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What Kind of Value Do VCs Add?

In a short but controversial 2013 interview published in Techcrunch, former Sun Microsystems co-Founder and current Khosla Ventures managing partner Vinod Khosla contended that most VCs don’t add any value to the startups they invest in.

The problem with measuring value-add is that it’s mostly subjective. How much does a piece of advice weigh? Or an introduction?

To clarify the issue, we compared what Founders say VCs bring to them with what VCs declare they spend the most time on.

What Founders say VCs bring them

In a 2001 study that remains relevant to this day, an entrepreneur-come-VC asked entrepreneurs to rate how their investors were doing on a range of value-add elements.

What VCs think they bring Founders

Let’s compare these findings with a 2016 study asking c.900 VCs based in the US what they thought they brought to the table. 

The percentages below represent what VCs say they do with portfolio companies:

  • Financing, Advice, and Introduction: 70%
  • Strategic Focus: 87%
  • Hire employees: 46%
  • Operational guidance: 65%

The apparent discrepancy is that, while VCs declare they spend time providing operational guidance, they score poorly on that item with Founders.

What is the most impacting value you bring startups in your portfolio?

💬 Let us know in the Comments section below.

👀 Sources & Additional Material

Responses

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  1. For strategic investment, I think VC can also bring positive synergies to each of its portfolio company given the investing ecosystem that CVCs ever established.

    1. Yes that’s one of the principal ways VC try to add value. Here again, some firms are really good at having Founders of their portfolio meet and do business, train them on specific issues, etc. While other firms don’t do anything meaningful on that front.
      > Have you heard of best practices from VC firms you know about?

  2. I think that it is hard for VC firm to provide founders operational expertise. Founders tend to know more about running the businesses than VC investors, because they are involved in the day-to-day operations. Quite often, the advice that the VC investors give is something that the founders thought of. Therefore, there is not much value-add.

    1. Yes that’s what the analysis provided shows 🙂 You could argue that VCs who are former entrepreneurs can be useful (in the early stages at least). What do you all think? Any examples come to mind? Testimonials from entrepreneurs?

    1. You’d have to check the precise definitions in the papers (I just added links to them by the way) but Liquidity means exit, and Operational Guidance would be any steps of the entrepreneurial journey that is not hiring. Let us know if you find more. Thanks!

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