VC needs an upgrade
Venture Capital is broken. Most european founders and also VCs are not satisfied with the state of products offered by Venture Capital firms. This post aims to contribute to the discussions on this delicate topic in our growing European tech ecosystem. I’d love to start a conversation.
VC has to become a product for Entrepreneurs
Thanks to the guys from Change.vc we have access to some data derived from their survey of 300 entrepreneurs, 160 VCs and 110 industry experts, advisors etc.
The results are alarming (NPS of -64; 70% of entrepreneurs would tell you to stay away from VC) — find the full report here.
These are the major topics VCs need to address — ordered by relevance:
· Add more value to portfolio companies
· Keep founders in the driving seat — align interests with them
· Faster & more transparent decision making process
· Lower pressure for fast exits
· Be more approachable & connected to partners
In order to stand out and attract the best founders and companies VCs need to do much more than just providing money. Here are some of the initial measurements that we are undertaking. I am happy to get further ideas and discuss.
# 1 Add more value through portfolio support
I was discussing a lot with founders and other VC to identify domains of expertise that will help us add value to our portfolios.
Here’s what we found and execute already:
· Board Seats and Business Development: Help founders to find the best growth strategy and connect them to relevant point people in the ecosystem and beyond. Contrary to the opinion of some (first time) founders I met, board seats are not taken by Investors in order to control the company or restrict the founders in any manner — they are taken with the strong ambition to accelerate growth and support the founders on any level.
· Follow on financings: Close connections to growth investors in EU and US are one of the key assets VCs need to bring to the table besides helping to prepare the pitch deck, financial plans, structuring the syndicate and support with advice throughout the whole process.
· Collaboration with Best in Class Service Providers: Most companies need external support in one way or another e.g. to establish a PR and branding strategy, find office space, implement BI & analytics tools to track all relevant KPIs, find matching insurance providers, lawyers or M&A advisors to make the company grow or ready for exit. As a multiplier and very good quality filters we are able to bundle demand and leverage it through attractive framework contracts with the best in class service providers.
· CXO Workshops: Once a quarter we invite the C-Levels of our portfolio to participate in our CXO meetups, e.g. CMO & growth, CTO & Tech, CFO & Finance etc. where external speakers and industry leaders address major problems that our portfolio startups face. Connecting the about 50 active portfolio companies always leads to productive synergies and open discussions within a “circle of trust”.
· One on one Mentoring: Especially during our portfolio onboarding phase we try to share our operational experiences as much as possible by providing coaching sessions to specific topics chosen by the portfolio founders.
· Founder Resources: We share our best practices and guidelines on all kind of topics, e.g. incentive plans, industry reports and much more.
More on those topics will soon be published on Earlybird’s view.
#2 Keep founders in the driving seats — align interests with them
I actually do not see a true pain point here. Especially as an early stage investor one of the core criteria leading to an investment decision is the team. If we do not believe in the team there won’t be a deal — even given a perfect business model, market environment and investment terms. As an institutional VC we are interested in building global or european category leaders and receive high returns from an exit after 5–10 years — that should be very clear to every entrepreneur raising VC.
Before reaching out to us or any other Venture Capital firm I recommend to read this highly valuable article on delightfully choosing your path of growth.
#3 Efficient & transparent Investment Process
Founders hate fundraising. It’s time consuming as hell, frustrating (nobody likes to hear a “no”), it distracts from the core business, putting pressure on the founder’s shoulders. Not to mention the outcome — it’s open until the very last moment.
VCs are aware of those problems but lack time. They have to find a balance between fundraising, deal screening, deal making, portfolio support and market research. Personally, I get more than 50 pitch decks on my desk, every month. Additionally, we are analyzing technologies and industry segments top down and reach out to promising companies by using tools like Pitchbook, Crunchbase or Product Hunt. In order to counterbalance the increasing workload VCs are getting our processes much more efficient through CRM databases and automated workflows.
Consequently, staying focused and prioritizing radically is no.1 when it comes setting out to make VC a great product for entrepreneurs. If I am on a deal — I am on a deal! — and try to postpone all other tasks. Most founders like to understand what a VC’s fundraising process actually looks like and where exactly they stand — let’s be transparent and provide them the information they need, here is our investment process.
#4 Lower pressure for fast exits
As mentioned above institutional early stage VCs intend to build category leaders within their field. The lifecycle of a VC fund is about 10 years long. Here is the typical J curve of venture fund investments.
Given the above mentioned fund lifecycle, every founder choosing the path of Venture Capital should know about his Investor’s fund lifecycle and keep in mind that after year 10 an Exit should at least be seriously considered — some funds are extended anyways. Usually, all shareholders internally discuss exit strategies extensively and the legally binding decision is made by the majority of shareholders (thinking of drag along and tag along clauses) preventing single parties to push an exit on their own.
What also needs to be taken into account are external factors driving an exit decision. The appetite and liquidity of potential strategic acquirors or the general market environments for IPO scenarios are affecting exits heavily. In the end, all interests and preferences of the shareholders have to be aligned in order to make an exit successful. Blaming VCs for being pushy does not reflect the topic’s complexity in an appropriate manner.
#5 Be more approachable and connected to partners
The role of partners in a VC fund is very diverse. Primarily they are responsible for fundraising, final decisions on deals, representing the company externally and adding value to portfolio companies in need.
From time to time Entrepreneurs in need of funding asked me for a partner intro after a 3 minutes elevator pitch. That does not help at all — the pre filtering and preparation of investment decisions is attached to the role of Analysts and Associates for good reasons. They are the ones most familiar with tech, market dynamics, competitors, trends etc. and will guide you to the process very efficiently. I highly recommend to read my colleague Christoph’s article thereto: Don’t talk to the analyst! Even in case you achieve to connect to a partner they will directly forward the documents to the best match within the investment team.
For our portfolio CEOs it’s a different story. In urgent cases partners will always be available to discuss and decide on pressing questions, especially when it comes to follow on financings, exits, key hires or restructurations e.g.
Let’s challenge the status quo and become better together:
>> @Founders: what else do you need? Let us know and we’ll consider it! Feel free to comment on this article.
>> @VCs: What are your experiences and opinions? Happy to discuss!
