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What Do VCs Do?

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  1. INTRODUCTION

    How This Module Works
  2. How Much Do You Know About The VC Job?
  3. The Six Tasks of VCs
  4. The VC Cycle
  5. Quiz 1
    1 Quiz
  6. GENERATING DEAL FLOW
    What Is The Best Way To Generate Deal Flow?
  7. Generating VC Deal Flow
  8. Building A VC Referral Network
  9. Networking 101
  10. The Importance of Branding
  11. The Startup Ecosystem
  12. Service Professionals
  13. Warm Introductions
  14. Co-Investing
  15. Cold-Calling Startup Founders
  16. Making Angel Investments
  17. The Deal Flow Funnel
  18. Analyzing Pitch Decks
  19. Time Management Tips For VCs
  20. The Anti-Portfolio
  21. Quiz 2
    1 Quiz
  22. EVALUATING COMPANIES
    What Are The Critical Characteristics VCs Look For In Startups?
  23. Analyzing Startups For Venture Capital
  24. VC Firms' Investment Strategies
  25. What Is (Really) Scalability?
  26. The Product/Market Fit
  27. The Hard Truth About Network Effects
  28. The Idea Maze
  29. More On Due Diligence
  30. Breaking The Mental Model
  31. Being Primed For The Problem And The Idea
  32. Making The Investment Decision
  33. Quiz 3
    1 Quiz
  34. Case Study: Write The Investment Memo
  35. How Much Do You Know About Term Sheets?
  36. NEGOTIATING TERM SHEETS
    Negotiating Term Sheets
  37. Our Term Sheet Courses
  38. Quiz 4
    1 Quiz
  39. Portfolio Monitoring Survey
  40. PORTFOLIO MONITORING
    Adding Value
  41. What Kind of Value Do VCs Add?
  42. What Is The Background Of Top VCs WorldWide?
  43. Jack Welch's HR Practices
  44. The Reporting Pack
  45. How Much Time Should You Spend With Portfolio Companies?
  46. Quiz 5
    1 Quiz
  47. How Much Do You Know About Exits?
  48. LIQUIDATING INVESTMENTS
    Selling Startups
  49. Testing Founders' Exit Strategy
  50. The Most Common Exit For Startups
  51. Taking Money Off The Table
  52. About Startup IPOs
  53. How Long Does It Take to Exit?
  54. When Raising Too Much Money Makes Exits Difficult
  55. Helping Founders Exit: The M&A Cheat Sheet
  56. Quiz 6
  57. How Much Do You Know About VC Funds?
  58. RAISING VC FUNDS
    Raising VC Funds
  59. Investment Strategy: Which Round To Target?
  60. When VCs Pitch Investors
  61. How Do VCs Make Money?
  62. Case Study: Acrobator Ventures

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What Do VCs Do? What Kind of Value Do VCs Add?
Unit 41 of 62
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What Kind of Value Do VCs Add?

In a short but controversial 2013 interview published in Techcrunch, former Sun Microsystems co-Founder and current Khosla Ventures managing partner Vinod Khosla contended that most VCs don’t add any value to the startups they invest in.

The problem with measuring value-add is that it’s mostly subjective. How much does a piece of advice weigh? Or an introduction?

To clarify the issue, we compared what Founders say VCs bring to them with what VCs declare they spend the most time on.

What Founders say VCs bring them

In a 2001 study that remains relevant to this day, an entrepreneur-come-VC asked entrepreneurs to rate how their investors were doing on a range of value-add elements.

Source: Dotzler, F. (2001)

What VCs think they bring Founders

Let’s compare these findings with a 2016 study asking c.900 VCs based in the US what they thought they brought to the table. 

The percentages below represent what VCs say they do with portfolio companies:

  • Financing, Advice, and Introduction: 70%
  • Strategic Focus: 87%
  • Hire employees: 46%
  • Operational guidance: 65%

The apparent discrepancy is that, while VCs declare they spend time providing operational guidance, they score poorly on that item with Founders.

What is the most impacting value you bring startups in your portfolio?

💬 Let us know in the Comments section below.

👀 Sources & Additional Material

    • You’d have to check the precise definitions in the papers (I just added links to them by the way) but Liquidity means exit, and Operational Guidance would be any steps of the entrepreneurial journey that is not hiring. Let us know if you find more. Thanks!

  • I think that it is hard for VC firm to provide founders operational expertise. Founders tend to know more about running the businesses than VC investors, because they are involved in the day-to-day operations. Quite often, the advice that the VC investors give is something that the founders thought of. Therefore, there is not much value-add.

    • Yes that’s what the analysis provided shows 🙂 You could argue that VCs who are former entrepreneurs can be useful (in the early stages at least). What do you all think? Any examples come to mind? Testimonials from entrepreneurs?

      • I think even a previous entrepeneurship experience is hard to translate into concrete operational insights, as the VC will be overseeing several startups at a time. Deep operational insights usually come from looking into detail what is going on and making incremental improvements on a day to day basis. The best insights on how to improve opps I have seen came from people who were living and breathing the problem.

      • That’s a good point, if they founder team is qualified in their industry but lacking start-up experience, the VCs could definitely add value. Might be hard to do if they have a large portfolio, though.

    • Yes that’s one of the principal ways VC try to add value. Here again, some firms are really good at having Founders of their portfolio meet and do business, train them on specific issues, etc. While other firms don’t do anything meaningful on that front.
      > Have you heard of best practices from VC firms you know about?

  • From my experience I agree with the discrepancy of how helpful “operational guidance” form VCs is. The time it took us at MedKitDoc to prepare bi-weekly investor updates and strategy discussions was definitely not justified by the input and advice we received during the meetings. Introductions to other investors during fundraising and hiring support were the key value adding activities for us.

    • This seems very natural. It is harder to beat the founders in terms of understanding the problem and how to operationalize the day to day solution. VCs will always have to catch-up with what the startup is doing internally and this limits how much a VC can actually contribute to the operations.

      • Yes! Superstar VCs can certainly add value through their fame, but for smaller firms, if the founders and their team aren’t fully qualified to solve the problem with minimal input from the VCs, they probably shouldn’t have invested in them in the first place.

    • I would really be interested in receiving an update from you how you asses the value add from the VCs with which you collaborate at your new role at Junto.

      @Aram, maybe this would be an interesting guest to get some more insights into VC from the founder (‘s associate) perspective

  • I wonder if there are exceptions for different types of VCs. Sequoia, specializing in funding semiconductors, might have a legitimate reason to be more involved in a startup’s operations. Possibly other niche VCs that invest only in very specific types of startups could be able to add operational value as well.
    But these results make perfect sense for VCs with a diverse portfolio, as it’s unlikely they would have expertise in a diverse set of operations. Their advice on general financial and strategic material surrounding startups is much more useful, consistent with what’s concluded here.

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