Beyond the Money: Some VCs Provide Startups With A Competitive Edge

Surprisingly, some of the most important resources from a VC isn’t the financial funding.

When I meet with startups I find it helpful to find out who their investor is, secondly, it’s important to watch how VCs are funding, as it impacts what type of technologies we’ll see in the next few months. I don’t know as much as I want to about the VC world, so when I have questions I turn to Jennifer Jones, just this weekend we were engaged in the topic of the overall value that VCs bring. No, not just the money aspect, but the other intangible benefits, as VCs provide several intangible services to their portfolio companies, as I understand it, they include:

VCs Provide Startups With A Competitive Edge by Offering Additional Services:

Thought Leadership
VCs are required to anticipate future trends, and as a result they are highly connected, obtain information from a variety of sources, and have to quickly synthesize what’s next. Some of the VCs are more active in public, and are on the speaking circuit, and are sharing their ideas. Take for example David Hornick, who does a great job at this as he discusses why and how he’ll invest the $650mm they raised in high tech. Considering the recession this fund will fuel a great deal of innovation –even during a downturn.

Strategic Guidance
Often, VCs sit on the Board of Directors of their portfolio companies and provide guidance, direction, and access to other decision makers. This not only protects the VC to keep an eye on the company, but gives the entrepreneurs a chance to bounce ideas off senior and seasoned investors.

Being Part of The Family
Access is important. When I meet with startups, it’s important to know who invested in them, as it indicates their network. If you watch carefully (real carefully) you can see that startups that share the same investor use each others products, exchange executives, and are talking to each other. They often have offsites

Ancillary Services
Some VC firms have education teams and marketing teams that provide a broad range of services to the portfolio companies who don’t have the resources to hire full time marketing staff. In fact, I’ll be doing a workshop with Giovanni Rodriguez in the near future for a VC group. Recently I held a dinner discussion with Allegis capital and Scale Venture Partners, to meet their portfolio and discuss market trends.

Umbrella Branding
Perhaps the most under utilized is the benefit of being part of the brand of a well known firm. There are certain firms that are known for investing in certain verticals, or have a track record of success that lights my eyes up. Companies often tout their investors in briefings, especially if they are a top tier firm.

Parties… eerr um Networking
Ok, that’s my polite way of saying great parties, well networking too. During the height of the economy, some VC firms flew the executives of their portfolio companies out to a one week retreat in Hawaii. Also, some of the best parties in all of Silicon Valley are at August capital –social media networking nirvana.

Recruiting and Fundraising
I added this bullet after the fact, after seeing how David Hornick has added to the conversation it’s too important to pass up. VCs offer additional services like recruiting, which I’d be so bold to say is often executive placement of the right folks. Secondly, they help with fundraising, which I would assume would be for additional rounds of investment, I would expect that this would often mean a solid reference from one investor to the next.

Entrepreneurs should weigh all benefits
Of course, with the top tier VC firms, there are certainly considerations, getting backed by a very successful VC firm may mean they have more influence over the terms, may drive the direction of your company, and ultimately, may have more equity of the company. I encourage you to think about the other services, network, and events that your VC will offer you, find out by observing or talking to companies in their portfolio.

VCs offer more than just funding
VC should continue to provide thought leadership in their space, discussing in public why they are raising money, where they anticipate market growth, and how they plan to invest. This not only attracts new investors for their fund, but gives branding cover for their portfolio, and the folks in the industry, like me, visibility on the next trends. What they do beyond the investment makes a different –I can see it.

  • http://technews.am Matt

    Thanks Jeremiah, this is a useful and timely post. Your first sentence pretty much sums up what most overlook, “some of the most important resources from a VC isn’t the financial services.”

    In the UK we have a tv show called ‘Dragons Den’ (similar to The Apprentice). When the investors sometimes get into bidding wars to award an entrepreneur funding, the entrepreneur will often choose the investor who has better ‘contacts’ or ‘experience’ in their industry.

  • http://www.web-strategist.com/blog/ jeremiah_owyang

    That’s an interesting concept Matt. It’s flipped the bidding process around.

    In the end, (although I’m no expert) I’ll suspect the best relationships are partnerships –not buyer and seller

  • http://www.afpr.com Andrew Finkle

    Good ones Jeremiah, I blogged the same thing but with a ifferent answer;

    http://www.afpr.com/2008/11/your-vc-s-hidden-value.html

    I think the most important thing a VC can add is business development related activities. “Warm” introductions to other related startups. This is a little different then the networking you mention above.

    You should explore http://www.socialleveragellc.com who has a portfolio of ‘Twittersphere’ related companies that are all intertwined in one way or the other.

    http://twitter.com/A_F

  • http://www.voodooventures.com Chris Schultz

    Jeremiah – great post. I really agree that capital is not the reason to chose a VC, although its a baseline. I think that mentorship and building a community within the portfolio as well as being a evangelist is really critical. I think of Fred Wilson as the model for this. I also think the financial model behind VC is in flux with the seed stage mentorship programs like Y Comb, and convertible debt like Charles River Ventures.

    I’m trying to figure this out down in New Orleans with a model that supports and spurs innovation but isn’t solely based on traditional exits for IPO & M&A for success. It’s tough to figure out, but I’d like to create a model that fully embraces all of your points above, and includes capital, but scales down as well as up. We’re not NY or SV so we need a model that recognizes what New Orleans is, and reflects the businesses that are being created down here.

    @Matt – love the Dragons Den we have that on BBC america here too.

    Jeremiah – thanks as well for helping Tiffany and me carry that heavy box of schwag to our booth at SXSW. Great to meet you.

  • http://www.web-strategist.com/blog/ jeremiah_owyang

    Chris

    I’ll have to check out Dragon Den stateside.

    Glad to help, I needed the exercise anyways, esp after all that BBQ.

  • http://www.jenniferjones.com jennifer jones

    Jeremiah, Thanks for the mention. All VCs should be focused on offering what you described not just the top tier VCs. If every VC were, many entrepreneurs would have even more successful companies. The problem is too many VCs get on too many boards and then the VC is not focused on the company but instead on running from board meeting to board meeting. I have had the opportunity to work with more than 20 VC firms in 20 years and the best VCs are hands-on and very concerned about making ALL of their portfolio companies successful.

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  • http://www.twitter.com/elginthompson elginthompson

    The point regarding branding cannot be overstated. Validation of the business model and management team by a quality VC can be valuable when seeking new customers (assuming your product or service solves a true problem). Stating to prospective Customer X, “We are backed by VC firm Y” can be helpful in the sales process, especially if the VC is known in the space.

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  • http://startupcfo.ca Mark MacLeod

    The name of the VC game is “unfair advantage”. You look for companies to invest in that have such an advantage in their technology or biz model, people etc. And if you’re a top fund you bring such an advantage in your network and experience.

    The VC industry is heavily skewed. The vast majority of returns (and unfair advantage) rest with

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  • Xavier

    Nice, nice and nice.

    But naive also.

    You don’t build a business by raising capital and working with VCs. That’s the wrong priority. Focus on building a great team, product, customers and a viable market. Once you’ve done that, VCs will start knocking on your door. Take their money, and forget about the rest.

    Hmmm, I take that back. The cocktail parties are nice.

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  • http://blog.nuevaventures.com Come Lague

    Jeremiah, I agree that choosing the right VC to work with is a key decision that can literally mean the difference between success and failure.

    I would also add that choosing the right type of capital for the stage you are at is very important. I wrote a post on my blog about raising a round in this environment and the various considerations for each type of capital. Feel free to check it out at:

    http://blog.nuevaventures.com/2009/03/18/raising-your-first-round-in-this-environment/

    I also have several other posts that illustrate the type of value we add.

    In Nueva Ventures’ case, as a micro-cap fund focusing on bootstrapping entrepreneurs with capital efficient business models, our model is extremely high contact just given the nature of these startups needing all the help they can get and keeping their burn low. I bring a broad array of business building skills and experience, having done several extreme startups myself including two in Africa. I fill in as CFO and part time business development person at 4 of my portfolio companies right now. Few VCs can actually say they have been in the trenches in the entrepreneur’s shoes. As an entrepreneur, I would always look for that experience in a VC to help me through the ups and downs.

  • http://www.web-strategist.com/blog/ jeremiah_owyang

    Come

    It’s great to hear from you! Thanks for this insight.

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  • http://www.247webpros.com 24Seven

    Great post – for anyone considering VC funds this serves as ‘Food for Thought’. As our firm prepares to create our presence we will take some points made here and apply them. Are any VC’s available at the onset of project for guidance and support (not funds) to assist in the direction and model structure?

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