The business of venture capital begins and ends with your entrepreneurs and portfolio companies succeeding and generating massive outcomes. While sourcing and investing in great early-stage companies is a good start, finding ways to add material value to your portfolio companies can be a meaningful driver of higher returns for your VC fund and your limited partners.
Moreover, as the venture capital ecosystem becomes more competitive, having a clear value proposition to founders helps you both:
- Source seasoned and first-time founders who are looking for venture capital funds to help bend the long odds of startup success in their favor
- Tell a differentiated story to LPs (e.g., pension funds, insurance companies) about how your fund generates above-market returns – through both attracting great private companies and helping them achieve better outcomes.
With the increasing number of sources of early stage capital from all directions – high net worth individuals, traditional public market investors (e.g., hedge funds), and even traditional private equity buyout funds – a traditional venture capital investment team can no longer viably take a passive role and expect to attract the best founders.
Like private equity operations teams, most large VC firms now employ operations or platform teams focused on providing portfolio companies with value-added services outside of investment capital. As we’ll dive into, these teams help with everything from customer introductions and recruiting talent to helping companies navigate the exit process (either mergers or capital markets and initial public offerings (IPOs)).
Unfortunately, not every angel investor or venture capital firm has the resources that Sequoia or A16Z have at their disposal to set up extensive in-house ops teams. However, this does not preclude smaller funds or angel investors from being value-add investors and actively supporting their entrepreneurs.
Building a Relationship With Your Portfolio Companies
As an angel or VC investor, How do you best support your portfolio companies? By using your most valuable assets: your network and in-house expertise. By leveraging your network effectively, you can add value to your portcos and increase their chances of becoming high-growth companies.
The first step should always be to build a healthy relationship with the founding team of the new businesses you invested in.
Transparency and communication are essential for the relationship to succeed. Entrepreneurship is no easy feat, and founders much rather work with investors that share their vision and understand their goals.
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Immediately after the initial investment, make sure to set up regular check-in calls for the first 3-4 months post-investment. Remember, early-stage technology companies move quickly, and keeping abreast of the latest developments is crucial if you and your firm are “hands-on” investors who actively support your companies.
By building a relationship with the founding team, you will be better positioned to understand their unique needs and how you can best support them throughout the journey.
Your firm should tailor the support it provides to each investment. Every founding team is different, with different motivations, skill sets, experience levels, and areas of expertise.
As an investor, you will have to be in tune with your founders throughout the lifecycle of the business and ensure you provide them with the support they need instead of following a one-size-fits-all portfolio management approach.
Below, we discuss several ways venture capitalists can support their companies beyond just making monetary investments.
1. Customer Introductions and Business Development
One of the most common reasons startups fail is that they do not find a way to acquire new customers repeatedly.
Software companies or apps founded by first-time entrepreneurs outside traditional technology hubs like San Francisco, silicon valley, or New York often have difficulty attracting new business. According to data from CB insights, 19% of startups fail because their competitors grow faster. Having a proactive, hands-on venture capitalist in the company’s corner can help alleviate this situation.
As an investor, the most basic way you can support your portfolio companies is by helping them generate revenue.
Between you, your partners, and the other members of your firm, you are collectively connected to thousands of individuals or experts that can assist your companies in entering new markets, closing deals, and honing their go-to-market functions. This is especially true if your firm’s investments are focused on one particular industry or niche.
Your team should leverage a relationship intelligence tool like 4Degrees to keep a record of these contacts and their priority needs allowing you to easily identify early clients for your companies.
Start by consulting with the founders or marketing teams in each portfolio company. Ask them to provide you with information about their ideal customer profiles.
If the firm is very early stage and is still honing its ideal customer profile, you can start by connecting them with someone in your network who can add value in this particular area.
It is as easy as opening 4Degrees and filtering by category.
For example, suppose your portco is looking to sell to small businesses or healthcare or telecommunication clients. Once you know the types of customers they’re looking for, match those profiles against the people in your network and offer to make an introduction.
2. Hiring Talent
No startup can be successful if it lacks the right team to deliver results. Regardless of how sound a business model is, every company needs the right team to lead and execute its growth initiatives. Well-funded growth-focused companies are constantly looking to hire talent or connect with service providers to help them reach their growth goals.
Unfortunately, most entrepreneurs are not HR professionals, and their companies don’t have a dedicated talent acquisition or human resources function that can focus on finding the individuals with the desired skill set that also fit their company culture.
On the other hand, relying on external professional recruiters can be expensive and time-consuming, so founders and teams are left with their often limited networks to source candidates at a critical stage when making a hiring mistake can be very costly.
For example, hiring the wrong VP of sales can have lasting negative consequences for months or even years.
As an investor, this can be an opportunity to set yourself apart and add real value by making this process more effective and less expensive by leveraging the power of your personal and your firm’s networks.
This can work for all levels, from individual contributors to C-suite level hires. The less time your CEOs are spending on recruitment efforts, the more time they can spend on growing the business. Helping portcos make the right hires and grow the company, is also in your firm’s best interest.
By periodically meeting with your portfolio companies, you can keep track of what positions or services they are actively recruiting. For example, if your team uses a Relationship Intelligence platform like 4Degrees. Then, you can easily share those people from your network that would be good candidates for the specific positions that your portfolio CEO is looking to hire. Then, all you have to do is make the introduction.
This process can be much more ineffective and time-consuming if you and the rest of your firm keep your network in disparate systems like spreadsheets, email, calendars, etc.
As an advisor, you can not compel your companies to hire all of your referrals. The CEO and senior management team will make the final decision. However, if you push too hard, it can be seen as a precondition for your investment in subsequent rounds, which can affect the relationship and trust dynamics with your CEO; this is something you would like to avoid.
To learn how other VC firms have curated a network of professionals and experts to help their firm’s investment succeed, check out this interview with Devon Leichtman of Origin Ventures.
3. Advice and Wisdom
Like most investors, you probably invest in companies that are in industries you know well. You understand the market, customer preferences, products, and the skillset and experience of the people they tend to hire. As a result, you or other team members have a wealth of knowledge that you can share with founding teams.
To get off on the right foot, make sure to set expectations before investing. Be clear with the CEO and co-founders about your expertise and the type of mentorship you can provide. Make it clear that you are a resource of knowledge that you hope they will explore. Then, stay abreast of company activities, such as their operations, growth, new projects, and future fundraising. Finally, don’t be afraid to reach out if you feel your wisdom can add value.
It’s not unusual for early investors to play an advisory role for their portfolio companies. Depending on the structure, they may even serve on the company board. You may not have a formal leadership position, but you can still offer your guidance to each company you invest in. However, be humble, and recognize that there is almost always going to be someone better suited to provide support to issues your startups run into on a regular basis. Here is where your network should come into play.
People tend to gravitate to what they know. If your entrepreneur is a technical founder, he might prioritize product development and disregard the go-to-market or commercial areas of the business or vice versa.
As an advisor, it is your job to plug knowledge gaps by providing advice, or better yet, connecting CEOs and their teams with the right resources. For example, If one of your portcos faces a specific issue, perhaps you can connect them with another portco that has navigated the same problem before.
Lindsay Knight from Chicago Ventures suggests building communities for people leading specific disciplines across the portfolio. For example, a senior role within a startup is often lonely; these executives are the only person in their company doing their job (often, they’re the only person doing three jobs). So Lindsay will often connect these leaders with people in similar roles elsewhere in the portfolio. Even if there isn’t a specific request for help, just the connectivity, and ability to talk to someone who’s experienced some of the same things can be a massive benefit.
By using relationship management software, you can mine and categorize your contacts, so you sort through them according to your needs and directly share them with your CEOs. This way, you will always be ready to support your founders without delay. A simple connection can avoid the frustration of seeing one of your investments underperform because they lacked the knowledge or expertise that you or someone from your network could have provided.
4. Investor Introductions
For most early-stage investors, your portfolio companies will need more capital to achieve the long-term vision that you invested behind. Not only does this increase the valuation of your stake – but more investors surrounding a company mean more resources (cash, network, stakeholders) that are working to increase the likelihood of achieving its goals.
For most investors, you have a much larger network of investors than the founders of your portfolio companies do – along with a better understanding of what they look for. As a result, a large part of the value add you can bring to your CEOs is coaching them on the capital-raising process and introducing them to future financing sources. Done well, this creates a number of positives for your fund:
- If your portfolio company is achieving its milestones and secures a top-tier investor for the next round, it is a positive signal for your ability to select great companies (and provides an opportunity to follow-on and double-down on the business).
- Introducing your portfolio companies to other investors can reduce the time the founders spend fundraising, giving the CEO and other executives more time to run the company and make it a more attractive investment for subsequent investors.
- A successful introduction to other investors allows you to stay top of mind and may lead them to reciprocate when there are potential investments that are in your focus areas that they can share with you.
- You’ll likely be able to get more honest feedback from other investors about why they may have turned down the portfolio company, which allows you to better help them hone their pitch and narrative to be successful in future conversations.
Effective portfolio management starts with providing support and adding value to your portfolio companies. To effectively do this, you need to be aligned with your CEOs and be available for any ad-hoc issues that may arise. At times, a simple introduction can make a material difference in the life of an early-stage company.
The size of an investment check is not the only value you bring to the table. As a VC, it is your job to constantly expand and strengthen your network to offer more value to your current and prospective investments.
When entrepreneurs are conducting their due diligence, most want to partner with investors that can provide them with the connections and advice to scale their business and help them overcome the challenges they face throughout their entrepreneurial journey.
To learn more, click here to schedule a personalized demo of 4Degrees for Venture Capital.