Capturing Value from your Investors

In last week’s essay, I challenged two extreme narratives that often overshadow the reality of a VC's value as an investor. On one side, some claim that VCs are worthless and should be avoided (while simultaneously mocking Patagonia sweater vests and Allbirds Runners), while on the other, proponents argue that the right VC can be a godsend who can make or break your company’s success.

Based on my experience as a former VC as well as venture-backed founder, I know that the reality lies somewhere in between. VCs can bring immense value, but that doesn’t happen on its own. Founders need to be proactive in extracting that value.

This Independence Day (for those of us 🎶 Living in America 🕺🏻), I want to focus on the level of dependence on VCs and the effort required to maximize the value founders can get from them.

The Importance of Effort:

While having VCs on your cap table may grant you some initial credibility, it’s important to understand that true value doesn't automatically flow to founders without effort.

The dynamics of the venture capital business play a significant role in this. VCs are constantly pulled in multiple directions, and most of those directions pull them away from actively helping their portfolio companies.

How so:

• They focus on generating deal flow, which requires them to meet many people that are not you, the founder.
• They are busy making new investments and adding to their portfolio.
• When they add to their portfolio, they add to all the administrative overhead that goes into bringing a new company into the fold
• They are constantly managing their their limited partners (their investors/bosses) and thinking forward to raising for their own funds.
• As for the companies that they are actually spending time with - those are the companies that are struggling, not the ones doing well.

As a founder of a company that’s doing relatively well, the value you can extract from an investor is dependent on the effort you put into capturing it.

Types of Value VCs Bring:

Before diving into specific strategies, let's explore the different types of value VCs can provide:

1. Credibility: Having a reputable investor (if not a whole team of investors) on your cap table immediately raises your company's cachet and credibility. However, maximizing this credibility requires leveraging it effectively.
2. Expertise: VCs can offer valuable expertise gained through personal experience in specific industries or building companies. Their pattern recognition skills, based on observing numerous companies, can also help provide insights and guidance. The level of expertise varies depending on the fit between the VC and your business - if they were an operator who ran and sold a business that was doing something similar to you, that VC can be extremely valuable.
3. Feedback: VCs have seen countless deals and they’re generally quite intelligent. Because of that, they can provide valuable feedback- not necessarily specific directives, but feedback on your strategy, product, and more. The pattern recognition of seeing 100 deals, 50 of which Failed, 30 of which did okay, and 20 of which did very, very well, gives them the perspective to help triangulate around good answers. However, it's essential to filter through feedback and distinguish between helpful and less relevant advice.
4. Accountability: While often overlooked, VCs can serve as effective accountability partners. Their involvement in board meetings and check-ins can help keep you on track and provide valuable oversight.
   
   This may seem like a negligible component of value that a VC brings, but I caution you not to overlook this and embrace it if it exists.
   
   …more on accountability → when I ran my previous startup, we set the company up in a way that gave us full control of the board, making it so that no VC could tell us what to do. However, after the first year of checking in solely via investor updates, I realized that not having board meetings wasn't a luxury. It was actually holding us back.
6. In the second year, we implemented quarterly advisory board meetings to create deadlines and generate accountability and expectations. These meetings weren't required by any legal agreement or imposed by a boss; they were something we felt we should do. And that's the value of having a VC who wants to hold you accountable right from the start. They will establish some form of check-in to ensure that you communicate with them and explain how you're executing your plans and why you are or aren't meeting your goals. That little bit of accountability is priceless.
7. 
   
8. Network: VCs possess extensive networks that can facilitate business development opportunities, partnerships, connections to portfolio companies / founders who are a couple steps ahead of you for mentorship, and introductions to other service providers or potential investors for future funding rounds.

Strategies to Extract Value 🎣 (get them on the hook! ):

Now that we've explored the types of value VCs bring, how can you extract the most value from your relationship with them? Here are some strategies to consider:

1. Maintain Strong Relationships: Foster positive relationships not only with the partner who invested in your company but also with other partners and junior analysts within the firm. Establishing regular touchpoints increases the chances of accessing the value they can provide. Remember, these relationships can extend beyond your current venture, as business is a long-term game.
2. Ask for Help: Don't hesitate to seek assistance from your investors when needed. Avoid the misconception that you might be bothering them. VCs are being paid with equity to help you, so proactively reach out and take advantage of the resources they offer.
3. Gamify the Help: VCs are competitive by nature. Recognize and appreciate the contributions of investors and advisors who support you, which can inspire others to step up their efforts. Highlight their impact in investor update emails or conversations to stimulate healthy competition.
4. Make Actionable Requests: When asking for help, be mindful of your investors' busy schedules. Instead of vague requests, identify individuals in their network who can specifically address your needs. Offer to draft forwardable emails or take steps to make it as easy as possible for them to provide assistance.
5. Focus on Execution: The best way to attract attention and help from your investors is to execute and build a successful company. Investors will naturally want to support and maintain a positive relationship with founders who demonstrate progress and future potential.

VCs bring various forms of value to the table, but it requires effort and active collaboration to extract that value. By establishing and nurturing relationships, asking for help when needed, gamifying the assistance received, making actionable requests, and focusing on execution, founders can maximize the value of their investors. Remember, the quality and extent of value depend on the fit, expertise, and networks of the VCs on your cap table.

Embrace the opportunity to leverage your investor’s support and guidance instead of just relying on investor updates like I once did 😛