3 Ways Early-Stage VCs Add Value to Portfolio Companies
With investors deploying record amounts of capital, founders and executive in search of cash don’t have to look too hard for it these days. But it’s important to remember that not all investment dollars are created equal. The right investors add value to their portfolio companies in a number of ways, bending the long odds of startup success in the founder’s favor.
Here are three different ways early-stage investors can bring value to their portfolio companies.
Experience and expertise
Experience is one of the critical ingredients an investor brings to the party. Often, as founders themselves, they’ve walked in the entrepreneur’s shoes and have faced the same challenges before. Alternatively, they’re career investors who’ve seen a boatload of portfolio companies jump over—or flounder under—the same obstacles.
Either way, they’ve seen many of these movies before. Take advantage of their pattern recognition and eagle-eye view on your industry landscape to get insights into where things are headed and what competitors and other startups in your field might be working on. It’s your job to find the investor with the right expertise and lean on it heavily.
Expertise is worthless without availability, however. While a potential investor may have helped build Facebook from 1 million to 2 billion users, how available will that expertise be to you? An unavailable superstar is just a check in the bank or a name on the cap table. An investor with too many portfolio companies can also be a red flag, as their attention will be spread thin. The right investors not only invest their dollars, but also their time and expertise.
Important caveat: Not every founder needs a VC to take a hands-on approach. For rocketship startups, the best way for VCs to add value is often just to write a check and get out of the way.
Expertise is great, but ultimately a business that doesn’t hire good people and grow revenue is not going to be successful. The right investors can help you with the day-to-day drudgery of building a company.
When an investor comes on board, their network should become your network. They should introduce you to potential exec hires or connect you to business development leads. As part of an investor's diligence, they may call potential customers that they can connect you to during their process, adding value regardless of whether an investment comes through. The right investors also raise the profile of their portfolio companies through press connections or inside access to events through speaker slots or free passes.
Don’t be afraid to regularly ask your investors for help. VCs aren’t passive bankers – they're network-rich former entrepreneurs or industry folks who invested precisely because they felt that their unique backgrounds allowed them to give you a competitive advantage. They have skin in the game and your success is their success.
Future financing and exits
Part of your startup’s journey is to grow in revenue and valuation, raising steadily more and more money from different kinds of investors. The right investor will add value by helping you complete your next round of fundraising by connecting you to their VC community network. If you happen to be the belle of the ball and spoiled for choice among investors at the next stage, your current investor can provide insights into your options.
Finally, investors can help you decide when and how to exit your company. They have either exited their own companies or helped their portfolio companies do the same, so they are well equipped to help you reach a successful outcome. They can intro you to the right corp dev people and provide strategic advice as conversations progress. When conversations progress far along enough, they can help you sift through matters of culture fit, post merger integration, value capture in an earn-out deal, and of course, deal terms and price.
Get a full-time cheerleader
Investors add value in two primary ways: their internal attributes and their external resources. Internal attributes are the expertise they bring and the willingness and availability they have to share it with you. External resources refer to the network they can deploy on your behalf, whether it’s a megaphone in the press or a whisper in the ear of the right corp dev exec. The best early-stage investors add value on both sides of the coin.
Ultimately, you want a true consigliere that you can call day or night to ask for advice, not just someone who reports for duty at board meetings. Running a company is a 24/7 endeavor – investing in one shouldn't be the domain of part-time cheerleaders who only chime in once a quarter.
Sunny Dhillon is a founding partner at Signia Ventures, a $100m seed and series A venture capital firm based in the San Francisco Bay Area. He invests in consumer and enterprise startups with Signia as well as angel investing in direct-to-consumer beauty brands. He previously worked as the first business development employee at a venture backed spin-off of New Line Cinema and in corporate strategy for Warner Bros., before launching his own startup and becoming an investor. Some of his investments include Alibaba (NYSE: BABA), Tenor (acquired by Google), and Cruise Automation (acquired by GM).
This article was originally published in Forbes.