What can a VC deliver besides money?
When you're seeking venture capital funding, it's important to consider how else a prospective investor can add value. Scottish Equity Partners has a value-add checklist for entrepreneurs embarking on the funding trail....
If you’re looking for venture capital (VC) funding to maximise 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 business attract top talent, seize opportunities, mitigate risk, navigate difficult times and build value.
Take the following into consideration:
Don’t be fooled by clever marketing
Take care to distinguish between marketing hype and reality in relation to ‘value-adds’ that a VC offers.
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 businesses but, equally, they may prove too generic to be of significant value and may not appeal to some entrepreneurs.
Look for VCs who can offer strategic interventions and introductions
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.
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We find that entrepreneurs value sessions which bring them together with like-minded peers who face, or have overcome, similar challenges; whether this is in recruiting talent or building a customer base in new markets.
For example, we brought together senior management from SportPursuit – a UK-headquartered e-commerce company specialising in online flash sales of branded sports and outdoor gear – with the top team from Mister Spex; a German-headquartered e-commerce company and Europe’s largest online optician.
SportPursuit benefitted from a confidential exchange of highly practical knowledge of specific target markets in Germany and Scandinavia and, also gained insights 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.
Make sure the VC has a wide circle of contacts
High-growth businesses inevitably need to recruit additional executive or boardroom talent as they expand.
An investor with excellent contacts among entrepreneurially-led companies AND corporate and professional circles can add value by making introductions to high quality candidates to take your company to the next level.
Ask yourself: Can I sit in the boardroom with this investor for the next few years?
In most cases (certainly with SEP) a VC partner is likely to join your board so personal dynamics and experience matter 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 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, ensure meetings are challenging and productive, and can 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.
Weigh up whether you want a hands-on investor
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.
You should take into account practical considerations, 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.
At SEP, our executives monitor three to four companies at any one point to allow us to devote sufficient time to each. This is fewer than some other investors so be upfront with potential VCs if you have any concerns over these issues.
Remember: Active investors = increased probability of an IPO or successful exit
Besides our own experience that a hands-on approach adds value, a recent Stanford Graduate School of Business study concluded that increased face-to-face interactions between investors and their portfolio companies has a positive impact on success, innovation and growth.
The research 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.
A good VC will provide governance on issues that impact your business
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, and 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.
Making a smart decision about a VC
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.
Martin Brennan is principal of Scottish Equity Partners (SEP).