venture-capitalI’ve seen several questions posted about how to impress or get the attention of venture capitalists so they see your vision as a worthwhile investment.
But I’ve begun to wonder about the VC-startup relationship from a different angle:
Aside from the obvious financial contributions, what (if anything) is a venture capitalist expected to contribute to the relationship?
For example, I’ve been watching a few episodes of Shark Tank this week (never watched it before). I’m not watching it because I expect it to be an accurate representation of what it is like to approach venture capitalists in the real world, I simply find it fascinating. On the show, the “Sharks” are often selling themselves and what they bring to the deal besides the money - they talk about relationships they have with various distribution channels, experience they have in certain markets, etc.
Obviously the VC wants their investment to have the best chance possible of actually earning money, but in the “real world”, if a VC commits $500k (or maybe $50k? or 5M?) to your startup, is there also an expectation that they are going to commit other non-financial resources to helping your startup succeed?
Something I find interesting about Shark Tank is that often the non-financial investment apparently being offered seems more valuable than the actual money on the table.
I’ve personally shied away from any strong consideration of seeking investments from venture capitalists if possible. Because at least for where I’m at now, I’d rather grow the business organically and maintain full ownership.
But it’s possible that is partly due to a misunderstanding of how the relationship works. If VCs commonly contribute their other resources like industry connections and experience, it would certainly make that type of relationship more appealing to me.
Unless it’s in the agreement, VC’s aren’t required to do anything. The term you’re looking for is “strategic value.”
UPDATE: Strategic investors like to think they make a difference, but in my opinion, it is not commonly a factor in the success of true startups; otherwise the VC would just buy the venture outright, leverage their position, and exit the venture. This is more common in private equity.
Taking investment from a VC with experience in your industry or market should allow you to tap in to their expertise. I wouldn’t necessarily put more value on the VC experience than a good board member or mentor though. But all experience is a benefit to your business.
VCs tend to have a good network of contacts, both industry experts, press, analysts and professional services.
In more practical terms, VCs may be able to help you out with boardrooms and meeting rooms from time to time. Useful if they have an office in the city but you’re based out of town.
All those benefits are nice to have, but shouldn’t change the purely financial considerations of the VC deal. At earlier stages, when looking for partners or angel investors who can also act as mentors or join the board, I would look more closely at what else they can bring with them.
I read somewhere that an average VC gives you 2 h/month of their time mentoring, establishing connections, helping you recruit, help with legal stuff, etc..
If the VC isn’t putting anything beside the money to the table. Thats a pretty shit VC and you shouldn’t take money from them anyways. There is a term going around called “Smart Money”. Ideally you want your investor to not be a standard business or finance guy, you want them to have ran a company in the same industry and they know people in the industry.
So as an example, if you are making another payment company, try to get investments from the paypal mafia.
Some VC companies set up a whole team of industry specialist to help with anything and everything you need to run a company. That is very valuable.
Like any other industry, VCs want to avoid commodification.
If it were just about the money then there would be no reason for you to take anything other than the cheapest deal.
So they want you to think that it’s not just about the money - it’s about other, less easily quantified, factors as well.
Which may - to a greater or lesser extent - be true.
So it’s basically a sales pitch.
It’s up to you to judge, in the specific case of your business and that particular VC, how much value they are likely to be willing and able to add.
tldr: value varies on a case-by-case basis, but in every case the VCs have a vested interest in making you think that their ‘strategic’ (as opposed to purely financial) contribution will be high - i.e. they have a vested interest in ‘talking up’ the non-financial value of their investment. It’s like the semi-mythical ‘synergies’ in mergers (which tend to work out not as good as hoped). So yes, these benefits can exist, but approach the concept with a degree of cynicism.
All content is licensed under CC BY-SA 3.0.