- A VC relies on his/her extensive network to add value to investee companies
- With insight, a VC can steer investee companies towards success and away from failure
MANY would point to Capital (money) which is a very obvious resource for a venture capitalist (VC). However, capital alone does not make an effective VC and founders must be aware of other major resources that a VC deploys to support and add value to the companies he/she backs.
From my own experience, there are four major resources i.e. Capital, Network, Experience and Time which I will elaborate a little each to provide context for founders' understanding.
You may think that bigger funds can logically inject more capital, right? Not necessarily. It also depends on the VC's investment strategy.
If the strategy is to have a large and diversified portfolio of companies (a.k.a. spray and pray), the investment per company may be much smaller, in contrast to a VC with a concentrated portfolio, which may allocate bigger investment per company (including allocations to double down on out-performers).
Bigger funds may also be more willing to invest in business models that require huge subsidisation such as some marketplaces or those that require a lengthy period of building a user base before monetising such as social media platforms, whereas smaller funds may be more inclined to invest in business models that monetise more immediately and require minimal subsidisation such as business-to-business (B2B) startups.
"Just as water is a key ingredient to growth on the farm, capital is required for businesses to thrive." - Sam Graves
A VC relies on his/her extensive network to add value to investee companies. These include referring major customers, strategic partners, distribution channels and co-investors.
Founders can assess the quality of a particular VC's network by counter-checking directly with the founders of that VC's portfolio for specific instances when he/she actually did something considered as "added value".
The proof of the pudding is in the eating. For example, I brought in a chain of twenty-one hotels as a major coup for one of my investee companies, Softinn Solutions, a developer of SaaS tools for hotels which at the time only had 150+ hotel clients.
That is a 14% increase in inventory and much more in revenue. In another instance, I brought in a co-investor for another investee company for its next round of fundraising which fetched a 10X increase in the company's valuation.
"Effective networking isn't a result of luck - it requires hard work and persistence." - Lewis Howes
When does a VC's experience becomes a resource? When it helps founders in becoming effective and avoiding mistakes.
A VC would be involved in multiple transactions, seen hundreds or thousands of proposals, invested in many startups, evaluated various permutations of business models, worked alongside many founders.
A VC who has hands-on involvement in all the above, eventually learns to recognise patterns of successes and failures.
With this insight, the VC can steer the investee companies towards the patterns of success and away from failures.
For instance, I have observed that startups tend to lose their core team members who are not founders at Series B unless there is a stock options scheme in place. In hindsight, this may seem like common sense, but many founders do need convincing to set this in advance as a pre-emptive measure.
"Experience is the teacher of all things." - Julius Caesar
The most under-rated yet highly critical. The more time that a VC can give to his/her portfolio companies, the more that VC will be able to dedicate #1, #2 and #3 for them.
How would founders know whether the VC always has them at top of mind? The answer is that it is only humanly possible based on an optimal number of investee companies that the VC has to work with.
From my own experience, that number runs between four to six companies only, especially when it involves early-stage companies. With that number of companies, I can make it a point to correspond with the different founders almost daily and meet them weekly on an informal rotational basis.
I can take a board seat, dig in into the challenges the companies are facing (which never cease) and all the while giving my full attention to the founders as much as my time permits. In contrast, let's say I had thirty companies to work with, it would be very difficult to make a similar arrangement. There just isn't enough time in the day.
"Time is the scarcest resource and unless it is managed nothing else can be managed." - Peter Drucker
By knowing and understanding these resources, founders can assess the VCs they plan to approach, make a calculated guess as to how much a particular VC can add value to their business, and after they get the funding, to ensure they maximise on benefits that are expected from a VC's participation in their entrepreneurial journey.
Kamarul Nizam Kassim is a Partner in Intres Capital Partners
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