Building technology companies, Forum

DNA Of A Value Creating VC

Anik Bose shares Limited Partner, Entrepreneur and a BGV General Partner perspective on the DNA of a Value creating VC. The Venture Capital industry is often viewed with a mixture of glamour and disdain. During the good years the media lauds successful VC firms and partners with the “midas touch” ranking, citing specific examples of spectacular value creation in building the next generation of valuable technology companies via massive IPO’s or M&A exits.   During the bad times VC’s are lambasted for delivering poorer returns than the public equity markets while living lavish lifestyle off management fees paid for by Limited Partners. Consequently Venture Capital as an asset class has been the subject of intense debate amongst both LP’s and General Partners. Putting aside the hype and the ups and downs of the VC market cycles we asked ourselves the question – what is the DNA of a value creating Venture Capitalist ? An LP perspective In a report published in June 2013 StepStone indicated a preference for GP’s who invest with a different model. Instead of shooting for “homerun” deals out of large portfolios to offset a high number of loss-makers, they indicate a preference for GP’s who use a combination of capital efficiency and real options to reduce the amount of losses in the portfolio while maintaining the potential for high multiples of capital on their winners. They make a case for best of breed GP’s with smaller funds to yield a 3X net multiple on capital, with low correlation to public equities. One can argue that innovations in cloud computing, open source software, scalable and standardized hardware architectures, and broad leverageable distribution platforms have made it possible to form and grow companies with less capital provided one stays disciplined on valuations. An Entrepreneur perspective The National Venture Capital Association (NVCA) released their first ever survey on venture capital branding in mid 2013. In this survey one of the topics covered was what they sought from a venture capitalist (apart from money) – including personal attributes. With a sample size of 158 CEO’s they found that entrepreneurs wanted a firm that was “entrepreneur friendly”, “trustworthy” and “collaborative”.  We also have anecdotal evidence from BGV experience that entrepreneurs often value a VC’s network to assist with customer acquisition, business partner recruitment and or hiring talent. A GP perspective Given BGV’s focus on early stage investing (Seed and Series A) which tends to be bandwidth intensive we believe in a focused smaller fund size. We also believe that it is critical to for a GP to help their early stage portfolio companies navigate through the value creating milestones required for a successful subsequent fund raise. This goes beyond just offering introductions to the BGV network of resources. At BGV each partner works collaboratively with the CEO and management teams of our portfolio companies to develop and execute on the roadmap of value creating milestones – be it product positioning, customer acquisition, strategic partner recruitment, team augmentation or go to market and business model refinement. This requires the intersection of the GP’s network AND their operational company building expertise along with a rare set of personal attributes including:

  • Collaborative work style – BGV portfolio companies have full access to our partnership, irrespective of which partner serves as the board member so that the entrepreneur can leverage the full partnership’s expertise and network
  • Ability to Listen – We listen and we strive to complement the creativity, ambition and vision of our management teams with insights, discerning advice and relevant capabilities and resources – we are humble enough to know we do not possess all the answers
  • Being Responsive – We respect the fact that our entrepreneurs need rapid responses and constructive, honest feedback so we pride ourselves on making timely and tough decisions.
What makes a good VC goes beyond what can be measured in the Midas list — which focuses on an important but narrow criterion: return over a short period. Many other “genes” are required to complete the make up of a VC’s DNA, including his/her ability to consistently avoid losses (a daunting challenge for those of us that concentrate on early stage companies), to act as a team member within the firm and as a supportive coach vis a vis the entrepreneur, to transparently align financial risks and rewards with his/her LP’s.