What can a VC deliver besides money ?
When you are seeking venture capital to grow your company, money inevitably looms large but it is important to consider how else a prospective investor can add value. Scottish Equity Partners provides a value-add checklist for entrepreneurs embarking on the funding trail.
When you are seeking venture funding to capitalise on major growth opportunities, keep in mind that deep pockets are important but by no means the only significant attribute in a funding partner. Do your own due diligence on whether funders possess the right blend of skills, experience, knowledge and networks to help your company attract top talent, seize opportunities, mitigate risk, navigate difficult times and build value.
Take care to distinguish between marketing hype and reality in relation to ‘value-adds’. The concept of ‘platform support services’ is increasing in the venture capital industry – current themes include in-house recruitment or marketing services. These may help plug gaps in manpower or expertise for some but equally they may prove too generic to be of significant value and may not appeal to some entrepreneurs.
In our experience of working with more than 150 high growth companies over the last 20 years, we have found that highly specific, strategic and targeted interventions, introductions and support are more effective and more valuable than a tightly-packed programme of events for hard-working entrepreneurial management teams.
We find that entrepreneurs value sessions which bring them together with like-minded peers who face or have overcome similar challenges, whether it be in recruiting engineering talent or building a customer base in new markets. For example, we brought together senior management from SportPursuit, a UK-headquartered ecommerce company specialising in online flash sales of branded sports and outdoor gear with the top team from Mister Spex, a German-headquartered ecommerce company – now Europe’s largest online optician. They benefited from a confidential exchange of highly practical knowledge of specific target markets in Germany and Scandinavia and, also on scaling up a workforce, logistics and payment methods.
All venture capital investors have networks which may or may not be potentially useful to you – scratch below the surface to determine how deep these relationships are and don’t be afraid to ask for examples of how introductions to their network have helped portfolios companies build value.
High-growth businesses inevitably need to recruit additional executive or boardroom talent as they expand. An investor with excellent contacts among not just entrepreneurially-led companies but also in corporate and professional circles can add value by making introductions to high quality candidates to take your company to the next level.
In most cases (certainly with SEP) a venture capital partner is likely to join your board so personal dynamics and experience matter if you are to get the best out of the relationship. Consider whether you can imagine sitting around the boardroom table with that investor for the next few years – do they possess the good people skills required to help tackle tough issues such as non-performance in a professional manner.
An investor with significant experience as a non-executive director can foster good communication in the boardroom and ensure meetings are challenging and productive. They can also help formulate strategy, change direction when needed and prioritise effectively. They can also assist with horizon scanning for new threats and opportunities for internationalisation or customer acquisition, as well as identifying an optimum exit that will deliver value for all shareholders.
Some investors are more hands-on than others – we believe that being an active, local and engaged investor builds value. We select the management teams we back carefully and commit to supporting them while trusting them to get on with the job. Practical considerations matter, including how often you will have face-to-face meetings with an investor and how many portfolio companies your VC executive is responsible for, in case they are spread too thinly. SEP executives monitor three to four companies at any one point to allow us to devote sufficient time to each. That is fewer than some other investors – be upfront with potential investors if you have any concerns over these issues.
Besides our own experience that a hands-on approach adds value, a recent Stanford Graduate School of Business research study concluded that increased face-to-face interactions between investors and their portfolios have a positive impact on success, innovation and growth. It identified a 3% increase in patents filed and 6% increase in citations per patent. While a US not UK study, it points to a causal link between active investors and increased quantity and quality of innovation as well as increased probability of an IPO or other successful exit.
Finally, VC investors can add significant value by helping instill best practice and good governance – increasingly high profile issues that impact on reputation and brand value. Good governance spans issues such as financial controls and reporting, business ethics, contractual issues and procedures. It helps to attract, motivate and retain quality staff as well as building positive relationships with customers, investors and commercial partners. Virtually all the companies in which we invest have broader employee ownership which can be very powerful in fostering a positive workplace culture characterised by good productivity, innovation and staff loyalty.
Ask yourself whether you’d want a prospective investor on your board if they didn’t also bring money. If the answer is ‘no’ you should probably go no further, if it is ‘yes’ you are likely to make a smart decision.
By Martin Brennan, Principal, Scottish Equity Partners (SEP)