How Do Venture Capital Firms Add Value To Portfolio Companies?

Business Growth

Investments are up! According to the Association for Investment Companies (AIC), VCTs raised £728 million in 2018, the highest amount for ten years.  As a fledgling Company looking for funding, it is important to remember that not all money is equal. Of course, the primary reason for a company to take venture capital is for just that – the capital. However, the right VC can and should bring much more to the table than just money.

The majority of venture capitalists will claim to add value to their portfolio. Whilst some are happy to hand over a cheque and merely monitor performance, the right investor will do what they can to bend the odds of start-up success in the founder’s favour- after all they have the same goals as you do.

There are a plethora of different ways in which a VC can help a start-up grow, so for the benefit of this post, we shall focus on those highlighted in an old industry survey by Gorman and Sahlman (1989) Ranked as most important by VC firms themselves. Number 1) Follow on Finance, Number 2) Strategic Planning and Number 3) Recruitment. It is worth noting that entrepreneurs agreed that it was was in these areas that they found VC involvement to be the most useful (Dotzler)

Round Two!

The chance of you reaching the exit stage with only one round of funding is highly unlikely, your VC will understand and expect that you need further capital to continue growth; after all it’s an essential part of the start up journey. Use this experience – the venture capitalist will have worked with companies in your situation before. If not willing or able to lead the proceeding round, they are sure to know the places to find somebody who can. Different firms will often look to invest at different stages, start-up to expansion, so finding the right investor for the follow on rounds can be crucial. Don’t miss out on the chance to present to your current investors before looking for new ones, they will give you constructive advice, or share with you the approach that previous applicants have done well with.

Strategic Planning

You can expect your Venture investor to be with you for the long haul, potentially up to nine years. It is crucial that between you, you agree on a strategy for where you’d like the company to go. Trying to predict anything 9 years in the future is a daunting task, especially for a new entrepreneur. Ultimately as CEO, the buck stops with you, you decide the path that the business will take. However, a good investor is an experienced soul and can act as a counsellor for any and all eventualities. They have most likely experienced dealing with issues that you had not even foreseen, the ability to draw upon this experience is an invaluable asset. The right VC will be by your side from the initial investment, all the way through to the eventual exit.

That Decisive Hire

No Company is perfect… this goes doubly for start-up companies. It is common for there to be pre-existing gaps in the management team or for new ones to appear as the business expands. Your VC investor should help fill these gaps with the right people, helping to find or interview candidates and ensuring that the team is constructed in the right way.

The overarching theme here being the network that a VC brings with them. When an investor comes on board, their network should become your network; they aren’t there to be passive money lenders or bankers. A good investor will do their best to put you in touch with the right people: these could be potential employees, advisors or customers.  A good entrepreneur gets the best out of all the resources that are available to them – this should include your new found connection.

 

Believe Venture Capital is the way forward for your company?  Check if you are suitable for the Midlands Engine Investment Fund and submit your Business Plan.

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