This is How VCs Can Survive
If you read my article 2 weeks ago you might be wondering - So what is a poor VC supposed to do? How to manage all of the transitions in the industry to stay relevant?
Firstly VCs need to remember the business they are actually in. Yes - they are providers of capital seeking a return but VCs don’t (or shouldn’t) be earning their returns just by renting money to startups - VCs are about expertise, relationships, and guidance.?
The job of a VC should be making sure the value they can add to the investee company increases the company’s value enough to justify the portion of the pie they took.
Disruption is coming to the VC world and that’s a good thing. It will help companies raise capital that is more suitable to their growth stage, while also helping top VCs generate higher returns for the value they provide - all of which should help drive more innovation and prosperity for the economy and society as a whole - the only question is how enthusiastically traditional VCs will embrace the change.?
VCs Need to be as Convenient as Possible
Revenue-based financing can be executed and funds delivered to a bank account in as little as 48 hours. VCs need to be convenient and while speed isn’t everything - it is critical.?
One of the biggest advantages a good VC can have over other financing sources is that they can be easy. Having a good structure or process established means an entrepreneur can go from pitching to having cash (or a quick no - equally valuable) within hours.
Crowdsourcing funds can involve a long and protracted fundraising period, filled with uncertainty and a high cost of funds (campaign advertising). When you’re trying to grow a company, having to wait for months for an uncertain amount of money is an added source of stress. Likewise, attempting to bootstrap or trim costs to the absolute minimum can also cause an entrepreneur to make penny-wise but pound-foolish decisions building up substantial technical or operational debt that will have to be dealt with at some point in the future.?
Making a company wait weeks or months for an answer is simply not going to cut it. At a minimum, a clear and transparent timeline should be provided. The firms that can provide a yes or no quickly will win. Otherwise, startups and entrepreneurs are going to turn away from your firm, or the world of VC entirely.?
VCs Need to be Hands-on Consulting Firms?
One of the biggest differentiators for a VC versus other sources of capital is that they can be the “smart money”. At their best, they can do a lot more than just writing a check.
When a startup runs into challenges, where the answers aren’t clear cut, the best place to get their answers is going to be from the organization whose goals are closely aligned with theirs. What VC "takes" from a startup in ownership and loss of control it can make up for by providing knowledge that an entrepreneur simply would not be able to access on their own.?
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Being able to simply go to one point of contact when you run into a problem cuts down the amount of time an entrepreneur might spend trying to look around for who can help them figure out what to do.
The sooner an entrepreneur can connect with someone and start ideating on a solution - the sooner problems can be overcome. The value a VC can also offer is being able to see in real-time the types of challenges and solutions happening in other portfolio companies. No crowdsourced investment can offer that type of insight.?
For companies working on highly technical problems having the expertise of a VC who understands the unique economic and practical realities of the industry can also allow the firm the differentiate itself from other sources of capital.?
VCs Need to be Community Builders and Matchmakers
Entrepreneurs have a tendency to work in silos - and have a habit of describing their world as “lonely” and “isolating”. Trying to form meaningful relationships while also building your business is an immense task.
A VC firm can differentiate itself by being a relationship broker. Helping to connect complementary portfolio companies, finding an expert for a founder to talk to, and making customer introductions that can dramatically reduce the amount of time a founder has to invest in getting themselves “out there” are all major value adds.?
Going from a first introduction to closing some type of “deal” can easily take 20 or more contact points. The value of an introduction from a VC is being able to cut out the first phase of relationship building. It’s about not having to prove “who you are” and lets founders dive straight into business.
VCs can play a unique role by pre-vetting a founder for anyone they might wish to connect with. This is valuable both to the founder, but also to the folks that they meet. Busy and important people often don’t get the chance to connect with promising up-and-comers simply because it’s difficult to decide who is worth the time - a VC firm can do the prescreening on that person’s behalf.
Much like how top tier universities can attract students because they are known as places to connect with similarly minded individuals by building these communities VCs can help make themselves into destinations for entrepreneurs. It's?those connections that can drive incredible value creation for companies of all sizes, and make VCs indispensable for founders.
Conclusion
If VCs believe their job is solely or mainly about providing capital they are going to be increasingly threatened by the changes in the industry. Technology and a larger supply of cash are making it easier than ever for growing companies to raise non-dilutive and less restrictive capital.?
The VCs that will survive are the ones who can prove that the added value they bring to the table through convenience, advice, and relationships exceeds the cost of dilution and loss of control startups face by raising VC funds.
I believe all these industry changes are good. It will make the industry more responsive to the needs of entrepreneurs, and it will make it easier for entrepreneurs to raise the right type of funding. All of this will make it easier for solutions that improve lives to make their way to market - and that is a very positive thing.