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How Do Venture Capital Investors Add Value to Portfolio Companies

How Do Venture Capital Investors Add Value to Portfolio Companies

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The biggest and most persistent problem that early-stage companies face is the lack of funding. Almost 44% of startups fail because they don’t have enough money to execute their initial ideas. [1]

Enter VCs.

But venture capitalists don’t just wear nice suits and throw money around. Admittedly, they do that too, but the truth is that value added investors do so much more than that. The good ones, at least. They’re like fairy godmothers for businesses, granting wishes and making dreams come true. 

There are countless examples of outstanding ROIs made by value added investors, like when Sequoia Capital invested under $60 million in WhatsApp in 2011 and when Facebook acquired Whatsapp in 2014 for $19 billion. Sequoia made $3 billion, resulting in a huge return on their initial investment.[2] 

But with great wealth comes great responsibility, and the value added investors bring more to the table than simply a checkbook. It’s not just about mere debt repayment but more about private equity value creation.

And that’s what this article will aim to explain – how true VCs make a difference and add value to a brand they invest in, as opposed to those who are merely a sum of their invested money and ROIs. 

For more insights into this topic, check out the video below from our Founder, Alexej Pikovsky, who, as a former VC himself and a startup founder who raised $4 million, has and shares firsthand knowledge of how important it is to pick the right VC. 

Now, let’s see what the right value added investors are capable of bringing to a startup that seeks organic but fast growth. 

1. Talent and Recruiting

It’s all about the workforce, so let’s first talk about talent and recruitment.

It’s fair to say that startups are usually run by young minds with a vision and a whole lot of passion, but what they usually lack is experience. Over 20% of startups fail because of bad hiring, lack of competent leadership and not hiring A players…[3] and that’s precisely why recruiting the right talent is crucial if a startup plans on flourishing. 

Top tier value added investors usually help the aspiring company build the right team and find suitable candidates for all the key positions.

Let’s take the example of Accel. They assisted Facebook in their executive search and connected them with several key company members, including their Chief Operating Officer, Sheryl Sandberg.[4] 

2. Strategic Guidance

Once you have the right product and the team for the job, next up is a game plan. To succeed in formulating one, you must take into consideration all factors. 

Value added investors utilize their rich and valuable insights from the market and other similar portfolio companies to provide actionable suggestions like:

  • Which market niche best suits your product
  • What potential markets or geographical regions you can expand into
  • What prioritize in your product build

In Google’s early days, two capital firms, Kleiner Perkins and Andreessen Horowitz, helped refine their search technology and product development​. The two VCs offered a roadmap that included which products and features should be prioritized, along with development cycles and resource allocation. [5]

3. Operational Support

So, you got your business up and running. You’re in the mud and getting your hands dirty, but how do you make things move along faster? 

One of the quickest ways of growing your business is streamlining your operations. VCs can recommend ways for oiling up the business bus by suggesting the best practices for your market, be it changes in supply chain management or resource allocation. 

Value added investors also tend to stay fairly updated on the latest technologies, software, or hardware that can be adopted and implemented to achieve operational efficiency.

For example, Bessemer Venture Partners (BVP) played a huge role in streamlining LinkedIn’s operations. They worked closely with them, identified operational bottlenecks, and suggested the best practices and technologies they could implement to improve. This helped LinkedIn improve its efficiency, scale up, and provide a sustainable growth model.

4. Market Expansion

Most startups dream of making it big. The definition of “making it big” may be subjective, but there are objective indicators that make it clear a startup is on the rise, such as forming alliances and partnerships and expanding its market. 

If you plan on venturing out into the sea and expanding internationally, you need to consider what people want and understand their culture and the local laws. VCs most likely had other portfolio companies expand into the new market so they might have off-the-shelf market research for you to get insights into the following:

  • Latest market trends
  • Customers’ needs
  • Competitive landscape

That’s exactly how Benchmark (VC) effectively guided Uber throughout its entire ordeal of entering the international market, from building its presence, meeting regulations, and forming a localized strategy to achieving a sustainable growth model.

5. Help in Raising Your Next Round

As mentioned in the beginning, the make-or-break deal for any startup is getting funding, with running out of money being the most common reason why startups fail. 

If you have a funding source that usually follows in the next round, but in your case they decide to sit out, this scenario might just be a death sentence for your start-up. This is also why you must know the requirements and benchmark for raising capital

The one thing value added investors must do, is to help you get the next funding round, even if it means introducing you to other investors. So say you raised a Seed round (your first institutional round), then the good Seed VCs will introduce you to Series A VCs before you actually require the capital from Series A. 

Value added investors can also be quite helpful for late-stage companies that are raising debt funding. They introduce them to other venture debt funds and provide extra credibility for the lenders to provide you with the required capital. 

A great display of how VCs can assist you in fundraising is seeing the way Andreessen Horowitz (a16z) helped Coinbase get funding [6]. They believed in the company’s potential and offered initial funding. Not only did they connect them with potential investors, but also helped pitch to them. Several rounds of investment later, Coinbase raised $100 million in Series D funding rounds. Long story short, their IPO in April 2021 was valued at over $85 billion on its first day of trading. 

6. Community Building

The story of the lone wolf may be cool, but it is hardly practical in business. Similarly, a startup cannot thrive in a bubble. VCs play a major role in connecting startups with like-minded people.

Most top VCs have a Slack community or a Whatsapp group connecting all their portfolio companies. They run webinars or even fly portfolio companies in for a retreat and networking between the founders. These can be invaluable learning and business opportunities about the success and failure of your peers, helping you derive wisdom and avoid common mistakes. 

VCs can also connect you with advisors and mentors who are likely on the board of another big tech company that might end up acquiring your business. We see that trend a lot. 

A great real-life example is when Greylock Partners invested in Linkedlin in the Series B funding round in October 2004. They saw the potential in LinkedIn to revolutionize professional networking. Greylock used its networks and helped LinkedIn form corporate connections and build professional relationships. It assisted them in boosting community engagement by hosting professional events, webinars, conferences, and meetups. Long story short, with their assistance, LinkedIn’s IPO was listed in May 2011, which led to its subsequent acquisition by Microsoft for $26.2 billion in 2016. [7]

7. Exit Planning

The right value added investors provide the necessary guidance for your exit strategy, including the following:

  • Optimal timing to exit
  • determining if the company is at its peak before exiting to maximize valuation
  • Whether to file for an IPO or go for an exit to a strategic, i.e. a trade sale, etc. 

An ideal scenario where this was executed with perfection is the story of WhatsApp’s success. Jan Koum and Brian Acton from Sequoia worked closely with WhatsApp’s founders to align on an exit strategy. They connected the founders with potential buyers, offered their expertise in company valuation and deal structuring, provided legal advice, and gave them a sense of credibility. This eventually led to WhatsApp being acquired by Facebook for a whopping $19 billion. This was officially the largest acquisition deal in tech at the time. [8]

8. Marketing and Sales

Young businesses typically have some marketing and sales strategies that help them sell their product and/or services. However, experienced value added investors can introduce new marketing and sales channels and enable you to come up with a well-rounded strategy that will bring the right levels of growth and scalability. 

Making another entry in this article, Andreessen Horowitz (a16z) also helped Github with their sales and marketing. They provided Github with support including: 

  • Initial investment
  • Sales strategy and development
  • Marketing campaign
  • Brand building

And what did it do for Github? The brand greatly increased its user base and market position, eventually leading to GitHub’s acquisition by Microsoft for $7.5 billion in 2018. [9]

Avid VCs usually also work with trusted agencies like NUOPTIMA as your operating partner for example and can introduce you to agencies so you do not need to do the due diligence and speak to hundreds of agencies to pick one to help you scale. 

Scale Up and Meet Right Value Added Investors With NUOPTIMA

NUOPTIMA has considerable expertise working with private equity funds and value added investors looking to acquire businesses. Our experience goes beyond traditional growth tactics to incorporate digital due diligence, which provides detailed insights into the performance and prospects of your aspiring company.

We help you capitalize on growth possibilities and increase your market presence by providing tailored solutions and innovative methods. 

Whether you want to strengthen your market positioning, optimize your customer acquisition channels, or boost your financial performance, our holistic approach ensures a strategic road to success.

Ready to start your journey to transformative growth? Book a free call with us today! 

Summing Up

Now you know that value added investors are more than just checkbooks with suspenders. They’re your startup’s secret weapon and your ticket to success and growth who are ready to sprinkle magic dust (read: hard cash, expertise, and industry connections) to help your business conquer and disrupt that market niche. 

FAQ

What Are Value Add Investors?
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Value added investors don’t just inject you with the much-needed funding, they add considerable business value by sharing their time, knowledge, and contacts that can often prove to be even more important for the growth of your startup.

What Does “Add Value” Mean in Investing?
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Value- added investors focus on properties that require upgrades, therefore the VCs doing this type of investment must have medium to high leverage to finance the project, depending on its size. The higher the level of improvement, the more debt is required.

What Is the Value Added Investment Approach?
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Value-add Investors seek downside protection by acquiring properties with solid in-place income in lower volatility property sectors, reducing leverage, and diversifying their portfolio.

What Is the Value Added Approach to Investing?
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Value-added initiatives necessitate a more involved and strategic investment approach, sometimes with a shorter time horizon. This category is often attractive to investors who want more hands-on management and are willing to take on more risk in exchange for better potential rewards.

References 

  1. https://www.statista.com/statistics/1271464/start-up-failure-reasons/[1]
  2. https://www.reuters.com/article/us-whatsapp-facebook-sequoia-idUSBREA1K04720140221/[2]
  3. https://www.statista.com/statistics/1271464/start-up-failure-reasons/[3]
  4. https://www.accel.com/relationships/facebook[4]
  5. https://www.forbes.com/sites/tomiogeron/2013/04/10/google-launches-glass-collective-with-andreessen-horowitz-kleiner-perkins-to-fund-google-glass-startups/[5]
  6. https://press.farm/the-top-investments-of-andreessen-horowitz/#:~:text=Coinbase,the%20transformative%20potential%20of%20cryptocurrencies[6]
  7. https://news.microsoft.com/2016/06/13/microsoft-to-acquire-linkedin/[7]
  8. https://www.forbes.com/sites/parmyolson/2014/10/06/facebook-closes-19-billion-whatsapp-deal/[8]
  9. https://news.microsoft.com/announcement/microsoft-acquires-github/#:~:text=Microsoft%20acquired%20GitHub%2C%20a%20popular,and%20services%20to%20new%20audiences[9]

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