Attention “Hands-On” VCs—Startups Aren’t That Interested

7/23/13Follow @curtwoodward

If you’re a venture capitalist, you might think it’s important to be a hands-on, energetic, innovative thought leader. But a new survey contends that’s not the way to attract startup CEOs.

The National Venture Capital Association partnered with PR and marketing firms on the survey of VCs and entrepreneurs to find out what both sides of the startup equation thought about the “brand” of VCs and how that factor helps (or hurts) firms in the marketplace for new investments.

The survey focused a lot on how important branding is for firms—the NVCA says it “set out to prove the hypothesis that branding really matters for VC firms.”

But here’s what I found most striking: the things that VCs emphasize often don’t matter to entrepreneurs. And conversely, entrepreneurs are placing much more value on factors that VCs don’t rank very highly.

That points to a pretty big disconnect in a market where “deal flow”—getting access to the best entrepreneurs and startups before they’re priced too high—is extremely prized.

It also shows why a newer firm like Andreessen Horowitz could have an opportunity to quickly climb the ranks of the traditionally secretive, relatively reserved VC industry by targeting the biggest deals and aggressively marketing themselves.

The NVCA survey also indicates that we should expect to see more VC firms offering professional services and other kinds of startup assistance to startups in their portfolio: 72 percent of CEOs surveyed said “the ability to add value to portfolio companies beyond funding” was very important.

Here’s the way it broke down: the NVCA surveyed 158 CEOs and 216 VC firms on the characteristics each side value. CEOs were asked to rank “which qualities are most important,” while VCs picked values that “best describe” their own firm.

(Not surprisingly, the No. 1 thing that startup CEOs picked was “entrepreneur-friendly.” Venture capitalists ranked that pretty high too, but let’s just set that aside for being too broad a term to define.)

Overall, VCs rate themselves as pretty well-rounded—no single attribute was named by even 45 percent of the investors surveyed. “Experienced” tops the list, with “hands-on” called out by about a quarter of the VCs surveyed. “Emerging,” “collaborative,” “thought leader,” “innovative,” and “energetic” all got a positive response somewhere in the 15-25 percent range.

Startup CEOs, on the other hand, only want a few things from their VCs. About 55 percent of CEOs named “trustworthy” as a valuable characteristic in investors, while fewer than a quarter of VCs agreed—a huge gap.

CEOs also were more likely to want their VCs to be “collaborative” and “supportive.” And that’s about all that CEOs cared about—all other characteristics were much farther down on the list of priorities.

And there’s an almost comically large gap between the two groups when it comes to valuing a “hands-on” approach—VCs clearly think that’s something worth promoting, while entrepreneurs don’t want a lot of VC fingerprints all over their operation.

The NVCA survey also points out a striking imbalance in the importance of gender diversity between CEOs and investors, with a quarter of CEOs saying it matters in selecting a firm, while only one in 10 VCs say it’s an important factor.

In a related survey with a smaller set of respondents (135 CEOs and 189 VC firms), we see even more evidence of missed connections.

Venture firms tend to rank “firm or partner blog” as not very important (only 5 percent thought it was effective in influencing perception of the firm), while 12 percent of CEOs thought a blog was useful. The equation was just about flipped when talking about third-party press—VCs tend to think those outlets are more influential, while CEOs don’t much care.

CEOs also apparently don’t give a rat’s ass about the VC firm’s other portfolio companies, with only 5 percent saying those other investments matter when selecting a firm. Reputations of the individual partners (57 percent) and the firm overall (38 percent) were the biggest drivers.

VC firms, however, have a much different view—investors see the reputation of their broader firm as the most important thing “driving a positive brand image” of their business (48 percent), while their portfolio (28 percent) and individual partners (24 percent) came in fairly even.

That disparity is part of the nature of venture investing, where VCs have to both attract entrepreneurs and please the limited-partner investors who bankroll their work. A big pension fund that cuts a check to some VC firm is definitely more interested in the track record of its past investments than another startup CEO would be.

Curt Woodward is a senior editor for Xconomy based in Boston. Email: cwoodward@xconomy.com Follow @curtwoodward

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  • http://www.dailygrommet.com Jules Pieri

    Good idea to share this analysis Curt. Wow.

    But…this is just deeply, deeply depressing:

    “The NVCA survey also points out a striking imbalance in the importance of gender diversity between CEOs and investors, with a quarter of CEOs saying it matters in selecting a firm, while only one in 10 VCs say it’s an important factor.”

    • curtwoodward

      Yeah, I thought that was crazy too. I guess if any given firm is 90+ percent men, it would reflexively say “that’s not a big deal.” You’d have to guess that it’ll only become more important to newer generations of CEOs, though.

  • Jessica Darko

    The number one thing that causes companies to fail is bad advice from VCs, in my experience. Often it’s not even advice at all, but ultimatims, as VCs think they know what’s best and generally do not. The number two cause of failure is conflict between the founders.

    Founders should generally avoid taking money if they can, and avoid “hands on” from anyone not intimately involved in the business (especially VCs who are generally not experienced entrepreneurs.)

  • All Hat, No Cattle

    “Entrepreneur-friendly, experienced, hands-on, emerging, collaborative, thought leader, innovative, energetic,
    trustworthy, supportive”. Gaining any useful insight from these ambiguous terms would be a challenge. Could all 158 CEOs have the same set of needs, and are all 216 VC firms going after the same clients? Any data on precision? I like the title of the article, but the survey, or what is presented, doesn’t add much content.

  • http://startupexecutives.tumblr.com/ John M Sutton

    “And there’s an almost comically large gap between the two groups when it comes to valuing a “hands-on” approach—VCs clearly think that’s something worth promoting, while entrepreneurs don’t want a lot of VC fingerprints all over their operation.” This distinction pivots between controlling and enabling behavior. It is a matter of semantics. In my experience, a founder’s greatest fear is that with fund raising, dilution occurs not only on the capitalization table but also with his / her influence. It is important to keep in mind that at an early stage, investors fund the team as much as the product or market opportunity. Outside of the rare occurrence, VCs do not invest in a company in order to wrestle control from a founding CEO. Like a publicly traded company responsible for shareholder value, with funding comes a responsibility to execute against the market opportunity and certain milestones. The CEO may find it uncomfortable that others measure his success or failure, but that is the nature of the game. When a startups looks for capital to extend runway, the selection risk runs both directions. The VC will conduct due diligence and so should the startup. All things being equal – i.e. terms – choose a VC with domain expertise with similar offerings at similar inflexion points, a track record for catalyzing growth and a “hands-on” approach that includes mentoring leadership, enabling strategic relationships and promoting your brand.