How Much Do Your VCs Care About You?
How much do your VCs care about you? An investment is an investment, right?
The reality is that both individual venture capitalists and their firms care differently about the various companies in their portfolios. And by “care,” I mean how important the investment seems to them. If a portfolio company feels important, then it’s naturally going to receive more of a VC’s time and attention than one that is less so.
While there are many qualitative attributes that can help inform how much a VC cares (more on that later), a simple guide can be distilled into three calculations.
The VC Attention Equation
The first figure is straightforward: the number of portfolio companies (especially those with board seats) an individual partner is responsible for.
The more companies where they are the point person for the firm, the less time they have for each individual one. Some VCs are overloaded with nearly a dozen board seats, which naturally distracts from any one portfolio company until there is a major event (sometimes crisis) happening. When a VC has responsibilities with many companies, they tend to spend their time putting out fire after fire instead of proactively giving founders constructive feedback on future direction.
Regardless of the number of investments, a VC doesn’t always treat each of them equally. The second relevant equation is: the amount of dollars that have been invested into a company as a percentage of the overall fund size.
This figure reflects how much relative capital there is to (potentially) lose in any given investment. Loss aversion shouldn’t be what drives a firm’s decision-making given the power law of venture capital returns, but it does often drive an individual partner’s actions. The relative amount of capital invested into any given portfolio company is directly correlated to how much of an individual’s credibility (spent in dollars) is on the line. This calculation becomes even more important if the VC invests more money in the company in future rounds of fundraising.
The third important metric in this discussion is: a venture capital firm’s ownership percentage of a portfolio company divided by its fund size.
It’s a less obvious ratio, but one that I’ve seen matters quite a bit. This measure determines the impact of any given sized exit is going to have on overall fund level return.
Let’s do some math to show how important this ratio can be. Both a $200M fund with 4 investing partners and a $400M fund with 8 partners could have the exact same strategy, but a $1B outcome where each firm owns 20% will return the entire fund for the first firm, whereas only half that for the second! And for a $50M seed firm which owns a “mere” 7% at exit, the impact of that investment on fund-level returns means even more.
So this “impact ratio” isn’t about downside, but rather it’s about upside. If this investment is a success, how much will it matter? That fact is certainly is something VCs care about. Additionally, it reflects upside for the whole firm, not just positive attribution for the individual partner who is the lead. So as a founder/CEO, if your impact-level is starting to approach fund-level returning valuation, start to expect attention from the entire venture firm’s partnership, not just one investor.
Other Reasons Why VCs Will Care
Outside of this “equation” there are a whole number of other factors and situations that play into how much a VC “cares” about a specific investment — and many of them are qualitative. Some examples include:
- If a company is suddenly on a major upswing vs. downswing (both will attract attention for different reasons)
- If the investment is out of a “legacy” fund where the original partnership makeup was different or that fund’s performance was poor (it won’t matter as much)
- If the current partner representative “inherited” that role from a previous partner who has since left the firm (thus not feeling moral ownership)
All of that said, while the above calculus is based on the structural dynamics of the founder-VC relationship, it leaves out one very important aspect:
VCs tend to care about companies they feel emotionally attached to.
This emotion can be based on a special affinity or a similarity to other past (successful) investments. But this emotional feeling is actually something founders can control as well. The more time they spend with the VC, or if the VC feels like they have been able to directly help the company, they often care more than the dollars or ownership might warrant. Like all relationships, the more effort invested into it yields more tangible positive results.
What Founders Should Do About This Equation
There are several conclusions here for founders:
- It’s important for entrepreneurs to be cognizant of and pay attention to the above measures, as they can help explain a VC’s behavior — as a result, you can proactively deal with your VC’s attention (or lack thereof).
- VCs with smaller funds can often translate to more attention for growing, successful portfolio companies because the denominator in the second two calculations are lower, but not always. Other inputs into the equation include the size of their portfolio in the number of companies and the firm’s follow-on strategy. A “spray and pray” seed fund with a lot of small bets won’t really be that interested in you until you’re huge — and then it doesn’t matter anyway. For the most part, the figures above find meaning in relative comparisons.
- Along those lines, the calculations I’ve outlined aren’t absolute, but they are a helpful lens through which you can compare multiple investors in your syndicate. There’s a reason that some of your VCs might be unnecessarily ignoring you while others are completely on top of you (sometimes in a not-so-good way).
Hopefully in most cases founders should want their VCs to care about them. The right investor can be constructive to a startup both inside and outside of the board room. Understanding the nuts & bolts of how a firm’s portfolio construction works shares an instructive lens into how VCs are motivated (or not) to interact deeply with their entrepreneur relationships.
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