Value Added VC: What Does It Really Mean?
By Jonathan Crowder on February 7, 2018
Selecting a partner is one of the most important and difficult decisions most entrepreneurs make. But when that partner happens to be a venture capital firm, which brings money to the table but also likely requires some measure of control, the dynamics become even more complex. My view is that broadly speaking, good VCs actually sell entrepreneurs a mixture of money, advice and control. Anyone’s capital will spend the same, so if you aren’t getting a good deal on the advice then you’re likely getting a bad deal on any degree of control however small it may be.
Investors acknowledge the importance of this point when they refer to themselves as adding value. In fact, it’s incredibly en vogue for VCs to describe themselves that way. But the truth is that, when building a business, not all categories of added value are created equally and it’s important for you to know what you’re getting as a founder and why it matters.
As you build your business, you’ll make a series of decisions on what should be built and operated internally, and what can be outsourced. The way we think about those decisions is that the things which approximate core company / product value or which cannot be reasonably outsourced shouldn’t be. But in the early stages, for most things outside those boundaries, it makes sense to outsource or use an external tool.
As an example, you might well decide that you need to have an excellent VP of business development so you’ll go out and hire that person. But instead of racking servers to host your service, you will almost certainly use AWS or Azure. Your team will need to communicate internally, but I suspect that you’re far more likely to use Slack than you are to build a proprietary communication app for that purpose. The reason you do this is because you’re unlikely to be able to afford the hardware or to recruit the quality of dev ops talent to build a cloud solution that is competitive with AWS. It probably won’t make sense for you to recruit the UX talent to design a high quality communication tool like Slack. They do it at scale and have the cost benefits that come with that, so in most cases it makes sense to use a service for those purposes.
I bring this up, because it is important when considering partnering with a VC firm that they bring a category of added value that would be challenging to reproduce internally. In essence, you’re looking for a partner that brings something extra in the highest marginal impact area of your business. I recently touched on this point in the following tweet storm:
Some investors claim that they’ll add value by helping you with your financial models and plans. But financial models rarely approximate core product value. I suspect no one will buy your good or service because it is backed by an elegant excel model. I’ve rarely seen a business that used a “finance ninja” to create a great business from a bad product. I have seen businesses that used a "product ninja" to turn a company that poorly understands it’s operational finances into a great business. Understanding the financial side of your business is crucial, but a mid-level operational finance person should be able to do just that.
In the early stages, it is also often unnecessary for that person to deeply understand the nuances of your product or business. As a result, you’d probably be well served by a part time CFO, who is likely to be both more experienced and lower cost than any full time CFO you would hire. There are many high quality execs in nearly every major metropolitan area that can fulfill this role.
At Intelis Capital, we believe it is important that each of our partners has experience in different aspects of designing and building various products. We’ve also worked to build out other capabilities that many early stage companies often find challenging. These include assisting with technical recruiting, the ability to offer guidance on architecting a sales strategy for difficult prospects such as energy companies or healthcare systems, helping to identify ways to create rigorous process while maintaining culture as your company grows, and long-term high-trust relationships with later stage investors who specialize in supporting entrepreneurs as they get farther along. This list isn’t exhaustive, and we continue to work on adding to it because it’s our goal to be an excellent platform to support founders on their journey.
Various companies will have different areas where the marginal impact will be highest. But if you’re going to give up some equity on your cap table, you’d be well served by finding an investor who brings skills you couldn’t easily hire or outsource using a quick google search. A good investor will be your partner for 5-10 years or perhaps more. So it’s important to choose wisely and really take time to understand what someone means when they say they add value, and whether that’s a fit for your needs.