Could VC ‘value add’ be quantified?

Every VC talks about ‘value add’. The unique ways in which they believe they can help you build your business, be a great partner, and increase the chance of your start-up being a success. These include their network, recruitment, strategic advice, operational experience etc. 

I have observed that a great angel/VC partner/firm can add enormous value. As a simple example of something concrete that changed Songkick’s trajectory, Saul Klein our board member from Index knew we were urgently looking for a world class designer, and introduced us to Gideon Bullock who he knew from his days at Skype. Gideon became our Creative Director and is a core member of Songkick’s management team. That’s just one example and I have hundreds more examples of things that our investors including Greg McAdoo from Sequoia, Peter Read, Paul Graham and many others have helped us with in building Songkick/Detour. 

But there are other investors that I have encountered or learned of who do not add meaningful value beyond their capital, and in some cases, actively destroy value by distracting, confusing and generally offering poor advice to start-ups. I’ve lost track of the number of off the record conversations I’ve had with founders where they tell me about a VC pushing them to do something they know to be fundamentally wrong for their business, and the distraction it is causing. 

Clearly there are qualitative signals of who adds value - you could look for example at which VC firms great angel investors steer their companies towards. You can look at how effectively VCs win deals etc. Just as there are qualitative signals around product market fit, the most important concept for start-ups. With product market fit, the most valuable contribution I believe anyone has made to the discussion is Sean Ellis’ concept of ‘% very disappointed’ as a way of quantifying how close you are to to achieving PM fit and moving it away from a purely qualitative discussion.

I’d like to suggest a comparable metric for VCs to track, as they question how much value they add beyond their $$. They should ask their portfolio companies “If I had provided zero capital, how much equity would you give me in your business for the advice and support I provide”. Let’s say the founder came back with an answer of 5%, but you own 20% of the company, you know that 15% of your value is in the capital you provide and 5% in your ‘value add’. YC have taken this to the extreme by offering so little capital that the 6% average equity stake they take is close to entirely value add.

This statistic will be somewhat inflated as founder worry about wounding their investor’s egos, but it should nevertheless provide a good sense of how your value add compares to your equity stake. More interesting, an independent 3rd party with the trust of enough founders, could establish a clearer index of investor value add across a wide set of start-ups, and help to rank value add across the investment community.

Over the long term as an increasing set of funding mechanisms emerge (Kickstarter, Angellist, Upstart etc), this may be an increasingly important question to ask as VC itself is disrupted and partially/completely decoupled from the capital it provides.

11 notes

  1. derfshaya reblogged this from soundboy
  2. fyietc reblogged this from soundboy
  3. moviebully reblogged this from soundboy
  4. soundboy posted this