matter of simple osmosis -- will have a pretty well-informed view of the technology landscape. In light of that, great VCs are able to give well-informed strategic advice to their portfolio companies.
This one is a little thing, but probably worth noting. Good VCs can help companies avoid reinventing the wheel. There are a ton of things that every startup goes through. They all have to figure out payroll and insurance and office leasing and hosting providers and salary levels and . . . . Now, there's no question that entrepreneurs can get help on these kinds of things from all sorts of people. But good VCs should be a resource to entrepreneurs when they are sifting through all these mundane issues.
Create a Keiretsu
A lot has been made of the idea of venture keiretsus. And in most instances I think that the value of the keirestsu is overstated. I don't think that good VCs will force one portfolio company to assist another in any way that isn't beneficial to both companies. But I do think that there are opportunities for portfolio companies to assist each other -- partnering, recruiting, introductions, etc. As Josh Kopelman describes in his post about the FRC CEO Summit, a bunch of value is generated by portfolio executives when they are in the same room "exchanging ideas and sharing experiences." We've had a similar experiences at August Capital when we've had events for our CEOs, CFOs, Heads of Marketing. Good things happen when you connect smart people to each other with a sense of shared purpose.
To paraphrase Glengarry Glen Ross, great investors should always be selling (ok, it's "always be closing" but you get the point). But, unlike some VCs out there, I don't think that venture investors should always be selling themselves -- they should always be selling the greatness of their portfolio companies. VCs spend lots of time with journalists and have the opportunity to spread the gospel of their portfolio companies and they should. We're on panels and in classrooms and on TV, and we should always be selling our portfolio companies. It is amazing how valuable a well placed reference to a portfolio company in the New York Times can be.
Making Exits Happen
And, of course, the culmination of all these other activities is that Great VCs can help make exits happen. Sometimes that means selling the company -- venture investors can make intros to potential acquirers, help position the company, create competition. Sometimes that means helping taking a company public -- venture investors can get the right investment bankers involved, brief the right analyst, encourage the right coverage. While VCs can't manufacture exits out of thin air, good VCs can definitely help to create a climate that will maximize the possible outcomes.
I can already hear the outcry about this blog post -- "value added investor my ass! That's an oxymoron." None of this is intended to suggest that venture investors are company builders. We aren't. That isn't our job. Entrepreneurs build companies, hire great executives, raise money, make strategic decisions and ultimately effect exits. But I think that good VCs can help a huge amount along the way, even if sometimes that means getting out of the way and letting great entrepreneurs do their jobs.