Saison Thinking
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Saison Thinking

Social capital: what non-partner VCs can bring founders

“We prefer to engage directly with partners”

Recently, I was turned down by a founder who I was trying to schedule a meeting with.

This got me thinking about founder-VC dynamics. I have been on the other side of the table (as a founder pitching to VCs), and to be completely honest, was initially guilty of taking the same approach. While I did not say this explicitly, as a founder, I was drawn to the most senior person in the room — most often the partner. Yet, as I developed relationships with non-partner VCs, I started to realize how wrong I was. While partners make excellent coaches, advisors and mentors, it is often the non-partner VCs who hustle on the ground, by a founder’s side: from making direct customer introductions, to negotiating office leases.

Now, from the other side of the table as a VC, and non-partner, my views on founder and non-partner VC relationships are unsurprisingly strong. The real question founders ask before engaging with VCs — partner or non-partner — is: “How helpful could this person be?” Seniority and decision making authority are useful social cues to make quick assessments, with the broad assumption being “the less senior you are, the less useful you will be”. Yet, I believe founders who think this way miss out on what non-partner VCs have to offer.

The tl;dr

VC = Financial + Social Capital

Financial capital is the most obvious value VCs offer to founders. Yet financial capital is also a commodity — a dollar taken from VC A is inherently no different from a dollar taken from VC B. The difference is ‘value-add.’ Yet, the “value add” of VCs has also long been a joke and meme, due to its vague nature. Promoting “value add” without diving into specifics of what is actually being added triggers alarm bells of overpromising and under-delivering.

As Marc Andressen from a16z has previously stated, one of the most important “value add” VCs can offer founders beyond financial capital is social capital: “I’ve always thought the biggest thing a founder buys from a VC is a bridge loan of credibility in advance of tangible evidence.” I am in total agreement.

To be credible, social capital needs to be accompanied by financial capital. Without this, a shade of doubt is often cast on the social capital offered. “Why is this being offered to me? What’s in it for you?” — these suspicions and questions can impact the underlying trust, reducing the value of social capital. Staking financial capital with social capital, or more coarsely, “putting money where your mouth is” quickly resolves any doubt of trustworthiness, as financial incentives are clear and aligned.

To put this in context, the first question I ask any fellow investor who recommends a potential company to invest in: “Have you invested in the company, or are you planning to?” While the investor is investing their social capital in the company I tend to favor referrals when their financial capital is also involved. There is skin in the game, and I understand the incentives of my fellow investor — to support the company’s growth with new investors (hopefully me). Without financial capital, I wonder — “Is this a company that the investor)has passed on before, and is now shilling to me?” Of course, there are exceptions when the investor is genuinely unable to deploy financial capital into the company such as a cheque size that is too big, too small, or a company that does not fit the investor’s mandate. However, the broad thesis remains: financial capital amplifies the value of social capital.

Two sources of social capital

Since social capital is valuable from VCs, it is worth understanding where social capital from VCs stem from. There are two types of social capital:

  1. Social capital from the institution
  2. Social capital from the individual

Social capital from the institution stems from the fund’s brand, and usually is most valuable when that brand is recognized as a signal of quality. This is why many founders seek out global funds with repeated track records of backing iconic companies; think funds like Sequoia and a16z that have demonstrated stellar performance across decades. Much of this social capital is implicit — founders can borrow the institution’s brand, call themselves a “XX-backed” company, which increases their credibility. As this is the most immediate and direct form of social capital, it is often what founders seek first and foremost.

Yet another form of social capital exists — one that is less public and obvious. This is the social capital from the individual investor. Each individual investor has their own proprietary social capital, which is a combination of breadth, depth and willingness (discussed more later). Even within a VC fund, each individual investor has distinct social capital to offer. The social capital of an investor who covers crypto and web3 differs radically from an investor who covers e-commerce, though both may work in the same fund. The former’s social capital may be derived from market makers, exchanges and protocols whereas the latter from supply chain, distributors, and logistics & warehousing.

This second form of social capital — from individual investors — is what founders have to uncover and understand, ideally before a partnership begins. While it is tempting to rely on the first form of social capital as a deciding factor for which VC to partner with, it is often the individual’s social capital that truly unlocks value in day-to-day operations. A warm introduction to a Fortune 500 decision maker as a prospective customer usually stems from the social capital of the individual investor, rather than the implicit branding of a “XX-backed founder”. The latter helps with first impressions, but it is individuals who unlock meaningful opportunities and introductions.

Social capital from non-partner VCs

Not all social capital is created equally, just as not all VCs are created equally. Social capital from the institution is easy to measure — “How well known is the fund?” is probably the best proxy. Social capital from individual investors is more nuanced. I believe this form of social capital can be assessed across 3 dimensions:

  • Breadth — How many people does the individual investor know?
  • Depth — How well do these people know the individual investor, and will they be willing to help?
  • Willingness — How far will the individual investor go to help founders access the breadth and depth of his/her network?

The seniority and tenure of an individual investor is generally correlated with breadth — the more time spent in the startup ecosystem, the more people an investor gets to know. Since networks compound over time, it is fair to assume that the partner with two decades of investing experience will have broader networks than the associate with two years of experience.

Depth, however, has a weaker correlation. While it is intuitive to assume that seniority and tenure is associated with the willingness of others to help out, this is not always the case. An analyst or associate who has previous operator experience may have deep relationships with fellow operators that a partner may not have access to. Helpfulness and friendliness is often a stronger indicator of depth in social capital: a junior investor who is actively present and supporting others can develop strong relationships and “earn favors” that accrue social capital.

Willingness is the one dimension where seniority and tenure may have a negative correlation with. Explained by Alex Hardy:

Social capital (is) weird in that you can’t freely give it away. It is stubbornly tied to your reputation in a way financial capital simply isn’t.

If I give you $20,000 to start a doomed business, no one’s the wiser. If I intro you to my whole network, I have real reputational risk.

This is where I believe non-partner VCs might have the advantage over their senior, tenured colleagues. Many analysts, associates and principals have “less to lose”, so they are often more willing to go the nine yards and swing on behalf of founders. This also means that the junior VCs are more likely to open up their networks and offer social capital, even if those networks have less breadth. Of course, there are senior VC partners who have the breadth and depth of networks, and are willing to put their reputation and social capital on the line for founders. These are individuals who founders should actively seek out and engage with closely. Yet, they are themselves a kind of unicorn: not easy to find. By definition, they cannot be risking their reputation for dozens of companies. Social capital from VCs work best when concentrated over a handful of portfolio companies and founders — I believe 10 is the hard cap, with the ideal range at 5–8 companies.

Non-partner VCs tend to be highly motivated to build their brand and track record. They want to prove themselves, and assuming their long-term goal is to remain in venture, the only way up is to build a track record of being a helpful investor, which attracts other founders, is to be a helpful investor; thus creating a positive flywheel effect of dealflow. As a result, they are most likely to be highly willing to help founders succeed. This is why founders who snub non-partner VCs are missing out on a huge opportunity. If we think in “win-win” outcomes, founders’ success is closely tied to the non-partner VC’s individual brand, so they have strong vested interests to hustle on behalf of your company. Granted, they may not have extensively broad and deep networks, but I would not bet against an individual with hunger, motivation and determination.

Assessing and utilizing social capital

When it comes to assessing the social capital of an individual investor, partner or non-partner, founders should aim to get information around:

  1. What are some of the ways the individual investor has supported founders in the recent 12 months?
  2. How many founders / portfolio companies are they actively supporting currently?

For the first question, nudge investors to share concrete examples, beyond generic answers such as “we made introductions to growth stage investors”. Positive signals of a strong individual investor would be specificity in responses and tailored approaches to the particular founder. Also, look out for individual investors who publicly stake their reputation on behalf of an early-stage, unproven portfolio company. Those who do so take on significantly more risk than investors who tell reverse narratives and publicize established, already-successful portfolio companies. Even if the early-stage, unproven company is not immediately relevant (e.g. different sector) or worse, does not pan out, it shows the investor’s willingness to offer social capital.

Several ways social capital can be productively used to support founders include:

  • Social capital to attract talent — VCs can help early-stage, unproven companies to attract senior talent. As someone who founded a recruitment tech startup, I particularly enjoy hopping on calls with candidates in the later-stages of hiring to share why we invest, and provide assurance of stability (in funds raised). Candidates are often surprised to hear from an investor, and may consider it as a positive signal (“this company is worth the investor’s time to participate in their hiring”).
  • Social capital to raise funds — VCs know other VCs, and we talk. Having an investor vouch for your company to another investor saves extensive legwork. Founders can also work with existing investors to accelerate the feedback loop and obtain genuine, candid feedback.
  • Social capital to find customers, including from other portfolio companies — Founders should take the effort to crawl their investors’ LinkedIn networks to identify potential introductions. While the investor may not have a direct relationship with all of their first-degree connections, this exercise is a useful litmus test for an investor’s breadth and depth of social capital. Alternate ways I have been experimenting with include opening up my network through LinkedIn Lives, or mentions in thought pieces on Medium.

On the second question, knowing the size of an investors’ social capital portfolio also gives a sense of how much bandwidth is available for you as the N-th founder under their purview. Keep in mind that investors encounter the perennial struggle of dividing time and attention between looking for new investments and supporting existing ones, so the level of support if you are their 3rd founder vs. their 30th founder will vary significantly.

What does this mean for founders?

The next time you pitch an investor and mention “we are looking to bring strategic investors on board to add value”, it is worthwhile to define what “strategic” and “add value” looks like. The founders that best leverage their investors have clear and specific asks on how their investors’ social capital can unlock opportunities that otherwise would have been challenging to access. Oh, and don’t snub the non-partner VCs. They might just turn out to be your best advocates.

If anyone wants to talk to a non-partner VC to figure out what it’s like, you can reach me on qinen@saisoncapital.com.

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