Capital Raising: How VCs and Professional Investors Add Value to Your Company — Part Two
Invariably entrepreneurs seek to raise “smart money” — money that comes from investors who can also can provide advice, contacts and assistance. Professional investors often have these smarts and they can arrange introductions to strategic allies, help deal with recalcitrant suppliers or even smooth over issues with regulatory authorities or government.
Usually VCs, PE companies or professional investors have a seat on the board when their shareholding reaches 20%. The percentage may vary, but the point is that when the investors have a director, that director can represent the company and lend it whatever gravitas that the director may have. This can be particularly important in initial sales presentations or in important negotiations.
Should Professional Investors be Paid for Their Advice?
Given that the professional investors provide value, the question is, “should they be paid by providing it?” It is one thing to pay directors’ fees, but another thing to pay for advice — and the issue can be divisive.
Some VC firms and more PE firms charge a monthly management fee to the investee company. Many investors (VCs at least), do not. Those that don’t charge see their assistance as part of thequid pro quo of getting involved in the first place — particularly if it was a hotly contested funding round. Many VC funded companies are also loss making, so the dominant view seems be that the money should stay in the company. These investors also see it as better for their investment that all the available money be used to pursue growth and increase the value of the company.
What Advice do Professional Investors Give?
In a perfect world, the range of advice would be as follows:
- Financial advice: Putting financial controls and reporting in place to give the management team and the investors the information they need to make good decisions. This relates back to the whole issue of post-investment monitoring. Once the systems are in place for financial monitoring, the investors’ representative on the board usually adds value by interpreting the results at board meetings. These systems and reports also help in the next round of funding (debt or equity) or even in a restructuring or merger. They also help tremendously when entering“Entrepreneur of the Year” type awards which, in turn, do an extraordinary job in promoting the business.
- Business advice: Helping with business plans, customer acquisition, strategic positioning, SWOT and prioritising goals and budget items.
- Networking: Giving practical demonstrations in proving, “It’s not what you know, it’s who you know” (and often what you know about who you know). Investors should introduce you to new customers, financiers, distributors, potential joint venturers and professional service providers.
- Scaling up: Giving assistance in selecting new markets, obtaining joint venture partners in other countries, complying with different regulations and dealing with customers from other countries.
- Exiting: Identifying potential buyers for the company and giving ongoing assistance in preparing to sell to these buyers or to IPO.
It is not, however, a perfect world. There is an enormous difference in the advice and assistance that entrepreneurs think they are going to get, and what they actually get. The Harvard Business Review makes the blunt point:
- ” … VCs vary tremendously — both as firms and as individuals — in how much effort they put into advising and assisting portfolio companies. Among those who do mentor their CEOs, ability and the quality of advice can differ widely. There are no solid data about the industry’s delivery on this mentoring promise. But if you asked the CEOs of 100 VC-funded companies how helpful their VCs are, some would say they’re fabulous, some would say they’re active but not a huge help, and some would say they do little beyond writing checks. This last group isn’t necessarily bad, of course: Some CEOs may be happy to skip the mentoring and just take the cash. But for founders who have bought into the idea that VCs provide lots of value-added help, it can be a source of great disappointment.” 
The help you get also depends greatly on your willingness to accept help.
What Other Value-Adds to Professional Investors Provide?
Probably the biggest benefit you will get from the involvement of professional investors is governance — a big aspect of what is often nick-named “adult supervision.” Adult supervision is usually thought of as most relevant when the management team is young, enthusiastic and completely ignorant of corporate governance. It does, however, also apply in varying degrees of subtlety as companies get bigger and head towards IPO or trade sale.
The reason that governance is so important to professional investors is that they are often minority shareholders. As such, they can’t control the company with their votes, so they have to ensure that there are sufficient corporate controls on the governance of the company to compel the majority to run the business properly. The shareholders’ agreement will have a number of safeguards built in, but good governance means that minority shareholder protection and good corporate management are embedded at board level as well.
Another benefit is the emphasis on keeping you focused. You sold them the benefits of your company with your business plan, so expect them to insist that you stick to the plan. Many shareholder agreements exhibit the business plan as an attachment to the agreement and have a clause saying that any material deviations from the business plan have to be approved at either board level or shareholder level.
The focus on the agreed plan is also important because you may have promised that the investors get to convert loans to shares, redeem loans, or exercise options on the happening of certain events or milestones. They will be very keen that you reach these milestones without being distracted by“shiny things” along the way.
Everyone always says that they want the “smart money” as investors in their company. Smart money comes at a cost — and the cost is continuous disclosure and constant monitoring. The benefits, however, are usually that you can leverage the contacts, knowledge and skills of your investors to accelerate the growth of your business. The issues are usually that different investors providing differing degrees of assistance and you may be expecting more than your investors actually ever give.
 Mulcahy, D., “Six Myths About Venture Capital” HBR May 2013, with version reprinted at https://hbr.org/2013/05/six-myths-about-venture-capitalists