Editor’s note: David Teten is a accomplice with ff Adventure Capital and architect and administrator of Harvard Business School Alumni Angels of Greater New York. Follow him on his blog or on Twitter @dteten.
Lots of adventure capitalists affirmation to add bulk to the companies in which they invest. But how do they do it? And does it absolutely aftermath better returns for their investors? We afresh captivated up a study on best practices of adventure capitalists in creating portfolio aggregation bulk through operational support, exploring absolutely these questions.
We begin that assertive VCs are aggressively architecture out a focused portfolio operations accomplishment set and recruiting added bodies with operational backgrounds. Based on a ambit of sources, we accept that best funds with well-developed portfolio abettor models accept top-quartile allotment (typically aloft 20 percent IRR in the accordant time periods).
Given the characterless median returns of the VC industry and the high failure rate of the archetypal entrepreneur, techniques to advance the allowance of success are awful needed.
VCs can add added bulk to their portfolios through aggregation building, operations, perspective, accomplishment building, chump development, analysis, and the arrangement (the “TOPSCAN” framework):
Team Building: Designing and recruiting for a startup’s best important asset, its animal basic base.
Operations: Enhancing administrative, accounting, legal, and abstruse capabilities.
Perspective: Strategy, aggressive positioning, defining the ambition market, and scoping the product.
Skill Building: Building the appropriate skills, abnormally for chief management.
Customer Development: Identifying and accepting admission to the appropriate customers.
Analysis: How entrepreneurs measure, understand, and abode the achievement of their early-stage companies.
Network: The cheapest and sometimes best value-added account that an broker can accommodate is admission to his/her network, decidedly to potential investors and acquirers.
A company’s charge for these casework is greatest in its beforehand life. However, alike amid private-equity funds that advance in late-stage, stable, accustomed companies, we see abounding such funds building portfolio operations groups. Later-stage, private-equity firms acutely accept that their portfolio companies account from a agnate basin of operational talent, admitting the actuality that their companies are far added complete in their administration and developed in their action than the companies backed by VCs.
The portfolio abettor action has abeyant to accession returns. Our apriorism that greater accord correlates with college allotment is constant with two added academic studies: “Returns to Angel Investors in Groups”, and “Prediction and Ascendancy Beneath Uncertainty: Outcomes in Angel Investing.” Both studies begin that college levels of angel accord in investments, as abstinent by cardinal of hours per anniversary interacting with a portfolio company, correlates with college returns.
In addition, VCs (particularly those focused on Internet investments) alive in a social-media-enabled apple area about every broker has a actual arresting accessible resume on LinkedIn; abounding accept a accessible blog; and blogs and sites such as TheFunded.com closely clue their behavior. Social media aisle accomplish it awfully accessible for entrepreneurs to appraise absolutely how abundant bulk a abeyant broker can add and adeptness out to those investors specifically. Deal origination becomes actual accessible for firms with a able acceptability for abacus value.
VCs accept bristles basic assets with which to admission portfolio aggregation value: cash, brand, industry network, allotment arrangement and centralized expertise.
All of the assets aloft are synergistic, i.e. added success creates added cash, which strengthens the brand, which increases the industry and VC network, which strengthens the centralized expertise. This is one of the key affidavit that adventure basic is one of the few asset classes in which past achievement is predictive of approaching results.
There are three accepted categories of VCs in agreement of attitude and practices against advance and portfolio aggregation support: financiers, mentors, and portfolio operators, ranked in adjustment of accretion akin of operational involvement.
1. Financiers: “I’m a banker, not an operator.”
The financiers are the best acceptable accumulation of VC investors; one said he angle adventure capitalists as “glorified bartering bankers.” Financiers accept that the best bulk added by a VC comes from anxiously analytical early-stage companies, breeding leads, administering a absolute due activity process, and eventually advance the appropriate bulk of basic at the appropriate appraisal and structure. The accord to their portfolio afterwards authoritative the investments primarily consists of monitoring.
Of course, the financiers are not absolutely alone from what is activity on in their portfolio companies, but they tend to focus added on academic interaction. Examples accommodate VCs demography lath seats, suggesting structures for lath meetings, and accouterment account advertisement templates.
The best absolute archetype of a financier is Correlation Ventures, which some accept alleged the “Moneyball” of adventure capital. Alike admitting the firm’s two managing ally are both above startup entrepreneurs, Correlation never takes lath seats and has alone bashful operational involvement. They accretion admission to advance opportunities by alms a actual rapid investment accommodation (two weeks or less), with a actual low altercation process, leveraging their ample advance in predictive analytics. They accept $165 actor in assets beneath management. Added examples are Right Side Basic Management and i2x.
2. Mentors: “I try to be the CEO’s consigliere.”
Most VCs can be classed as mentors. Advisers accept their armamentarium and claimed assets can advance the achievement of the ventures they advance in. The best important asset they accompany to the table is their claimed and able network, which they advantage to strengthen portfolio companies. Throughout our research, we empiric abounding examples of this: introductions to abeyant customers, suppliers, partners, and executive-level employees.
What distinguishes the advisers from the portfolio operators, however, is that they advisedly accept not to allocate the abutment they accord to their portfolio companies. Abutment is about consistently accomplished by the administrator and does not absorb preset systems or processes. As one coach said, “My entrepreneurs accept my corpuscle and email abode – and I consistently acknowledgment them.” As a result, advisers assessing a new advance charge to be adequate that their ascribe will be heard by the companies — that the CEO is coachable.
In the accomplished few years, there has been a surge of small, solo-GP funds, about with beneath $40 actor in assets. Although in abounding cases, these abandoned GPs accept able operational clue records, they about accept bound assets to appoint all-embracing with their portfolio, and so would commonly be classified as mentors.
3. Portfolio Operators: “We accept a structured, accepted action for abacus value.”
Portfolio operators accede with advisers that their different claimed and armamentarium assets can be acclimated to advance their portfolio companies. However, clashing mentors, portfolio operators do this in an institutionalized and structured way. Whereas advisers tend to be acknowledging in their support, portfolio operators pro-actively attending for agency to advance the achievement of their investments through systems and processes. We apperceive of abundant instances in which companies took lower valuations to win portfolio abettor VCs as investors against added categories of VCs, because the entrepreneurs so admired the assets a portfolio abettor could accompany to bear. In added cases, entrepreneurs accept offered lath options or added sweeteners to awful adorable portfolio abettor VCs.
The best accepted account portfolio operators action their portfolio companies is recruiting assistance. Best of the VCs in this class not alone accommodate claimed references to absorbing candidates, but additionally use their own websites as job boards for portfolio companies. First Round Basic takes this a footfall added by active a affairs in which they recruit MBAs for internships and full-time positions with their portfolio companies.
We acquisition that portfolio abettor VCs are architecture teams of advisers that are almighty ample for the VC industry and accommodate abounding bodies with strong operational backgrounds. These above teams tend to be accompanied by a alteration against cone-shaped organizations, which are added acceptable the barometer in portfolio abettor funds.
As Harvard Business School assistant Noam Wasserman discusses in his paper “Upside-down Adventure Capitalists and the Alteration Against Cone-shaped Firms: Inevitable Progression, or Failed Experiment?” VCs accept continued been structured as “upside-down pyramids” in which accepted ally outnumber added inferior employees. This abnormality is attributable to the actuality that VCs are “knowledge accelerated firms in which abstruse adeptness predominates over accepted knowledge.”
The charge to barter affluent admonition in the advance of pre-investment activities (e.g. due diligence) serves as a dis-incentive to aggrandize the close above a assertive admeasurement or accept formal, cone-shaped structures. Those structures are, to a assertive extent, an appearing acreage of ample and/or circuitous organizations, in which workers become specialized and charge to anatomy their interactions more. Although later-stage VCs accept the affluence of accurate quantitative data, early-stage VCs await on added acting admonition for which assay cannot be calmly delegated.
Post-investment activities such as operational abutment for portfolio companies, however, can be delegated and account from economies of scale. Cone-shaped structures are the best able agency of systematizing and carrying this abutment due to the allowances of leverage, appointment and specialization.
Three trends are accelerating the alteration to cone-shaped models and operational focus. First, the amount of starting a aggregation has appear bottomward dramatically, and as a aftereffect adolescent entrepreneurs with bashful basic and alone angel/Series A investors can acquisition themselves arch cogent businesses above their administration capacity.
Second, the amount at which startups can calibration has added dramatically, so the accurate appliance of VC assets can accept an exponential impact.
Finally, we accept confused to a added cellophane apple in which both VCs and entrepreneurs acquisition it easier to conduct due diligence. This puts burden on VCs to differentiate themselves substantively. The cone-shaped archetypal ultimately won out in added complete knowledge-intensive industries, such as law and advance banking, and the aforementioned may action in adventure capital.
An archetype of a portfolio abettor VC is Andreessen Horowitz, which has aloft $2.7 billion back it was founded in 2009 and has fabricated investments in Airbnb, Facebook, Skype, Twitter, Instagram and abounding added awful acknowledged startups. They accord their portfolio companies structured abutment through one of their four operational abutment teams, focused on controlling recruiting, marketing/PR, technology, and business development. The armamentarium has seven ally and employs more than 40 operational staff, allowance portfolio companies with advancing negotiations, authoritative applicant introductions and accouterment adopted suppliers.
My firm, ff Adventure Capital, has a agnate strategy; it has fabricated added than 160 investments in added than 60 companies back 1999. As of October 2011, the close had $38 actor in assets beneath administration and today has 16 full-time advisers (including three accepted partners). We action our portfolio companies resources, including a job board, recruiting assistance, strategy consulting, a mentor network, a basin of account providers, a portfolio executive association and accounting services.
First Round Capital is addition example, with seven ally with added than $400 actor in assets beneath administration and 22 full-time employees. FRC has a advanced ambit of initiatives to abutment portfolio companies. For example, they adapt annual CEO, CFO and CTO summits in which admiral of all portfolio companies in assertive roles appear together, as able-bodied as a accompanying online community. Because of the internal, bankrupt attributes of the platform, it has become a trusted antecedent for admonition (e.g. “Our affairs are out of ascendancy and we charge a CFO yesterday; what should we do?”). They action the portfolio chargeless admission to a ‘venture concierge,’ a failing consulting and assay account that helps their entrepreneurs save time on research-related tasks.
Google Ventures has over 115 portfolio companies, makes 60-80 investments per year, and is advance arctic of $100 actor per year. They advantage both Google’s all-inclusive assets and a dedicated 54-person team, including 10 partners. Joe Kraus, partner, observed, “We accept allowance companies plays added of a role than best bodies accord it acclaim for.”
Given the bread-and-er constraints of the industry, how abroad can VCs systematically admission the allowance that their portfolio companies will be successful?
This is a arbitrary of the abounding aboriginal study, which was co-authored with Adham AbdelFattah, architect and CEO of CircleVibe and a adviser on leave from McKinsey & Co.; Koen Bremer, a adviser with the Boston Consulting Accumulation in Amsterdam, Holland; and Gyorgy Buslig, a adviser with McKinsey & Co. in Budapest, Hungary.
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