The relationship between VCs and their portfolio companies has changed significantly over the past five or so years. In many ways it is still the same, in that VCs provide capital, then take a significant equity stake and often a board seat.
However, as the funding process has become more transparent and new capital sources have emerged, startups are looking for more value from their investors than just the cash they provide.
When I was toying with the idea of my current startup — we’re a private network for venture-backed companies to connect with business experts and solution providers they want/need access to — I was curious how many founders felt their VC firm provided value beyond the capital they invest. After informally polling one hundred or so founders, the overwhelming response was, “Thankful for the money, but not incredibly helpful otherwise.”
To be clear, VCs really don’t have to be helpful. If you’re a founder who is depending on your VC to help you run your business, you’re probably in the wrong line of work. My general advice to founders is to be thankful for the cash they receive from investors, don’t expect much help and be pleasantly surprised if they do help. That being said, as the funding landscape changes, VCs can and should add more value than just cash to their startups. In the end, advice or useful industry connections could be the slight push that tips the scale for the startup and improves the investor’s ROI.
The good news is that VCs are beginning to realize that their business is changing, which is why every firm has hired or is now hiring a “Head of Platform” or “Director of Community,” even though one VC recently admitted to me that he wasn’t sure what his head of platform was actually going to do.
The best way to get value out of any partnership is to hold up your end of the deal.
Regardless of whether your VC has people dedicated to helping your business operate, smart founders need to find a way to maximize the value of their relationship with their VC. This process should start before the check even hits the bank. When you are pitching VCs, you should understand them inside and out in order to maximize your chance of success in closing a deal, but this knowledge should also guide you in determining how they might be helpful post-closing if you do end up working together.
Conduct qualitative research on their past investments and ask those founders about the working relationship they had with their specific partner. Were they helpful recruiting? Do they have real connections with players that could lead to business development deals and did they follow through on making introductions? What is their availability during the hard times all companies go through? Do they truly have knowledge about operating a business that they can bring to the table? While conducting the deal, it is obviously key to negotiate terms of the deal, but also to determine how the relationship will work.
Once you have a handle on the working relationship and your deal is closed, try to schedule ASAP a working session with your investor to determine specific ways they can add value during your partnership. The areas outside of other general board duties I typically focus on are business development, recruiting and coaching. For very early stage companies, there may be ways for your investors to save you money by letting you work out of their space or leveraging some back office resources.
Ultimately, as the leader of your business, it is your responsibility to get value out of your investors, just like it is your responsibility to get value out of your employees. Try to get regular working sessions with your investors, being mindful that you’re not their only portfolio company. Try to make your asks as precise as possible, as VCs have a lot of people asking them for meetings, money, introductions, etc.
Finally — and I probably should have opened with this — the best way to get value out of any partnership is to hold up your end of the deal. As quickly as possible, you need to get to a place with your investors where you trust one another. You need to be comfortable sharing both good and bad information; good investors will be useful in both situations.
Beyond board meetings, it is important to be consistent in sharing your updates with key investors. A regular schedule shows discipline and demonstrates that you aren’t just sharing good news when it comes through. Good portfolio companies have really clear reporting dashboards, determining the KPIs with their investor at the outset and how to best present them.
Amateur entrepreneurs will create things like cumulative charts and show percentage growth without base numbers, and they won’t provide historical perspective, etc. Ask your investors what they expect from you in terms of information and the type of working relationship they seek. So long as the expectations are reasonable, you should meet them and then some in order to position yourself as one of their founders who they love to help.
As I mentioned, it is prudent to enter into a relationship with a VC assuming you are responsible for getting value out of them beyond capital. You will have to work with them in order to get the most out of the relationship. And if you can’t work with them, work around them. As CEO, you have to hold up your end of the deal, and get access to and obtain the resources you need without their help. But, if you’re smart, you’ll try to extract that additional value out of your VC relationship.