Ask your VC (part 2): how will you help?
So, you’re looking for a VC backer for your company. You’ve thought through all the issues around the capital you are looking to raise…
So, you’re looking for a VC backer for your company. You’ve thought through all the issues around the capital you are looking to raise (terms, valuation etc), now you’re looking for the VCs to partner with. As well as making sure VCs are the right fit for your capital needs, it is worth thinking through what else you can squeeze out of your VC. The market in the UK has matured quickly, and (fortunately) it’s no longer the case that VCs get to invest where they wish, as they wish — many deals are competitive, and VCs need to “sell” how they can help, beyond the capital.
For founders, it’s crucial to work out what exactly a VC can offer beyond the initial investment. Many VCs will simply say “We have a great network”. One founder said to me “I think this is only meaningful to VCs — it is literally meaningless to founders. Network among who?”. Founders need to dig deeper, so that they pair up with the best VC possible.
So, how can your VC actually help?
Operational value add
Lots of VCs say they offer some form of operational value add, and some even have non-investing staffers/ partners focused on delivering this support. They’re usually doing this for one of two reasons: either for marketing purposes, so that they can attract good founders, and win deals when they become competitive; or because they think their support is good enough to “move the needle” for startups — materially affect their chances of success.
As a Founder looking for a VC partner, it’s important to think through a VC’s operational support — do you think you’ll need the support being advertised? How much support would you get, and how? As with any product, so is true of the venture product: if a VC is telling you they do everything, it is very unlikely they do everything well. So what operational support might VCs claim to provide? A selection of what is on offer from various funds includes (but is not exhausted by):
Founder development focus — such as mental health, physical health, leadership development. Even perhaps supporting a founder who wants to make themselves more financially stable by selling secondaries.
Hiring/ team building — it is now a cliche in venture that — in particular at the earliest stage — the team is paramount. Helping to develop the existing team — and, crucially, helping to hire — is a key value that lots of funds offer. It’s important to work through exactly what form this support takes. Will the fund be hands on and help directly, e.g. by sourcing candidates, and closing them, or (a little easier) by posting your jobs to their jobs board? Or will they help indirectly, by helping the founder with honing their hiring processes or building a plan for team-build? **
Distribution/ sales support — this could just be indirect support- i.e. helping you become a better sales person — or it could be “direct” engagement in the sales process — e.g. they know several buyers they can introduce you to. Some of the most interesting funds have sought out LPs in the target customer base for their investee companies, so have great routes into the customer. The same is true of Corporate Venture, where the “mothership” may be a target client.
Product support — help with your product. Again, this varies. There are funds like the product design teams at the Designer Fund in the US that are hands on with software design; there are other funds that simply have this competence on the team, and will offer high-level support through helpful calls.
Strategy support — this covers a huge range of topics — market positioning, pricing, market entry, prioritisation of projects etc. Most funds claim to do this to a degree. For a founder, it’s key to understand where a fund’s competence really lies, and how they can support in this area.
Regulatory and policy support — This is where Form sits. We invest in companies taking on markets where regulation, policy or politics plays a material role — offering opportunities or risks on the startup’s journey. Like other forms of support, this can be indirect — simply helping a founder/ team think through these issues and how to tackle them — or direct — actually helping to engage stakeholders and influence. For what it’s worth, Form does both, as we think we can be most helpful this way.
On top of working through what they do to support founders, it is worth asking how they support you — that is, who delivers the support, and how often can you expect to be supported. This can vary hugely — it is very unlikely that a pre seed fund with nearly 100 startups per fund can offer the same hands on support that a series B fund with 8 startups might offer. But there isn’t a clear rule between portfolio size and amount/ type of support — so it’s best to ask.
Future capital
As with operational support, this is a form of support that can either be provided directly, through investment, or indirectly, through network.
For direct support, as covered in part 1, VCs often have the capability to invest directly in your future rounds. The key questions here are:
How often does the fund follow on — from every time there is a round (often caveated by “where there is a new lead”), to never. If they are selective, how do they select?
How much do they usually follow on in a round? Just taking their pro rata to protect their stake, or do they sometimes look to build their stake through the rounds?
For indirect support on future financing rounds through network, this is arguably just as important — does the VC have strong links into other funds that will potentially invest in your follow on rounds? Is the relationship, and trust, between the funds strong enough that your odds of raising follow on capital would be higher through a relationship with this fund?
Brand
Will the fund’s brand add value to your company? Will it increase your profile, and send a signal to other investors and (potentially even) clients that you should be pursued? This is where the important (or not important, depending upon your view) signalling value comes in. Raising money from a top fund — Sequoia, for instance — undoubtedly gets you noticed. Yes, there is potential negative signalling value if the fund subsequently stops investing in your startup — but most people agree that the brand value of having their support in the first place trumps the downside.
And finally…
So when you’re looking at what VCs can do beyond their initial capital, operational value add, future capital and brand are all things to consider. BUT, there are two crucial caveats:
Firstly, as many people are quick to point out, “what do I get beyond the capital” is important, but not necessarily definitive. Venture is a relationship business, and finding a VC that you want to personally work with — regardless of underlying support — is often a very meaningful reason to choose a VC. The inverse is also very important — to avoid working with people you strongly dislike.
And secondly: don’t take a VC’s sales pitch at face value! Ask around; do your references. VCs have a strong incentive to “sell” — in order to win competitive deals — but for founders, it is the reality of the support/ finance/ brand that matters, not the pitch. So do your references — among other founders, particularly those in the fund’s portfolio, and even ask other funds — what does taking a fund’s money actually get you, beyond the initial capital?