VC value add
Buyer beware
Whether we like it or not, we’re all selling something.
VC’s sell money. Money is a commodity. And if you agree with the late Tom Perkins — of Kleiner Perkins fame — then it’s the least differentiated of all the commodities…
“With water, you’ve got Calistoga, Perrier, and San Pellegrino, all noticeably different. With sugar there’s the cane and beet variety; some can tell the difference. But with money it’s all the same” (Tom Perkins, Valley Boy)
If you’re selling a highly commoditised product then your only choice is to differentiate by providing something extra. This is why the VC industry obsesses about ‘value add’. It’s a VC’s point of difference and why they hope founders will choose to work with them over their competitors.
From a founder’s perspective, where the odds of building a startup are always stacked against you, it makes complete sense to get as much ‘value add’ help as possible.
Sounds good… what am I missing?
Here’s the thing about value — it’s a spectrum that runs in both directions. The opposite of ‘value add’ is not ‘valueless’ but instead ‘value destruction’.
‘Valueless’ is the equivalent of doing absolutely nothing at all. This might sound preferable to some founders but in reality it’s extremely unlikely. VC’s are professional investors incentivised to manage their investments. Whether you like it or not, as a founder you’re going to be spending time with your VC.
‘Value destruction’ on the other hand is a real possibility and it’s probably not what you think. It’s unlikely to be malicious or intentional. Instead it will come from inexperience, incompetence, a lack of alignment or simply not knowing all the facts.
Most founders will solve for positive value add when choosing their VC investors. This is only natural and is, after all, what the VC industry markets as its product.
In my experience most founders ignore the potential for negative value destruction. This is a BIG mistake.
What is it and how to avoid it?
“Inexperience, incompetence, a lack of alignment or simply not knowing all the facts.”
Inexperience and incompetence: These are easy to understand. If you’re a repeat VC-backed entrepreneur then they’re easy to spot. If this is your first time then my top three recommendations would be:
(1) reference,
(2) reference some more,
(3) and then ask yourself (be honest!) — do I want to make really important decisions with this person?
Referencing is not just your right, it’s your duty as CEO of the business. You’re about to accept a fund as a significant shareholder in your company and the individual will become a board member. It’s an irreversible marriage — there’s no divorce clause. Don’t be shy and don’t just accept the references a VC offers you; find other ways to get informal references and find the ones that didn’t work out as expected. And finally, remember that liking someone is not the same thing as trusting them to make really important decisions regarding your company.
Not knowing all the facts: This one is on you and only occurs after the investment has been made. It’s avoidable with consistent, high quality and timely communication. Things move quickly in a startup but if your board is making an important decision with unexpected information then you’re doing something wrong. A topic for another day.
Lack of alignment: this one is the BIGGIE. It’s where I see the least focus and yet the most room for error. And importantly there is so much you can do about it before deciding on your investors.
Alignment could break down in one or several key areas — values, vision, mission, ambition, risk, timeline etc.
Good references can give you some insight on these topics but ultimately they’re all subjects that are unique to you as a founder. No one else can answer this for you. If you’re not aligned with your VC investor on the values that are important to you, the vision for what you want to create, the level of risk you’re willing to take along the way, and how long you’re willing to take to achieve it, then you WILL end up in difficult conversations, and you’re likely to compromise heavily along the way.
I can’t state this strongly enough — alignment with your board and key shareholders is everything. It won’t (or shouldn’t) make a difference on the small decisions, or the day to day running of the company, but it absolutely can and will make a difference to the big stuff — hiring, firing, strategy, business planning, funding rounds and exit.
PLEASE, PLEASE, PLEASE…
Spend a significant amount of time trying to work through areas of alignment with your VC prior to investment.
Go for a meal together, drink wine together (if you drink), get your partner to meet them (and yes, I mean your life partner — if you have one), get lots of your team to meet them, take references from founders that have worked with them, meet all the partners in the VC firm (it’s the firm that’s investing not the individual), ask where they are in their fund cycle, how do they allocate follow-on capital, read their investment paper, what level of return are they expecting from you, how many other investments do they make per year, how many other board seats do they have, what does their perfect board meeting look like, what is their biggest VC success, what is the biggest VC failure, how long have they been with their firm, how long do they intend to be with their firm, do they think you need a Chairperson for your board, who do think should be your next senior hire, how do they like to communicate with their portfolio CEO’s, etc etc…*
(*link to a separate standalone list)
To find strong alignment there’s no substitute for spending quality time together. Your job in the early meetings with VC investors is to persuade them to invest. But once they’re hooked it’s your turn to dig in and figure out if you want to go on the journey together. If an investor is willing to do this with you then it’s a good sign. Embrace it. If, on the other hand, an investor has met you twice and then gives you an exploding term sheet (i.e. sign now or never) then my advice is to walk away. They clearly don’t value the trust and respect needed to build a great working relationship.
Conclusion
Make no mistake… VC value add is real and not just a sales tool. When it happens it’s a beautiful thing. It’s a true win / win. Everyone gets a better outcome for the company. Founders feel better about all the costs of VC funding over time. And VC’s get great founder referrals. Happy days.
BUT… VC value destruction is also a real thing. When it happens it’s ugly and painful. It’s a true lose / lose. Everyone gets a worse outcome for the company. It’s demotivating for founders and creates resentment which leads to lower quality communication and decision making. A VC might think they’re getting what they want in the short term but it’s unlikely in the long term.
Raising money for a startup is fraught with challenges. I’m not trying to suggest that this topic is the first or only thing on your mind during that process. After all, your job as a founder is to get your company funded. My message is quite simple… if you’re lucky enough to have a choice regarding your VC investor then first reduce the potential for value destruction, then and only then should you focus on how to get the most value add.
In my experience value add is smaller than everyone thinks and value destruction can be bigger and more common than everyone thinks. After all, it’s you and your team that are going to build this company, not your investors.
