Companies looking to raise money turn to venture capital for a variety of reasons. Top among them is generally access to capital, but often on the list is the hope that raising capital from experienced (and well-networked) investors will have other positive impacts on their business. Certainly from the venture perspective, VCs (Foundry included) pitch themselves to companies, co-investors, and LPs as more than just capital. Indeed, many firms even institutionalize the practice of providing help to portfolio companies through extensive platforms that may include PR, talent, marketing, technical, and other help (sometimes offered for free, sometimes offered ads a pay-for-service, but often at below-market rates for those services). There are venture firms that have dozens of people employed in the service of their portfolios.
But how impactful is all of this according to the people who actually matter – venture-backed CEOs? The answer may surprise you.
Creandum’s recent article, Do VCs add value? tries to answer this question and, in the process, raises a few other interesting ones. “Most founders don’t feel they are getting value from their investors, even in areas like follow on rounds where they would hope to see specialized experience. They feel they can do better.
Interestingly, and I suppose not all that surprisingly, VCs have a very different perspective on the value they’re bringing. The two graphs below highlight this across a number of different areas of impact.
I suspect some of this relates to expectation setting and how VC investors “pitch” themselves to prospective portfolio companies. But it certainly highlights the need for a deeper level of conversation between venture investors and their portfolio CEOs about where and how they can truly be helpful. Will they help you find other investors for future investment rounds? How do they make decisions about follow on investments? Do they want to be involved in operations of the business, recruitment of executives, etc? What level of support and expertise will you get from them and their network, particularly when things are rocky?
And fascinating to me that VCs believe “brand” is the most important thing that they offer vs where it shows up on the CEO list (#5, behind things like ‘personal chemistry,’ and ‘network’). I wish the survey had broken out “brand” from “reputation” because I suspect the gap around brand alone is actually quite a bit larger (although I don’t think that will stop many firms from focusing on their branding and marketing efforts…). Also standing out from the graphs above is the gap between how much VCs think they’re helping with recruitment vs CEOs ratings of the same (69% of VCs think they’re making a significant contribution to recruiting while 79% of CEOs say that they’re not).
As in most things, focus can help. I suspect investors trying to do too many things for any given company is both unrealistic and in my experience generally not very effective. Pick a few things that you really need help with (they don’t – and shouldn’t – be the same for every investor or board member), clearly outline what help you need and what your expectations are, and focus. Regularly revisit these to track your progress and update your list.
All of this highlights (again) why performing due diligence on potential investors is so important. We’ve just come through a market that was moving extremely quickly (too quickly, in my view). On the venture side, there was plenty to be concerned about in the need to make investment decisions so quickly. Overlooked was the challenge that placed on companies, who were making an equally important decision and entering into long-term relationships without the chance to meaningfully look into the firms that were courting them. Exacerbating this speed were valuations that in many cases were out of touch with reality, putting more pressure early in a company’s relationship with its new financing partners around company performance and trajectory. None of these dynamics allowed companies or their investors to form the basis for a longer-term working relationship. Hopefully, the new market dynamic will allow for more of this.