The Truth About VC Value-Add
I recently read a post on TechCrunch from NextView’s Jay Acunzo about how “Director of Platform” is the hot new title in VC and why, going forward, it will allow investors to differentiate their value beyond capital. I agree with Jay’s core point, and I wholeheartedly welcome any VC embracing this approach — but I’d also suggest this “new” trend isn’t all that new. It’s been around for years.
In this post, I’d like to share the story of how and why we built OpenView Labs and explain why, whether VCs call it “platform” or “value-add,” the real differentiator is focus.
Truth #1: VC Value-Add Isn’t a New Concept
When I arrived at Insight Venture Partners in 2000, the startup and VC environment was frothy. The tech bubble hadn’t burst yet, valuations and cash burn were insanely high, and growth capital was, for the most part, readily accessible. For smart entrepreneurs with truly game changing ideas, that was a good thing. For VCs trying to win the best deals, it was not.
Competition was fierce. Most great companies had several top VCs fighting for their business and all of those investors offered the same financial “product.” For founders, this made differentiating between term sheets pretty difficult, which subsequently led them to start looking at the fringes of offers from VCs. What value could they derive from an investment partner beyond the capital that showed up in their bank account? And how exactly could that value-add help the business scale faster and smarter?
Frankly, I first noticed this trend when I was the managing director for Putnam Investments from 1997 to 2000, but it became more acute after I joined Insight. After working several deals, it was glaringly obvious that entrepreneurs were only partly interested in the money we could offer. Outside of that, they also wanted VCs to answer a very simple question: Why you?
If your answer revolved only around money, you were toast.
Building Out a True Value-Add Infrastructure
By mid-2000, I began the process of defining the functional areas that would best help Insight’s target investments grow more efficiently. I started by hiring some management consultants (that was my background, having started my career with McKinsey and Company) and I slowly began to build out a roster of functional specialists who would work in-house as part of Insight’s value-add team (what might today be called a “platform,” “onsite value creation,” or “operational support”).
Notice I used the word specialists. From experience, I knew the last thing founders needed was a team of uninvested generalists. Instead, these founders and their companies needed very specific, actionable insight and strategic advice that could help them solve their problems as quickly as possible.
The process I followed to do that involved three key steps:
- Understanding Insight’s focal point (investment stage, sector, strategy, etc.)
- Identifying the opportunities to add value within that focal point
- Building a team with the unique skills to deliver on those opportunities
Ultimately, that led to the assembly of a super talented group of individuals with deep experience in the various areas that mattered most to Insight’s target investments: M&A, R&D, lead generation, market analysis, and more.
Tweaking the Model at OpenView
When I founded OpenView, the rest of the VC world had started to catch on. Many other VCs had begun building out value-add functions within their firms and when they delivered a term sheet they often promised to do some of the things Insight was already doing. Some firms actually followed through. Others offered little more than generic consulting work that did very little to move the needle.
I knew the latter wasn’t an option at OpenView, so I again set out to build a team that aligned with the needs of our target investments — expansion-stage B2B technology companies ready to hit the accelerator and dramatically scale. To clarify, these companies are generally characterized by reasonable product-market fit, a solid unit economic model, and a basic understanding of the operating levers that can be pulled to drive efficient growth. These businesses are typically on the verge of dramatic customer and employee expansion, and may also be in the process of developing many new capabilities — particularly in the areas of product, go-to-market, customer success, and management systems.
Naturally, that focus led my team to build OpenView’s value-add infrastructure around three universal pain points expansion-stage B2B companies face:
- Hiring better talent
- Acquiring more customers
- Developing greater operational expertise
Those opportunities might seem obvious, but addressing them isn’t so simple.
The truth is, actually creating a structure that provides value in those areas — without disrupting, distracting, or annoying a growing company — is difficult. It requires significant time, investment, expertise, and focus, which is why many VCs either choose not to do it or fail trying.
Truth #2: If a VC is Really Going to Add Value, Sector and Stage Focus is Critical
I can’t overstate how important sector and stage focus are to a VC’s ability to actually deliver operational value to its portfolio. The reason is simple: The needs and opportunities to add value will be very different for an early-stage consumer startup than a growth-stage B2B business ready to scale. Operational challenges will be different. Market opportunities will be different. Expertise gaps will be different.
At OpenView, our focus is on expansion-stage B2B software companies. As a result, that focus has allowed us to build and tailor OpenView Labs — our “value-add” operational support team — specifically to impact the unique opportunities and challenges those companies face. We’ve aligned our processes, strategies, and team to focus solely on them. Our reason for doing this was twofold:
- By sharply focusing on a specific sector and stage, it allows us to always deliver relevant insights, ideas, and advice
- By building our reputation in that specific sector and stage, it allows us to develop a network of outside experts who can help us, our portfolio, and the greater B2B software market as a whole
A big component of the second objective is OpenView’s Labs website, a content platform exclusively focused on ideas and inspiration for expansion-stage B2B software companies. We use the site to further our mission to gather, develop, and disseminate the best company-building ideas and practices not just with our portfolio, but with the broader tech community, as well.
OpenView Labs isn’t just an editorial site, however. In addition to producing a regular flow of relevant content, our team helps the portfolio in two other key ways:
- Experimentation and implementation of ideas: In addition to curating ideas, we also spend considerable time testing them, determining which are the most impactful, and discovering the best practical approaches for putting them into practice. In that sense, we often serve as “guinea pigs” for our portfolio companies and work hand-in-hand to help them implement tactics once they’ve been validated.
- Acting as an extension of their growing team: We have found our primary areas of impact are helping our portfolio companies grow their talent and grow their customers, and we’ve cultivated our internal capabilities accordingly. In addition to a team of talent specialists who help the portfolio companies meet their recruiting needs, we also have teams designed to help them with market research, customer acquisition, and sales and marketing optimization. Eventually, most companies hire those roles in-house. But early in the expansion-stage, businesses often lack the capacity or resources to hire for those specific functions.
Of course, there are many other capabilities that portfolio companies need to develop during the expansion stage. Our approach to the other needs is to try to help those businesses connect with other members of our network, each other, and with the best outside experts in those areas. Our workshops and forums, in particular, serve as a great catalyst for introducing implementable ideas and connections that can help.
All of that said, we’re never really done building our capabilities. We get new ideas and requests from portfolio companies daily, and we spend a good amount of time trying to figure out the best way to service those requests. For example, we are just now launching a business development program for our portfolio companies. It’s a capability that I put in place at Insight over a decade ago and it’s a capability that we are ready to add to our list now that our portfolio is large enough to warrant it.
Which Race Are You Trying to Win?
If I said you were entering a race and you could choose any car you wanted, you’d probably pick the fastest sports car you could think of. But what if I told you the race was actually a drag race? Or the 24 Hours of Le Mans? Or something off-road in rough terrain? Each of those races would require a unique vehicle and a driver with a unique skill set.
My point, if it isn’t already obvious, is that delivering real value as a VC (and creating differentiation in the process) isn’t as simple as choosing the fastest, biggest, or strongest car, or re-branding value-add as something that sounds new and fresh. Doing that might drum up attention initially, but unless the VC’s value creation strategy is explicitly designed to handle the specific needs and opportunities of a specific type of company, then it will fail to deliver real results.
So, whether we call value creation services “platform” or “value-add” or something else entirely, the goal for VCs must still be to deliver highly relevant, meaningful value to the companies they invest in. To do that, investment firms must follow the three-step process I described above (with one additional step if the firm has a broad focus on companies in various stages and sectors):
- Find a focal point within a specific investment sector and stage
- Identify the opportunities within that focal point
- Build a team capable of delivering on those opportunities
- Rinse and repeat for other investment segments
Overall, if that’s the direction the VC world is heading in, I’m genuinely thrilled about it (even if it does mean the VC environment will be a little more competitive for us). Here’s why: With better access to relevant, actionable insights and ideas, more founders will build better companies, more investors will experience successful exits, and the tech world as a whole will be much better off as a result.
Photo by: supercake