What does it mean to be a value-added VC?

By Jonathan Crowder on September 20, 2019

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Many VCs, including us, tell entrepreneurs that they’re a value added investor.  It sounds great on paper.  Often it is even true.  But why do you want a value added investor, and what does it mean in practice?

One of the benefits of being a VC is developing a network of peers that are usually grappling with the same challenges you do.  A few weeks ago, I sat down with my friend Kira Wallette from the Labora Group to chat about portfolio company support and how to scale those processes as the number of investments grows.  She’s one of the most process-oriented, thoughtful people I know in this space and our discussions often cause my thinking to evolve. 

Our conversation sparked an ongoing internal dialogue about which areas of operational and strategic support are most valuable for a firm to offer to entrepreneurs.  In other words, what principles define whether it’s a good idea for an investor to offer a service?  Are they things you as the entrepreneur should want?

After mulling it over for a couple of weeks, I think there are several broad principles which generally hold true.  I want to be clear that this list is far from exhaustive and doesn’t cover basic shareable resources like financial models or cohort analysis templates, deck and fundraising advice, etc.  While those have great value, I won’t cover them here.  Below are a couple of example principles for contemplation:

  1. Circumstantial – Certain types of tasks and knowledge are very situationally dependent. In these cases, increased friction in knowledge transfer quickly erodes performance.  Thus, outsourced or external support resources tend to perform worse. 
  2. Categorical – Here success on tasks is less dependent on situationally specific knowledge; the quality / skills of the person are far more important than their understanding of the deepest nuances of a particular business.
  3. Coverage – At what point along the talent distribution do you see diminishing returns to incrementally improved skills? What if the 99th percentile person in this space is great but costs 2x more than the 95th percentile person?  Is the last 5% worth it?  Do you get increasing marginal returns to skill as you move up the talent distribution?
  4. Credibility – How important is credibility and trust to the company’s target market?
  5. Community – Do you have access to / can you construct a network of peers in similar situations that could offer extremely relevant, useful advice? A community implies a “many-to-many” relationship, so the value of knowledge compounds rapidly.
  6. Counseling – Entrepreneurship is almost by definition an emotionally challenging pursuit, and easing that burden is important to both performance and fulfillment. Treating entrepreneurs as humans first and foremost, and offering advice based on having seen / been through the journey, helps them deal with the inevitable struggles that come along.

I think these principles play out in fairly nuanced ways, so I want to give some practical discussion around each.

Circumstantial

When I think about the first principle, product management immediately comes to mind.  It is my belief that one of the most important aspects of building a product organization is to maximize the fidelity of information that product management gets from the customers or users of the product. 

This often means that the PM may have some measure of account management responsibility, or is extremely close to the customer success organization internally.  The greater the distance between a PM and both the economic buyer or end user of the product, the less effective that product organization tends to be.  Your results may vary, but based on my experience thus far, there’s no substitute for a product manager being deeply embedded in the day-in-day-out use of your product. 

So how does this play out in terms of a VC adding value for their portfolio?  A great VC with product knowledge can offer advice on how to interpret various incoming data streams, how to organize a product team, how to hire product talent, broad principles on how to prioritize features, navigate internal team dynamics and many other things.  I’ve been fortunate to see up close how this advice can deliver exceptional value. 

But ultimately a healthy product team is a crucial ingredient in a great company, and it is something I feel you absolutely must own internally. 

Categorical

I’m sure many will disagree with me on this but I suspect that marketing follows principle 2 quite closely.  While a marketer must be familiar with your buyer context (i.e. experience marketing to individual consumer users on social media likely won’t be as relevant for marketing to enterprise buyers in a regulated industry), once we’ve crossed that threshold of familiarity, their absolute categorical (marketing) skill is dramatically more important. 

I’d use Amazon Web Services as an analogy here.  The services offered are extremely important, but aren’t something that necessarily has to be a core competency for your firm.  Categorical knowledge is as important or more so, which allows Amazon to specialize in the skill of managing your infrastructure without knowing every little nuance of your specific business.  It’s a services layer, and certain types of marketing can be thought of in a similar way.

Coverage

We call this principle “coverage” based on a loose analogy to the statistics notion of coverage probability.  Here we’re asking whether a 95th percentile person will be adequately good an adequate percentage of the time.  There’s an added nuance that in some fields the very top of the talent distribution isn’t just slightly better… the difference can be substantial.

When that’s the case, the sharpest tip of the spear is likely of greater value than their embeddedness in your organization.  While it isn’t a fit for every company, this is why so many startups continue to use external firms to manage AdWords campaigns, etc. even as the company reaches scale.  Outstanding marketers seem to be worth their weight in gold, and are far more effective than merely very good marketers.  But their knowledge is very portable – they don’t necessarily need to be deeply embedded in your organization.

This is a great candidate for an investor to add external value, as they could have an exceptional internal marketing team, the cost of which they amortize across the fact that they’re able to help a number of portfolio companies.

Credibility

The fourth principle is completely irrelevant in certain markets, but in others is absolutely essential.  At Intelis Capital, we invest in the digitization of traditionally analog industries, with a focus on energy.  Utilities or power generation asset owners are often the best customers for many of the companies we want to invest in.  These are often extremely risk averse segments, for good reason.  It means they value trusted references and relationships.  They want to buy from people who “speak their language.”  That’s why we spend a great deal of time getting to know executives in this space, and understanding their most important challenges.

It also means that over time we develop a reputation as a trusted partner for those customers.  They know we understand their business, and by building a track record of listening then bringing them solutions to their problems, we develop credibility.  We take these relationships extremely seriously and protect that trust.  Because we anticipate that many of these groups may have use for the product of more than one company we invest in, we can bring some de facto credibility to the table as a reference.

“Hey, remember when your team was really struggling with X problem in Q1 and we introduced you to this amazing team whose solution has been performing really well for you?  Well I remember you also mentioned you’ve been seeing challenges with Y assets, and based on what you said, I think another of our portfolio companies can help with that…”  Because of our association with other products they have used and liked, we become trusted references for these customers’ needs, whereas normally early stage startups would need a greater number of credible reference customers.

It also seems to be true with other investors.  Sometimes we see other sector agnostic investors that are interested in a company we’re meeting.  Those investors are often excited about the technology, team or market size, but correctly realize they aren’t well placed to evaluate or reduce go to market risk.  An investment from us often brings credibility and comfort to a deal that makes it easier for these more generalist firms (which often bring their own additive value in other ways) to say yes.

So in markets where relationships built on expertise, trust and credibility are important, industry-specialist VCs can offer a lot of additional value.  Luckily, it’s also value that compounds over time as a portfolio grows.  It creates a type of network effects.

Community

Most VCs intend to invest in a reasonable number of companies over time.  This means they maintain strong relationships with a number of founders and senior operators in each of the companies in which they’ve invested. 

Depending on the investment strategy of a particular VC, these founders will often be working in similar industries / stages of growth, or have other parallels.  Creating a sense of community and facilitating relationships between founders can offer an important, rapidly compounding knowledge network effect.  Companies in related industries or stages usually experience similar problems as they look to scale product teams, customer acquisition strategies, recruiting practices, etc. 

Often, another founder in an investor’s portfolio will have encountered (and solved) similar challenges to whatever you may be facing.  Facilitating those connections within the community accelerates the speed of that knowledge transfer, and is highly scalable. 

Counseling 

This almost speaks for itself – entrepreneurship is often an emotionally challenging endeavor.  In the early months and years of a startup’s life, the daily oscillations can feel like they will have massive impact on the prospects for the company’s long term success.  Any bump in the road can feel like a mountain.

Emotional health is crucial to maintaining performance and morale.  Often it helps to just have someone listen that understands your situation.  Because VCs often meet hundreds or thousands of entrepreneurs each year, they’ve seen founders experience the whole spectrum of emotion that comes with building a company.  Those connections usually create deep empathy. 

If the VC you’re speaking to has relevant operational experience, this will often be even stronger.  When Kevin Stevens and I were operators, we experienced the rollercoaster of emotions as the team raised rounds of funding, and eventually sold the company.  We experienced both failure and success as part of a team.  That experience teaches you that the swings in momentum that feel massive are usually much smaller when you zoom out and view them from a long term perspective.


I know other VCs will have useful insights about which principles are true and I’d love to learn from their perspective.  We believe it is important to consider these kinds of questions as we decide where to allocate resources as we work to enhance our ability at Intelis Capital to support entrepreneurs.  Most of all, I hope the discussion helps entrepreneurs begin to grapple with the question of who they want to partner with as they grow their company.