Hey VC — show me the statement, not the brochure!
A look into how Frontline tracks and evaluates value-add to our portfolio companies
One of our core beliefs at Frontline is that learning at the speed of your own experience is not fast enough to win. This is why our first hire outside of the partners in 2012 was a Head of Platform.
Kim’s role was to figure out how we accelerate the development of our portfolio companies through group learning and giving them access to specialised knowledge on-demand.
As the funding environment gets more competitive, we are constantly thinking about how we keep the Frontline “product” in tune with the best founders’ needs. At the end of the day, we are selling a commodity called capital — so being a standout funding partner is not straightforward. Beyond capital, the two areas where funds can differentiate themselves are: (1) Team and (2) Value-Add.
When you take on a seed investor, you are going on a long journey together. Making sure that you have good personal chemistry really matters. It is also important that you find an investor whom you feel thinks with a clear mind, even when the going gets tough (as I have shared views about before: “Solve for Rational”).
As we built the Frontline team, we thought long and hard about personal style and how any potential new member of the Frontline team will interact with the best entrepreneurs. Thomas, who joined us last year, was grilled by three of our portfolio CEOs during his last round of interviews — one of them early on a Sunday morning in Dublin Airport, as the CEO was on his way to the US. Sorry Thomas!
Like many entrepreneurs, I am often underwhelmed by the claims of “value-add” activities many VC firms make. The reason entrepreneurs have been let down is because many firms do not:
- Invest dedicated resources (time and money) in value-add. It is seen as something that the investor does in their spare time.
- Get close enough to / build enough trust with the founders to understand what their key challenge is at that point in time.
- Hold themselves accountable. When a company misses its budget, a deep analysis is done of what went wrong. When a VC firm fails to add the value they promised, nothing happens — other than the founder community continuing to get more skeptical about what having a great investor onboard can do for a company and the CEO personally.
How have we tried to combat this?
- Invest in value-add from Day One
We invested in the Head of Platform role from day 1 to make sure someone came into work everyday thinking about how we are accelerating learning and enabling knowledge access for our teams. Investing in some ways was the easy part, but we got lucky in hiring Kim, who has set the pace for this Head of Platform role in Europe.
They are incredible resources that all of our companies can access on-demand before they can afford to hire a CRO, CTO, or CFO of that experience level.
2. (and 3.) Understand and be held accountable
In conversation with Paddy Benson last year about how Moltin could show their customers what value they were adding for them, it occurred to me how we should deal with points (2) and (3) above. We are calling it the “Value-Add Statement.”
You wouldn’t accept it if your bank said, “We will take care of your money, but cannot tell you exactly what is in there. But trust me, you will be able to access that in the future when you want it.”
As a customer, you want to see a statement that shows precisely what is in there and that you can access the money when needed. You want every important transaction written down, so that you can assess your financial position at any point in time.
With this concept in mind, we started 4 months ago capturing everything we did, as a team, to help our portfolio companies. We did this by bcc’ing all value-add activities (introductions, advice, etc.) to an email inbox and then transferring to a spreadsheet.
Our findings so far:
- In the first month, we realised we were doing lots of small things to help the companies — but things that didn’t drastically move the needle. We stopped tracking those to the statement and stopped ourselves from allocating time to things that didn’t really add that much value.
- On average, 4 members of the Frontline team are engaged in value-add activities to each of our portfolio companies (as measured over the last 4 months in table below). This is encouraging for us as we move away from the traditional VC model of each founder only having 1:1 access to one partner and towards a Platform model.
3. Our companies’ challenges are pretty consistent. Here is the percentage breakdown of value-add activities by category:
- Fundraising 34%
- Expert Knowledge Access 21%
- Business Development / Customer Intros 14%
- Talent 13%
- Other General Advice 6%
- Marketing/PR 5%
- Team Extension (Virtual CFO, CTO, Head of Sales) 5%
- M&A 2%
Now, we are moving from the “Data Capture” phase into the “Review” phase of the Value-Add Statements product. We are sitting down with some of our investee CEOs to review where we have interacted with them, ask for their input on what was helpful or not, and discern whether this has met their expectations for value-add. We did our first review with a portfolio company, pictured above.
Out of this, we expect to be able to further refine what “Platform” means and decide where to double down. The goal is to exceed the expectations of each of the founding teams we work with. If we do that, we will have transformed our capital (a commodity) into a differentiated service that will continue to attract the very best entrepreneurs in Europe.
I would like to see a future where, in 3 years, every founder could sit down with their investors at year end for a Value Statement review.