I recently spoke with Gadi Shamia, COO of Talkdesk, and one of the things we spoke about was the influence that Talkdesk’s investors had on its success and, more generally, the value of a VC to a start-up business. Gadi’s take on what VCs bring to the table is an interesting one:
“You know, people over-estimate the actual value of a VC. Investors are great. They provide money. They provide good advice. But the biggest help an investor can provide to a company, especially in their growth stage, is just enable it to continue doing what it’s doing. Because you invest only in great companies. No smart investor invests in bad companies.”
This got me thinking about the various ways in which a VC can contribute to the success of a start-up. There is the obvious contribution which is the cash that is required in order to grow the business, but what of the advice, the mentorship, the network of contacts, the industry-specific experience, and the seal of approval that comes with being backed by a big brand VC firm? Surely there is more to Venture Capitalists than just, well, venture capital.
It’s a two-way street
In order to understand what to expect from an investor, it’s important to know what they’re looking for from you. So it’s helpful to look at things from their point of view. The VC has a fund of say $100m, with a commitment to the Limited Partners who invest in that fund to provide a return within a typical period of 10 years. Then, if you take historically only one in every ten venture backed firms turns out to be a success, you will begin to understand the kind of growth rates and timelines to exit that a VC is likely to push you towards as an entrepreneur. Also, don’t forget Storm Ventures Managing Partner, Jason Lemkin’s, math which explains that
“If the [VC] firm owns 20 per cent of each company, and the VC takes 20 per cent of the gains, that’s four per cent effective ownership in your company. Multiply that by say eight investments per VC per fund, that’s 32 per cent effective ownership of one composite company. That’s more than you.”
VCs do not invest in firms if they think they are going to fail and, once n board, they are both institutionally and personally invested in your success and accountable to their limited partners. These are the pressures that face a VC and somewhat explain the pressure they might apply to you as an entrepreneur.
Dolla’ dolla’ bill, y’all
I can see where Gadi is coming from in that the most important thing a VC can offer is the capital required to enable growth, the safety net that allows the entrepreneur to take the risks necessary to be successful, while interjecting from time to time with some advice or a unique perspective. However, this is all well and good when you’re leading a company like Talkdesk that’s growing exponentially and all seems right with the world. It’s easy to be a laid back VC in this instance – just make sure the management team have the funding they need to keep doing what they’re doing and if it ain’t broke, don’t fix it. But what if things aren’t going so smoothly and growth rates aren’t living up to your VC’s expectations? Is this where their true value, beyond the capital, comes to the fore?
Been there, done that
Many VCs are successful entrepreneurs themselves who have managed to build, grow, and successfully exit their own startups in the past. If they managed to do so in the same industry that you’re operating in then all the better. Think of this kind of VC as an invaluable resource, your own personal SaaStr.com, someone who has done it before and can help you to navigate the murky waters of getting to initial traction, scaling your business, building the right team, nailing your business model, ensuring customer success, etc., etc. There is no substitute for direct experience so seek out a VC that has experience as close to your industry vertical as possible and one that is willing and available to share their knowledge.
Open up that rolodex
It is quite likely that if you’re VC has been around the industry for some time and been successful, they will have an extensive network of contacts with whom they have worked in the past. They can put you in touch with potential partners, suppliers, or customers but also warn you off parties with whom they have had negative experiences. The value of a warm introduction and the immediate piece-of-mind given to the contact owing to the fact that the VC has invested in your business, cannot be overstated. Often times it’s a single connection with the right person at the right time that can be the difference between success and failure. This aspect of VC backing is particularly relevant if you are new to the particular industry/vertical and lack the connections yourself.
The Seal of Approval
VCs are notoriously rigorous in the due diligence they carry out on prospective investments. They will do a deep dive on the fundamentals of your business, your team and their background, the market in which you are aiming to compete, your product/market fit, and so on. Having gone through this process and come out the other end with a name brand VC supporting you is a signal to the market that your business is a solid one. It says to enterprise customers that you aren’t just a startup upstart who will disappear from the scene within six months but rather that you are a serious player with significant clout behind you.
In short, there are many reasons why having a VC on board can add value to your SaaS start-up. Much like in choosing your co-founders or first VP Sales, you wouldn’t choose just anybody, so treat your choice of VC in the same way. They will be a partner in your business for the long haul and one that can’t be fired if the relationship starts to go awry.
Nothing ventured, nothing gained and bringing a VC on board might just be a capital idea.
by Michael Cullen @michaelcullen87