By Joseph Flaherty, Director of Content & Community
In the first dot-com boom, entrepreneurs effectively worked for VCs. There was a joke that valuation equaled money in. Thankfully, that power dynamic has changed in the intervening decades, and the best VCs know they serve the entrepreneurs. However, there’s a danger in letting the pendulum swing too far back and believing that venture capital is a fungible commodity. Founders do the hard work and are ultimately responsible for the success of their startups, but few have all the answers or the full toolkit they need to succeed at the start.
I understand the desire to avoid bringing on investors who want to micromanage their founders or second-guess all the decisions they make, but a highly-engaged investor can provide leverage that no one else on the org chart or cap table can equal. For the last four years, I’ve had the great pleasure to watch a team of VCs who have backed a lot of billion-dollar companies, and many more nine-digit winners. They’re deeply engaged, but in ways that add value.
Here are a few examples of where an engaged VC can be a difference maker:
Streamline Talent Recruiting
An engaged investor will have a sense for where a founder needs support and be able to line up a series of potential execs to fill holes. A first-time founder probably doesn’t have a great bench of senior execs ready to step in once funding clears. Good VCs will know most of the people worth knowing in a given space and can do references that shake out whether the person you’re trying to recruit was a rainmaker or just along for the ride on a rocket ship startup. Even something as simple as screening and decoding executive resumes is done faster with an experienced advisor on your team.
Speed Business Development
There’s a good chance your VC has a network of VP or C-level execs at a key company you’re trying to pitch, and can rapidly open doors that would take your BD team months to unlock. Founders shouldn’t expect to outsource sales to their investors, but used judiciously; they can provide leverage in a transformative fashion.
Serve as Hype Man/Woman
VCs talk amongst themselves, a lot. They catch up over coffee, share stories at events, and have regularly scheduled check-ins with each other. An engaged VC will be pre-selling your startup to their peers at the next stage during many of these interactions. Compelling metrics and a great deck can close deals on their own, but when an investor keeps hearing from a peer about how a given company is crushing it, deals tend to close more quickly. On the flip side, if you’re out fundraising, and a prospective investor asks your disengaged VC about your startup, and they aren’t sure, it’s a negative signal.
Aid in Negotiation
Most founders haven’t had much practice negotiating with potential partners that have 100X the market cap and decades more experience. The highest-stakes negotiation a founder has ever faced will be a not particularly taxing Tuesday for an experienced VC.
Engaged VCs can recognize when things are going sideways, or worse. They often know when to hold them, when to fold them, and when to bring in a banker to help the founders sell the company. The difference between going to zero, and a 5X exit that makes a founder a multi-millionaire, is frequently a VC who can help manufacture liquidity when the founders decide to.
Every investor’s dollars are green, but the guidance they provide is highly variable. There are a half dozen hinge points that will make or break a startup. Should I raise that monster round, and from whom? Should we go D2C or via a channel? Should we go through with these layoffs? A disengaged VC will probably offer shallow advice that conforms to the current zeitgeist. An engaged investor will be able to serve as a true thought partner.
One thing I continuously hear from founders is how hard it is to make individual decisions and how hard it is to find competent counsel. There is no shortage of people who will offer advice, often of dubious quality, but finding someone who shares your financial incentives, and has internalized the nuances of the business, team, and market are incredibly rare — and valuable, often more than the capital they provide.