Best Practices for VC Portfolio Management
“Our business is all about helping someone — a founder, a CEO — building a great business. It’s not about seeing our names in the press” — Douglas Leone, Sequoia Capital
In the world of Venture Capital many funds rely their position mainly on marketing strategies. Around 70% and 80% of the Venture Capital funds in the US Market add negative value to startups in their advice and could probably reach 95%, according to Vinod Khosla, co-founder of Sun Microsystems and founder of Khosla Ventures. This is reaffirmed by the overestimation of the value contributed by fund managers to startups, where GPs rate themselves with a score of 7.0 while, in contrast, their portfolio founders rate them with 5.3. This implies a 32% of overestimation (Creandum new fund).
What do startups need and how can VC funds help them?
When startups partner with or receive investment from Venture Capital funds, they mainly expect to benefit from their network of contacts in the industry. This is crucial for startups in business development, capital raising and talent recruitment.
1. Business Development
This is one of the most common reasons why startups fail. Business growth can be supported by entrepreneurs’ access to decision makers. Venture Capital funds usually contribute by opening doors with potential customers and suppliers. Others can introduce entrepreneurs with experts on multiple topics that support this growth. Speed in this effort is critical to accelerate the startups’ competitive advantage. This relates with the 19% of startups that fail because their competitor grows faster. (CB Insights)
2. Capital
Capital is vital for startups. Lack of it is the second reason (29%) why startups fail (CB Insights). Venture Capital funds can add value through introductions with other market players so that startups continue their capital raising successfully. Entrepreneurs will always need the introduction with some other Venture Capital fund or other type of investors.
Sometimes when they are first-time entrepreneurs, Venture Capital funds can add value by advising the entrepreneur on their capital raising process, marketing materials or elevator pitch. Advise can range from strategy decisions on when and how to raise, to legal requirements and negotiation, especially in early stages.
3. Talent
No startup can be successful if it doesn’t have a strong and experienced team that adapts according to its growth phases. The training of this team can be accompanied by the participation of Venture Capital funds who contribute their network of contacts with entrepreneurs and business executives.
In addition, they contribute to the definition of talent strategies “Insourced” and “outsourced”. The first identifies the key processes that must be developed with their own staff. The second determines those processes that can be developed by third parties and potentially with VC funds’ contacts.
VC funds or growth team advisors support startups crafting development plans, hiring and specially retaining the team.
Another relevant element for entrepreneurs when partnering with Venture Capital funds is the fund’s overall expertise and the operational support that they can provide. The main activities in are:
1. Support in the strategic definition and business model of the startup
Venture Capital funds contribute their own or third-party knowledge (advisors) in the construction and definition of the startup. The manager’s experience may be relevant in defining the business model (B2C, B2B, B2G), expansion to other markets (geographies, users or segments), reaction to external contingencies, among others.
2. Growth
The growth of a startup begins with the evolution of the product. The input of Venture Capital funds or their allies may be relevant for visualizing and correcting failures. Others can be supported in marketing, finance, legal and administrative matters (https://acv-vc.medium.com/how-a-vc-fund-structure-looks-like-ea440989bf32)
There are specialized funds whose work and experiences are focused on processes and working methodologies such as Openview in Product Lead Growth or Blitzscaling.
Venture Capital funds provide money and many other things; yet entrepreneurs are the ones who really lead innovation in developing a product or service and generating value. All Venture Capital funds must be aware of their strengths and, above all, their limitations in order to work on them and reluctantly add value to entrepreneurs, startups and the VC ecosystem.
Hector Shibata Salazar, adjunct Professor at EGADE Business School and Director of Investments and Portfolio at AC Ventures Fund
Ana Maury Aguilar, VC Investor at AC Ventures
ACV is an international Corporate Venture Capital (CVC) fund investing globally in Startups & VC funds.
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