Founders should see through the marketing hype and ask VCs the questions that really matter.
A lot has been said about the evolution of value-add VC contributions going above and beyond their primary (albeit unglamorous) function of merely providing startups with capital. We’re seeing VCs raise the topic as part of their marketing pitches — especially now that competition among VCs is growing. After all, everyone’s money is just as green as everyone else’s. Or, as Atlas Ventures’ Dustin Dolginow puts it:
“Capital is a crappy differentiator”
As a European VC, I have been following the U.S.-driven evolution of VC value-add concepts over the past 15 years. What started as mere brand marketing (just check out those cute partner/founder-couple photos on most VC websites!) has gradually evolved into trendy “portfolio support platforms.” Advertised to founders as complementary operational support resources, these so-called platforms, talent agencies, or functional councils (besides generating the desired marketing effect) help large VCs explain to their own investors (LPs) where the annual management fees of sometimes $50 million+ are going.
Now, don’t get me wrong, I am a fierce proponent of any initiative that can heave our good old VC-business model to the next level. But I would advise founders to maintain a healthy degree of skepticism about the claims VC firms make about adding deep operational value. And here is why:
Prefab operations support isn’t a fit for innovative startups
Every entrepreneur who has already built an innovation-based company will agree that almost any operational aspect of their business must be meticulously honed to the specific requirements of the uncharted terrain they’re navigating. Optimizing processes, marketing messages, product packages, and customer value propositions requires continuous rethinking, if not willful transgression of cookbook rules. What counts is the ability to quickly verify assumptions and flexibly modify them with the learnings made in the trenches with your own customers.
This is precisely where I have great difficulty imagining how a bouquet of generic operational support resources can help. To make matters worse, the very concept of generic operations contradicts a VC firm’s goal of balancing portfolio performance by investing over a broad variety of business models, industry sectors, and technologies.
So next time you hear a VC brag about generating extra sales leads via their internal “value add platform,” remember the last time you tried to outsource simple outbound sales-prospecting activities to a third-party call center. And when it comes to more generic horizontal business services, why would you think that VC platforms could outpace the efficiency of specialized recruiting, marketing, or M&A firms offering dedicated sector practices with international reach? Just read through Jay Acunzos’s navel-gazing analysis of his job as NextView Ventures’ platform director to get an idea about the reality of things.
Another thing to consider: Any rivalry between a VC firm’s investment and platform teams could distract VCs from their most important role: catering to entrepreneurs in the role of well-informed coaches and sparring partners. Vinod Khosla’s indignation about “the 70–80% of VCs adding negative value to a startup” highlights the dilemma of VCs confusing sporadic and superficial operational assistance with the noble task of providing adequate advice in major inflection points over the life of a company. Remember, every startup’s road to success is marked by not more than 5–15 crucial turning points and their related decisions, each of which has an impact on the final outcome.
What really counts
It is in these moments of inflection where experienced VCs can add tremendous “non-operational” value, illustrated by the following incomplete list of examples:
- A VC’s ability to close financing rounds smoothly without overly distracting management
- A VC-firm’s predictability and ability to lead and coordinate a syndicate in (difficult) follow-on financings
- Well informed contributions in burn-rate adjustments on the basis of meaningful KPIs and sober scenario planning
- Playing the role of a professional referee when founder quarrels are looming
- Dealing with general board and shareholder misalignments while shielding management
- Providing a second opinion in the few most critical hiring situations a startup faces (e.g. VP Sales, CFO, next stage CEO)
- Active VC-participation in fact driven debates about the “when and where” of an internationalization strategy
- Assistance in the honing of a company’s strategic positioning and related pitch
- Informed backing of crucial negotiation strategies in such important matters as financing rounds, major licensing agreements, OEM or strategic partnerships (including a jointly backed “license to leave the negotiation table”).
Pundits will point to the concepts of “company builders,” “incubators,” and “accelerators” as evidence for the existence of deep operational investor value-add. It’s true that heavy hitters in that field (like Germany’s publicly listed Rocket Internet) are building complete startups with their own internal resources before sending them off to new shores under the management of a casted group of hired guns. But don’t be fooled: These guys are, quite rightly, focusing on copy-cats or replicable versions of generally proven concepts (e.g. marketplaces, plain vanilla e-commerce sites, etc.) where success and competitiveness primarily depends on superior execution speed and preferred access to massive funding sources.
Do your homework
However, those rare individuals driven by the ambition to disrupt existing principles by means of highly innovative concepts are facing entirely different challenges. They are the creative bunch of savvy entrepreneurs who should carefully select financial backers with a proven track record of wisely navigating difficult waters at major inflection junctions. These are the founders who need the backing of a VC who’s less interested in relying on past patterns and more interested in helping on an as-needed basis with critical issues that arise.
Identifying these VCs is not an easy task when you’re caught in today’s marketing maelstrom. But it is certainly worthwhile to go the extra mile, listen around your network, and ask for references. This will have a disproportionately higher impact on the success of your company than the incidental customer-lead thrown in from a personal rolodex or that odd VP candidate being identified by a VC-platform’s talent manager.