Do VCs Add Value?
Vinod Khosla’s recent comment during an interview with Michael Arrington that 95 percent of VCs don’t add value (and that 70-80 percent might actually add negative value in their advising) got me thinking about the underlying dynamics of the question.
I agree with Khosla that a surprisingly large portion of VCs add little value, but whatever your number, I believe the situation can be improved if we take a closer look at the ways VCs can add value, and act accordingly.
Basic ways VCs can add value (beyond $$):
Connector—here’s where there’s the most potential for increased value. VCs have broad and often deep networks of experts and resources who can help with recruiting, financing, marketing, sales strategy, etc. The key is to find out who they have in their network and what strengths they have, rather than whether the particular VC can help. Being proactive here pays dividends.
Sounding board—helpful VCs are good listeners. When they’re trusted, they can help put things into a broader context that might identify a new path (perhaps one less familiar, but still traveled by other entrepreneurs). Running a startup is a lonely business, yet most CEOs don’t trust VCs enough to share their real concerns.
Advisor—now here’s where it gets tricky. I think this is where VCs and entrepreneurs need to be careful about giving and taking advice, and where negative value can accrue. The best VCs are great observers, and judicious with their opinions. They realize that the right question is usually more effective than a stated opinion. However, even if you find yourself facing overly opinionated VCs, you should be able to listen, collect data, and use it as part of the “wisdom” of a small crowd (or not).
Company advocate—this is noticeably true on the consumer side, where popular bloggers can rally large groups of followers to create buzz and early trial interest. However, on the enterprise side, VCs can have a significant impact by helping to create positive word of mouth interest from channel partners, customers, senior team members, and other VCs.
What CEOs can do to get more value from their VCs:
Be specific in your requests, both in terms of the task at hand, and the individual who can help. VCs are competitive, so throwing out a general request to the group is less effective than asking individually (and perhaps letting each know that you will be asking others).
Try trusting a VC with one of your challenges, and see how they respond. If they are not helpful, you’ll have a much better idea of what to expect in the future.
Try to get to know your VCs outside the board room—building trust with your VC will work both ways. Ask individual board members for help, and be explicit and time-bound about the help you need. Treat them like a resource, and they may start to behave like one. You may even be surprised at what they can bring.
Share information so that your VCs are better informed—particularly in areas where you may ask for help.
The good news:
The venture industry is evolving (slowly) and younger firms see their business as much more of a service oriented activity. This is impacting even the traditional firms, who make up the majority of funds and VCs.
Helping frame a board member’s role as primarily a resource—connector, sounding board, and company advocate—with some opportunities to advise isn’t easy, but it can be achieved with nearly anyone. Just as you expect your VC to be trustworthy, respectful and empathetic, try to help her or him find the right question rather than the right answer. Here’s some jujitsu for you—when you start to hear advice (the answer) when you really want a question (sounding board), it means you need to re-frame the dialogue. Ask for help brainstorming various possibilities so that you can distill them with your team and agree on a direction.
Many investors get involved in venture capital precisely because they love the challenges of building a successful enterprise. If you can harness their energy and passion, you give yourself a much greater opportunity to thrive—and realize value.