“What is your value add as an investor?” That question caught me off guard. It was rather late and to be honest, I was just getting ready to politely end the meeting. Then he threw the question at me. One of the most elusive questions you can ask a VC. It is as elusive as asking an entrepreneur “why are you a good entrepreneur?”
There is a cookie-cutter answer to this question and it goes as follows: “We bring years of successful experience to the table and guide our entrepreneurs through every step of the way. We use our vast network to help you with introductions and recruitment.” You will find this slogan on every VC website including ours.
In practice, however, there are VCs that you would rather stay away from although they bring some good qualities to the table. Experience and connections are a must but it takes something more to become a good partner.
Let me take a step back and tell you a short story. I began my career as a VC at the age of 30. Back then, there was a certain board member that really impressed me. He knew everything, always had something smart to say and was very charismatic. Myself and the other board members would attentively listen to him and seek out his approval. Personally, I considered him to be the paradigmatic value add VC. One of his main characteristics was being strict with entrepreneurs, demanding constant sacrifice and always putting the company’s interest above everything else.
But as time passed my perspective changed. The board meetings became tedious as he would repeat the same speeches over and over again no matter what challenges the company was facing. In hindsight we learned that he was often wrong, but he would never admit it. And what I saw as great charisma, turned out to be an aggressive takeover of board meetings.
Moreover, my entrepreneurs were going through a personal crisis. His constant demand for sacrifice had a devastating impact on their family lives. It was as if he thought that there was only one formula for success and that it comes at a great personal cost from the entrepreneurs.
There is a gap between what experienced entrepreneurs and VCs view as value add. This graph from DeSantis Breindel which I simplified, demonstrate the gap nicely. While experienced entrepreneurs most value friendship and trustworthiness, VCs’ self propaganda is about experience and hands-on.
Over time I’ve come to the realization that there is no blueprint for a Partner that fits all entrepreneurs. Different people need different things from you, and these things change over time. Earlier on, entrepreneurs will probably need more help with introductions, recruitment, and operations. With time, and as their brand and team grow, they will need more strategic and financial advice and someone to brainstorm with. And all throughout the journey, they will need someone who deeply understands their domain and can help them strategize. Entrepreneurs also need their investor to be positive, trustworthy and attentive — otherwise they will find themselves avoiding that investor. Lastly, entrepreneurs need the investor to fully understand the difference between being a VC and being a CEO, someone who has their back but does not assume to know better.
Back to our questioning entrepreneur: I looked across the table, contemplating whether it was worthwhile to explain it all. He was waiting anxiously for my answer. I could sense he wanted to hear the traditional self-promoting propaganda. But I couldn’t bring myself to give it. Instead, I said honestly: “It’s complicated, it really depends on your needs.”
For me, being a value add investor is an ever-moving target that I’m trying to hit. Over time I have developed a few guiding principles:
- Be fully transparent — in good times and bad times.
- Never ignore a request — whether it is for introductions, recruitment, strategy or even personal help.
- Always ask questions, but rarely assume you know the answer.
- Entrepreneurs are the heart of the company — help them to grow.
Lastly, the best way to add true value always starts with a simple question: “How can I help?”