Within the last few years, Venture Capital firms began offering a variety of services to enhance their offerings in the early stage startup funding landscape. Services like sales, marketing and HR started to become popular.
These VC services were not only birthed out of a desire to protect investments, but out of a desire to compete for the attention of hot startups. After all, the pressure to invest in the fastest growth companies forces VCs to provide startups with the most “helpful” money possible.
Recently, the landscape has morphed again, with the emergence of Platform VCs. Platform VCs are a different beast, taking cues from traditional venture capital and accelerators to drive success within their portfolio.
What Does a Platform VC do?
A platform VC takes a heavy hands-on approach to helping portfolio companies reach the growth stage. Although the specifics vary by company, platform VCs have in-house employees who take a proactive on approach to a variety of functions within the startup. These functions, including marketing, sales, business development, and often product development, are funded by a portion of the overall investment going directly to the in-house services team.
From the VC’s standpoint, this type of approach allows the VC to better understand how a company is viewed by the market, how their products are being received and their true growth potential. It’s another way to protect their investment.
What Stage Companies do Platform VCs Invest In?
Generally speaking, a platform VC will want to see some kind of initial customer traction within a company, prior to making an investment. Since their skills are geared towards moving a startup from early traction to growth, they want to see companies out of the idea stage. They like to invest in startups that understand their customer’s problems and have a track record of being able to solve them.
How Much do Platform VCs Invest?
A platform VC will generally make an initial investment in the $100K-$250K range. As the startup reaches certain milestones, more is invested to move the team to the next stage. It’s important to reiterate that not all of that money goes directly to the company; the platform VC may keep anywhere from $10-$50K for their in- house services.
Conflicts of Interest
Since some of the investment money goes back to the platform VC, conflicts of interest are a chief area of concern for investors. Investors may not be comfortable with the VC still taking a 2 & 20 fee structure, in addition to for in-house services payment.
While there may instances where the “double-dipping” may not make sense, this type of compensation is appropriate for the right platform VC. After all, these startups were likely going to hire out or pay employees to perform these services anyway. Fulfilling the needs via a platform VC can prove to be highly efficient and decrease early stage waste and employee turnover.
Proceed with Caution
While success stories already exist, it’s best to proceed with caution when engaging a platform VC. First of all, investors need to thoroughly vet the potential partner. Have they had success with a similar startup? Are their services prices at fair-market value? Will they only offer in-house services that the startup needs or is it a package deal?
The other major consideration is to assess whether the startup needs the in-house services offered. Could they hire these functions internally at a better price with a better outcome? Do they have a better understanding of what they might need for long-term growth?
In the Long Run
It’s hard to say how these things will play out down the road, but we are excited that innovation continues within the venture capital space. Technology investing demands it.
