Courtesy of VC Starter Kit
The VC game seems to be changing. It’s become a big enough industry with enough widely observed idiosyncrasies that it’s possible to raise an entire fund based on VC memes. One common meme is the mythical VC “value add”— seems like founders and VCs alike are trying to figure out what it actually is.
One reason is probably that increasing competition between too many funds makes it hard for founders to differentiate (however, there is plenty of competition amongst investment bankers, and the value-add to companies is definitely debatable, but they still don’t receive nearly as much meme attention). Another is high expectations, overselling, and bruised egos on all sides of the VC dealmaking process in the past, present, and future.
Memes aside, data also show that there is a discrepancy between founders and VCs on the latter’s perceived level of “helpfulness”:
Five years into venture capital, this is a topic I reflect on a lot because it actually defines the journey I will be on in my career. I try to routinely map out the kind of skills I have to optimize for to be successful in my career (e.g. to be picked by founders) against my goals as a human being and see if they align. Therefore, the answer matters a lot to me, personally.
Here, I will attempt to provide a more nuanced perspective on VC value-add than: “our platform, our network, and our experience,” and I also hope to also build a narrative against the one we seem to be converging to right now: “our money, the fastest, and more of it for less of your company.” I write this with the full understanding that most of it is stuff savvy founders probably already know, but sometimes it’s just helpful to have a framework to think things through, outside of the superficial stuff. This may be especially true during this unique time in the market with an overabundance of venture capital, very limited human interactions, the shortened length of a deal cycle (I’ve heard as little as 9 days end-to-end, to pick a partner for 10+ years potentially?!).
This post, admittedly, may also be my biased way of rationalizing against the evolution of early stage investing into something much more transactional (but hopefully not). Because if the main takeaway from an early stage fundraising process is “how much capital and how fast”, then surely there must be other ways to distribute capital than to tie up hours and hours of talented founders’ time with calls, coffee chats, and dinners.
So what can a VC give your company?
Early stage VC is probably one of the most expensive things you will procure in the lifetime of your company, and there is no stack-ranking of best to worst because it largely depends on what you need from your VC and what kind of company you want to build, but there are some ways to more or less objectively qualify what they bring to the table:
Access to capital is first and foremost. It is the lifeblood for the company, and when in famine, it might be the only criteria that matters. I’m not here to convince any founder they shouldn’t set a fair price for their company because that is really important. However, access to capital doesn’t stop at this particular term sheet:
How real are the terms? Have they done the work to understand your company or do they just want a seat at the table? Have they backed out of or renegotiated deals before?
What is the investor and his/her partnership’s approach to thinking about you de-risking the business such that they’re willing to support your company if the market falls out or you’re just shy of your milestones for going to the market?
What is your investors’ conviction in you based on? Is it borrowed? and how fervently will they fight for you when their conviction is tested?
How much support does your investor have within his/her partnership to build a case for allocating more capital to your company?
How do you rank against the other portfolio companies in that particular fund in terms of importance and size of position?
How much dry powder is left in the fund which invested in you?
What kind of co-investors or follow-on investors will your investor attract for subsequent rounds?
What kind of signals does it send to the market if they invest or don’t invest into your next round? What kind of signals do you send by accepting their money?
Acknowledging that you most likely won’t get the most helpful answer by asking these questions directly and the assessment will largely have to be done by triangulation. However, by framing the questions around past investments scenarios, you can build towards a better understanding of your partner.
2. & 3. Access to knowledge and access to network are important badges worn on many VC’s websites and are pretty well understood at this point. Different entrepreneurs value different things here, and evidence is mixed on how value-adding it really is, but usually evaluating criteria revolves around:
Does this person REALLY understand your industry, your customer, and will care enough about the problem you’re trying to solve to keep their understanding current over the next 10 years?
Does this person have very specific operational insights that can help you shortcut your decision-making process through trial and error, and do you trust that they are still relevant?
(I want to harp on this one for a minute because I think this is overemphasized in investor conversations. Very rarely do we come across the exact same situation twice, and most of the time the entrepreneur will go with her instinct rather than follow someone else’s rubric exactly. What is perhaps more helpful is using these experiences as sounding boards to test the boundaries of experimentation, or method advice to help transfer tried-and-true processes for finding the answer yourself. These operational heuristics can be incredibly expedient, but they’re extremely imperfect as well and can be dangerous when we forget that.)
Does this person have enough context to help you frame your strategic choices and discuss tradeoffs with you in a way that helps you come to a better decision?
Is there some inherent network effect of being in this VC’s community? How do they encourage this?
Does this person help you expand your network in an unobvious way? Do they have also some sort of information advantage on their network (e.g. Talent tracker tools, etc.)?
How willing is their network to go the extra mile for them? and how much does their word mean (e.g. are they all tapped out)?
Does your partner offer professional services that your org can get leverage from? And for how long will you need them?
Perception of Helpfulness of VC Operating Teams
*note* Historically, data shows that VCs view this as more important to founders than founders themselves
4. Access to human. I may be naive in thinking that this is perhaps the most important dimension for picking an investor, especially if you’re thinking about bringing this person onto your board. Ultimately upon signing the docs, you’re picking a partner who now has a major role in your future and the future of your company for a decade. Arguably, the capital, institution, and access to knowledge and network can be commoditized over time — they’re essentially table stakes for any modern VC fund — but the human element remains super subjective, as it usually does. Since there are now so many talented humans working as venture investors, and the success of the VC-founder relationship has so much to do with achieving fit:
What will they be like in 10 years based on what you know they’re maximizing for now? Will you still want to work together then?
How much of themselves are they willing to dedicate to you? How might that change over time? Sometimes that is directly impacted by how many other portfolio companies they have.
Do you trust this person? There will be ultimately be times when your incentives will be at odds. Do you trust they will stick to a set of values that still makes it possible for you to collaborate during those times?
Do they have a different enough perspective but good enough communication with you to help you expand yours? Do you get energy from looking at the world through their eyes?
How does this person fit into your existing board dynamics?
Is this investor serious about a long term career with their current fund or are they likely to hand you over to someone else?
How much skin in the game do they have for you to be successful? How much does their wealth or (perhaps more importantly) their reputation depends on your success?
How does the person make you feel when you interact, and how does that help you achieve your goals as founder?
Do they care more about your success more than they care about their ego? (very easy for a VC to be self-unaware about this)
Does your investor actually know you? and invest into knowing how to better work with your personality / biases / style?
I fully realize that founders often don’t have the time or perhaps the interest to sit and dwell on their VC’s personalities, but it makes me upset when they structure the process such that it basically discourages any form of mutual discovery of human traits. And maybe the sad reality is that founders are converging towards treating their early stage investors as they do with public investors, and the human element isn’t as necessary, especially if the control rights are also structured as such. While this may be true for some founders, but I truly hope this is not the case for all.
Some of the most fruitful VC-founder relationships I’ve seen leading to amazing outcomes have come from growing and developing with one another over the course of decades, and some of the worst have led to a total time waste for everyone involved to energy-draining, or toxic boardrooms.
Feels like an easy win would be to apply more rigor to the process of picking and getting more out of your investor relationship in exchange, rather than taking the human element out of it altogether.
Additionally, VCs should also invest more into developing themselves in this way to better serve the founder (a good article on that from our friends at The Generalist). Some of the best board members I’ve observed have developed it through years of experience, and others have personalities that are naturally more suited to being a good advisor. However, there is a lot of skill-building that VCs can be proactive about and a lot of literature around what good advisors should do. I don’t see this discussed enough in VC circles:
Personally, as I reflect on my path in venture, I think about how I can objectively check the boxes on #1–3 and work to improve my skills in #4. Ultimately, there is still this element of “fit” that will always remain subjective, which means that I won’t be a good choice for every founder, just as not every company’s mission will speak to me personally. I am very curious in the founder perspective after reading since this has largely been a thought exercise for me in order to develop a set of hypothesis against which I am mapping out my own career milestones.
This survey taken in 2018 by our friends at Creandum and Newfund seems to support that the human element exists, but market conditions today seems to reflect differently than the data shown.
So founders — what do you think? What have you gotten from the best VCs you’ve worked with? How can we optimize the early stage VC process for value-discovery for you — whether that value is the personal relationship, the network, the knowledge, or just the money (and more of it for less of your time)?