Does venture capital add value?
The debate rages on: does venture capital add value? In the cloud/lean startup era, many B2C businesses arguably don’t need venture backing anymore. When I talk to entrepreneurs, this theme arises frequently, so I wanted to explore it in a blog post.
For better or for worse, some entrepreneurs I speak to are generally dead-set against venture capital. Top-of-mind concerns I’ve heard have been the dilution of founder’s equity and distraction due to long due diligence processes. (One entrepreneur had experienced a six-month due diligence process with another VC firm. Ouch! For the record, our average process takes 6-8 weeks.)
For the data-oriented: my friend Furqan Nazeeri (who maintains the popular @altgate blog) posted a great paper on this very topic. The Harvard Business School research suggests that great VC firms are like great stock pickers, backing serial entrepreneurs and those who are most likely to succeed.
On the other hand, you have situations where raising venture capital clearly makes sense. HubSpot, a leader in online marketing, recently received $32M in backing from Sequoia Partners, Google Ventures and Salesforce.com. The co-founders explain why this makes sense for them in a very well-written post. In short, for B2B SaaS companies, customer acquisition costs are paid up-front. Even if your unit economics are profitable, it’ll take significant cash to move from being a great company to becoming a leader in your industry. And, as the authors point out, in the Internet age, being #1 means everything. (Though if you’re late to the party, don’t despair. As the venerable Al Ries & Jack Trout point out, if the #1 spot is taken, you can still differentiate yourself and be #1 in a related but slightly different category.)
Whether or not to work with VCs is a personal and a strategic decision. Arguably, good VCs help drastically reduce the risk associated with new ventures. Seeing that most ventures fail, the argument goes, it’s probably a good idea to get all the help you can get, even if it means giving up some equity along the way (the idea being that some equity in a large company is worth much more than a lot of equity in a tiny company). Even the HBS researchers show that serial entrepreneurs raise venture money in “21 months as compared to 37 months for first-time entrepreneurs.”
Outside the money and the involvement, there are other benefits as well. For OpenView, we have a full-time internal consulting team (called OpenView Labs) that we bring on to accelerate our portfolio firms’ growth. As a former management consultant, I believe the value-add here is significant, which was one of the reasons why I joined this firm. But just how this helps will have to wait for another post…