When VC’s add value … and when they don’t

“There are 2 main views, both well qualified.  One is the venture capital situation in the US, which says that VCs do much more than provide capital – they help companies grow.  Another view is that more than 95% of VCs add 0 value to companies, and perhaps 70 or 80% add negative value.”

This is how Bakhrom Ibragimov of EBRD VC Investments set the scene at InfoShare 2016 in front of an audience of startups and VCs alike.

Bakhrom pointed out that when returns are used as a benchmark, investors often generate positive returns – but that this is not necessarily the best benchmark.

If, statistically, a VC has a track record that shows they are generating value, it implies that they have certain proprietary systems, such as culture and brand procedures, that will help create success for their portfolio companies.

But how can culture be proprietary?  All VC websites, for example, are the same.  Every VC claims to provide capital, advise and mentor companies, and help with networking, brand, and visibility for portfolio companies.  So how do VC’s really differ?  And will they actually add value to your company?

3 Types of VCs

Bakhrom identifies 3 types of VCs, and the value they add – or don’t add – to companies.

1. The Operator: Operators have a well structured process, and provided standardized services via operational support teams such as recruitment and product development.  These VCs work will with tech businesses at the seed stages.  Negative:  Can get too involved and micromanage.
2. The Mentor: Mentors have been through the journey themselves, and use their networks and personal experience to help add value to portfolio companies.  they work best with A-C funding rounds.  Negative: They are as useful as your company is relevant to portfolio returns.
3. The Financier: Financiers focus on investing the right amount at the right state at the right valuation.  They work with founders through formal interaction at a board level, if at all.  They work best with late stage companies and help raise more equity and debt capital, and with mergers & aquisitions and IPOs.  Negative: They may distract you with an obsession with financial engineering.

Don’t raise money you don’t need

“Every dollar a company does not spend is a dollar the company does not need to raise.” says Bakhrom.  “Overcapitalising the company which leads to lack of focus and drive.” He believes the best thing VCs can do for companies is not capital, but talent.  “Helping companies to recruit is the core function of VCs.  When things go wrong, the best thing a VC can do is strengthen the team with execution experience, as opposed to getting involved. The main function of the CEO is to hire and for VCs it is to recruit.”

He admits that for VCs, it can be hard to draw the line.  “Some VCs, especially former CEOs, want to do the job for you, but take none of the blame.”