The myth of the value add VC

Alright, so I know based on the title some of you probably want to verbally shadow box me in a twitter thread. But hear me out before you assault my fragile ego.

(what I imagine the VCs reading this post look like..)

First, what the hell is a value add VC?

A value add VC is an investor who not only gives money to a startup, but also provides value in the form of introductions, industry expertise, and sometimes even strategic support.

In the 1980’s there were ~280 VC funds managing $17B, today there are more than 2,900 funds managing $995B! But that also means there’s now wayyy more competition among investors. They’re competing to get into the best startups. One of the ways they try and differentiate themselves is by claiming to provide more value than just the money they invest. But if VCs are really working their butts off to provide value to their portfolio companies, how come it seems like every venture backed founder complains about their investors being useless? Well… because investors aren’t always incentivized to add value.

Let’s talk about incentives

Now I’m sure I’ve got a bunch of you in a tizzy thinking, ‘Jack, how the fuck are VCs NOT incentivized to help the companies they LITERALLY invested in’. Well my friends, this comes down to portfolio construction. As most of us know, VCs only make money on a handful of startups they invest in. On avg 70% of startups die within 10 years. On top of that, most of the 30% that do survive never have a solid exit (exit meaning, IPO/acquisition/etc). So if a VC makes 100 investments, they may make substantial money off of 5-10 companies in their portfolio.

So let’s imagine you’re a VC who has 20 seed stage portfolio companies asking for introductions & help on a regular basis. Let’s say 2 of those 20 companies are CRUSHING it. They’re growing like crazy, the founders are tech-twitter celebrities, every investor in silicon valley wants to pre-empt their Series A, etc. You as a VC want to do everything in your power to help these 2 portfolio companies. It seems like they’re well on their way to being unicorns! But… what about your other 18 portfolio companies?

Well.. the other 18 of your companies are on a sliding scale of struggle, I’ll call this the The Portfolio Company Struggle Bus.

12 of the 18 have made little to no progress since raising money. They have no revenue, they keep pivoting, employees are hard to retain, etc ( no shade, this is where I’ve spent most of my startup career). The other 6 are like C students standing in the shadows of their A+ siblings. They’re pulling their shit together, but their dad (VCs) never seems to acknowledge their growth.

(forgive my horrid handwriting - I dropped out of college for a reason my friend)

Now you as a VC have a busy schedule. You’ve got 8 meetings today, 100 unopened emails in your inbox, a couple investment memos to approve, and associates to manage. On top of this schedule, you’ve also got 10 of your portfolio companies asking for introductions & help. As you’re slamming down a turkey sandwich for lunch, you’ll probably be happy to shoot off a couple emails for your golden child portco that just closed another $2M customer & wants more enterprise clients. For the other 9 portfolio companies on the portco struggle bus, you’re not really sure how to help, or honestly don’t want to make some of the intros because they’re clearly not ready. I mean your reputation is also on the line! So what do you do? You tell your portcos on the struggle bus that you’ll circle back later (and then probably forget) or you pass them off to your Wharton MBA associate. This is where startup founders start throwing their hands in the air and get jaded that VCs don’t provide value.

Now if you’ve made it this far in the post you’re either rapidly shaking your head in agreement or are prepared to call me a failed founder and question whether I’ve actually raised VC money in hacker news. But this is the point in the article where I flip the script and defend VCs. So get ready founders, I’m gonna say some shit you might not like.

VCs help founders who can help themselves

A couple years ago I started a fundraising bootcamp to help other founders raise money. This was a lot of fun & I met a bunch of incredible entrepreneurs. Every time I ran the program we’d get 20-50 founders a

group, & at the end of the bootcamp at least half of these founders asked for investor intros or extra feedback/pitch sessions. After a couple months I realized what it was like to be a VC. Because soon the only founders I REALLY wanted to help were the ones who had their shit together & were prepared to raise money. The other founders who came to me often had businesses that weren’t VC backable, or had terrible pitches, or weren’t ready/willing to put the effort in to get in front of VCs. These folks weren’t bad people or bad entrepreneurs. They were just hard to help & hadn’t done enough ground work to make it easy for me to lend a hand. It was almost like they needed so much help that in my limited time that I had with them, it was almost impossible for me to make progress. Although I think most people in my fundraising bootcamps had a great experience - I know some felt jaded that I didn’t give them the VC intros & magic wand advice they wanted. This is what happens with founders who become jaded their VCs aren’t more value-add.

I’ve had to learn the hard way that the trick to getting help, is making it really easy for people to help you.

So what’s the take away?

Investors: There’s nothing wrong with striving to be a VC that provides outsized value to portfolio companies. However, if you continue to over promise and under deliver, the number of jaded startup founders will continue to grow. Experienced founders will opt to take investment at the best terms from firms that will just leave them the fuck alone. At the end of the day, your job is to give startups money so they can build incredible companies. If your portfolio company is struggling and you don’t think you can help them right now - be straight up with them. Tough love is hard to do but incredibly valuable.

Founders: Remember that there’s no one person or VC firm or idea that will make your company succeed. Instead, I like to think of entrepreneurship as planting a lot of seeds. Your new investor is a seed. That twitter thread you’re about to post is a seed. The podcast you’re doing next week is a seed. All of these actions have the chance to bloom into momentum that will drive your startup forward. But sometimes, seeds don’t grow. So plant a lot of them. Give yourself optionality to succeed in a multitude of different ways. If you’re banking on your lead investor to help you hit hockey stick growth, good luck, you’re probably fucked.

Final thoughts

Now this isn’t to say that there aren’t great VCs out there providing value to their portfolio companies. Hell, I have know a lot of great investors & have had some amazing VCs/angels support me in the past (shoutout to folks like YueChen Zhao & Allen Gannett <3). But VC has become a much bigger business than it used to be, and there’s been a lot of hype around this term value add investing and I find it to often be disingenuous/wishful thinking. Reality is, the real value you get from a VC is the money they give you. Hopefully the money you get is at favorable terms & from reputable investors. But pretending VCs are some godsend to solve founders problems & provide tons of value leads to miss-managed expectations & disappointment.

Thanks for reading. If you’re founder raising money and want to chat, feel free to reach out to [email protected]

Jack