The Paradox of VC Value-Add

Scott Maxwell of OpenView Partners had an awesome post up this morning titled The Truth About VC Value-Add. Go read it – I’ll still be here when you get back.

You may recognize Scott’s name – I wrote about him in my post When VCs Don’t Bullshit You.

The next person on the list of supporters is Scott Maxwell at OpenView Venture Partners. Scott and I were both on the Microsoft VC Advisory Board that Dan’l Lewin organized and ran. While we had never invested together, I felt like Scott was a kindred spirit. We both spoke truth to Microsoft execs, even though they mostly ignored us. I remember a meeting with the Microsoft Mobile 6.0 team as they were pitching us their vision for Microsoft Mobile 6.5. Both Scott and I, on iPhone 1’s or 2’s at the time, told them they were completely and totally fucked. They ignored us. A year or two later they had less than 3% market share on mobile. We had a blast together and as we went out to raise our Foundry 2007 fund, Scott made several introductions which resulted in two wonderful, long term LP relationships.

That’s how a friendship develops, at least in my world. You do stuff together, learn from each other, and then do things for each other. Simple.

Scott’s post is a great history lesson about the evolution of “value-added VC” behavior, especially around organization building by VC firms to “add more value” to their portfolio companies.

Before I dig in, I need to express two biases. First, whenever someone says “I’m a (adjective) (noun)” I immediately think they are full of shit. When someone says “I’m a great tennis player”, I immediately wonder why they needed to tell me they are great and it makes me suspicious. “I’m a deep thinker” makes me wonder the last time the person opened a book. “I’m a value-added VC” makes me think “Isn’t that price of admission?”

Second, I went through the scale up of the organizational VC firm in the late 1990s at Mobius Venture Capital. When we started Mobius, we were four founders and two EAs. At one point we were a 70 person organization, with 10 partners, 20 associates, two business development people, three recruiters, a marketing person, two incubators (anyone remember Hotbank?), a staff to run the Hotbanks, a big back office for accounting, EIRs, and some others folks.

It was a disaster. Now, you can argue that we were terrible at it. Or that we completely fucked it up. Or that our basic premises about what we were doing was wrong. Or that how we managed it was ineffective. Or that it would have worked great if only the Internet bubble hadn’t collapsed. Or probably 83 other arguments.

Regardless, it created a very deeply held belief that I share with my partners at Foundry Group that we wanted to run a VC firm that had none of this. We didn’t want associates. We didn’t want to grow. We didn’t want to build an organization. Instead, we wanted to be extremely close to the entrepreneurs and do all the work ourselves. It just occurred to me that we are bare metal VCs. That kind of fits with the word Foundry in our name.

So, my fundamental biases are (a) I don’t like the phrase “value-added investor” and (b) I have no interest in building a VC firm that looks like one that is configured the way many of the current larger VC firms are organizing themselves.

However, while it’s a bias, I have no opinion on whether it’s a better or worse approach. It’s a different approach. And that’s totally cool – there are lots of different ways to do things successfully. And there are lots of different ways to fuck things up.

In my opinion, Scott is one of the guys that is doing this effectively. I’m an investor in Scott’s funds and a very happy one. Scott’s also been thinking about this and working on it for over 15 years, now at two different firms, so he has a lot of run time with what works and what doesn’t. Many folks that are trying to incorporate “value-add infrastructure” into their firms would be wise to read his post carefully.

Now, if you are paying attention to my biases, you’d logically ask “So why did you co-found Techstars and why are you and your Foundry Group partners so involved?” Remember that it’s a different approach. We deeply believe that the way companies are created and funded, especially at the seed stage, is radically changing on a permanent basis. Techstars, at the very beginning, was based on this premise. It’s scaling magnificently around this premise and the iteration loop on learning is incredibly tight. And, while we are very close to it, Techstars is not “our firm” so we can help with our opinions, lessons we’ve learned, and belief system without having to run it.

Remember, there are lots of different ways to do something. However, there’s a huge difference between “doing something” and “doing something successfully.” The distinction is always worth paying attention to.

  • guestn

    From this article:

    ” I immediately think they are full of shit. When someone says “I’m a great tennis player”, I immediately wonder why they needed to tell me they are great and it makes me suspicious. ”

    and from your description at the top of the page :

    I invest in software and Internet companies around the US, run marathons, and read a lot.

    Not to meant to be offensive but above parts are mismatch to each other or there is some disconnect somewhere.

    Just like you mention that you read a lot, other people say they are great tennis player/ deep thinkers …etc. It is similar pattern of putting themselves at higher level like you did. Hope you noticed. Thanks.

    • Someone very smart once gave me this advice — “When you’re defining yourself, it is best to use nouns, not adjectives.” I believe Brad is objecting to folks who choose their own adjectives (e.g. ‘great’, ‘value-add’, ‘deep’). I’m not great with grammar, but I think that Brad’s description of himself features zero adjectives.

    • Nice catch. I suppose “I read a lot” is different than “I love to read” which is what is more important to me (than the number I read). Changing now!

    • Dasher

      Sorry, but I don’t see the connection. Brad saying he reads a lot is not similar to saying I am a great tennis player. He is in no way boasting.

    • DaveJ

      To me the underlying problem is when people attempt to “define themselves” outwardly. It’s one thing to do so inwardly – to make sense of oneself. It’s quite another to position yourself with others and try to define the narrative. Politicians, of course, do this quite intentionally, and probably there is some career advice somewhere that says we should treat ourselves as a product to be marketed. It seems like common sense, but it doesn’t quite work when people do it in relation to themselves.

      • One of the marketing notions that I find gross (among many others) that has been shoved in our face in recent years is the idea that people should develop and nurture their “personal brand.” My guess is this shift toward defining oneself is linked to this in some way.

        • DaveJ

          A brand is a promise, not a slogan. You (Brad) work hard on your personal brand – by writing controversial stuff, wearing completely unacceptable clothes, making money investing in companies, and providing good advice to entrepreneurs. Not with a catchy slogan. The promise is that you will continue to do all these things.

        • Teapot calling the kettle black?

          • I hope not. I spend zero minutes of my life thinking about my “personal brand.” I just am me and do what I want to do.

  • Dasher

    Brad, one of the many things I like about Foundry is that you guys don’t have EIRs. Can you write a post on your honest take on EIRs at VC firms? Thanks.

    • Yup – will do at some point.

  • Interesting how even the language is telling – “value add” implies a casual connection whereas Scott talks about having an operational support team. Which with Foundry sounds like, that’s you as partners that do all the lifting and you don’t take on investments you aren’t willing or able to provide operations support to.

    It made me think of a parallel, which is how important editorial focus is in publishing. If you don’t have a focus and relevant skills, your news publication / forum / website etc will get shredded quickly. Is there anything online you’ve run across, or written, that details how you put together an approach each time you provide operational support / feedback to a co you invest in?

    • We don’t have anything formal online about this but I’ve written many many posts about stuff we’ve done in the context of companies. I usually try to tell a story that is broadly applicable rather than a post that says “look at me – look what I’ve done …”

      And, the approaches are fluid. We have a simple point of view – as long as we believe in / support the CEO, we work for her. Each CEO needs and wants something different. So we conform to her, rather than have her conform to us.

      • Cool, I will dig a bit deeper into the archives for that

  • lol, this almost feels like a honeypot for me.

    First, my straightup, kneejerk reaction: VCs don’t add any value. I’m sure you’ve heard the phrase, “its all dumb money.” That’s not too far away from my experience. In fact they are generally more of a distraction than anything else. Its too bad there isn’t some sort of First Round ATM or something where you get your money and never have to hear from them again. Maybe thats one of the reasons Kickstarter is so popular…

    All that said, the truth is obviously more nuanced. However, I really do feel like the only things worth anything from a VC are sales leads and/or introductions to potential acquirers. Since neither of these happens very often (even tho they generally use both as carrots, especially if the company has more than one VC competing for them), they’re not much use, except for the cash of course 😉

    With respect, VCs like the way you appear to be are actually the worst kind, I call them “activist VCs”. All touchy feely and sticking their noses in with all sorts of politically correct distractions e.g. getting all your portfolio companies together periodically, spewing “culture” all the time, slanting hiring practices (e.g. more women!). Ick. (Sorry)

    BTW, I am a good tennis player. I play pickup at Wash Park down here in Denver as often as I can. I usually say that to other people when I find out they are tennis players. It has nothing to do with you. It has to do with me. I don’t want to play against somebody who sucks so I tell them that to prevent them from trying to play with me if they are a newbie or suck for some other reason. Its quite useful actually.

    • Frank – which VCs have you worked with?

      • Heh, now it really feels like a honeypot. I’d rather not mention names for obvious reasons. I was in two VC backed firms. The first as an employee. That company was funded by three firms. All were east coast, one was a very famous Tier 1 firm, the second was Tier 2 then but is arguably Tier 1 now. The third was a small local firm. I did not have direct interactions with the board members but certainly got the flavor of the relationships from our execs. There was only one round and then a 10 bagger acquisition, very fun.

        The second I was a founder and CTO. I went through three rounds of funding (raising and spending) before I left burnt out. We started with five in the syndicate at the first round and had six after three rounds. All Tier 2 east coast firms. Several are no longer in business now. I had quite a bit of direct interactions with these firms.

        I also did a “west coast tour” during our second round raise. We flew out to the coast and pitched like a dozen firms in 4 days or something like that. Many of them were Tier 1 west coasters. This was very fun but let me tell you, it was like deja vu when I was watching the first two episodes of season 2 of Silicon Valley.

        • I will respect your desire not to name the firms but five minutes of searching gave me a pretty good list of VCs for the two companies.

          Based on the firms that you have worked with, I can easily see where your perspective comes from.

          My only suggestion is to be conscious that you are generalizing across a wide-range of behaviors based on a few data points (per my D&D post – http://feld.com/archives/2012/08/vcs-are-like-dd-characters.html)

          I’ve had many similar experiences with VCs over the years, both as an entrepreneur and a co-investor. As a result, we limit the firms we work with, especially at the early stages.

          And, it’s not just a limiter on the firms, but we focus on specific partners, especially in firms that are very large.

          I wish more entrepreneurs would name names, Per your note above where you refer to me as the worst kind of VC(“With respect, VCs like the way you appear to be are actually the worst kind…”) you don’t seem at all shy about saying this directly to me publicly even though we’ve never met or worked together, yet you are uncomfortable saying something about someone you’ve worked with.

          I don’t get that.

          • Its a reasonable reaction. I’m being clearly provocative and you’re deflecting things with calm logical counter arguments. Its one of the reasons I like your blog. I have measured discussions with you rather than the flame wars with personal attacks that are typical in so many other discussion forums.

            The reason is this. You initiated the contact. You have the blog, its public and you talk about VC things. If it weren’t for your blog, I probably wouldn’t even know your name or that your firm even exists. The other facet is that alot of the people on here are sycophants and I’m not. I’m past my startup days I think. I don’t have the physical stamina anymore for the required hours. That means I don’t really care about VC dollars and so I can tweak VC noses. You’ve got a blog that allows me to do that, especially with your reasoned demeanor. All that said, I still have contact with lots of people on the east coast so discretion is the better part of valor with respect to them I think. Probably still doesn’t make sense to you but that where I’m coming from.

            I apologize if the way I’m expressing my opinions isnt using phrasing you like or is “too personal.” However, I guess I feel like somebody who’s obviously and adult and has no compunction about spewing the f-word as part of normal public communications on the Internet should be able to take a few arrows and you do admirably.

            Hopefully what came through the last comment was this notion of “activist VC” The term in my vernacular is a measure of how engaged the VC is in the daily routine of the company. You and your firm seem to be fairly deeply involved in your portfolio companies. I was exposed to other “activist VCs” during my startup days and I really didnt like the ones that were engaged analogously. Is a distraction. Our teams were busting ass 12-14 hours a day just to get product out the door, we didnt have time for it. Then they’d come in and spew whatever latest trendy business meme was circulating at the moment. My view, leave em alone to get their work done.

            Actually we did meet once briefly at your Defrag conference last year. But we’ve definitely never worked together and likely never will But if I really cared about that, I wouldn’t be saying anything negative, like most of the commenting I see here. 😉

    • Re: the “good tennis player.” My first question would be “what level are you?” If you answer this with 3.0, 3.5, 4.0, 4.5, or 5.0 then I have real data (vs. “good”). If you say “I don’t know what you mean” then I have some more real data.

      If I’m a 5.0 and you say you are good, but for you good means 3.5, I’m going to be disappointed when we are on the court and you are going to be way over your head…

      • Ya, usually the level thing comes up pretty quick. I’m a middle of the pack 4.5 player. I can hold my own nicely as a hitting partner with the #1 5.0 player in the state, who also plays at Wash Park although I have trouble getting games off him and they’re usually service holds. Just an FYI. Woohoo! I’m heading out to hit right now!!

  • @bfeld:disqus – The term “bare-metal VC” appeals to me. A “bare metal VC” can give answers or prepare me where maybe I don’t have time to look at in depth.

    They prepare evaluation frameworks or set of “rules of thumb” to consider that I can “go to” in my mind if a surprising question or opportunity arises.

    Suppose huge B2B Client we just signed ask if we are in the market for funds (seed for us). We get that this indicates credibility in our sector, but does it “poison us” in anyway for later trade sale or VC / institutional rounds?

    or

    Suppose Partner Y seeks exclusivity for a limited territory – What terms ring alarm bells for an investor and hurt value ? – What flexibility mitigates this?

    It seems to me that I (and possibly many pre-funding entrepreneurs) have loads of questions where a “big-brother” advisor who has been through due diligence a 1000 times may have instincts, that may add real value.

    They are close to the metal.

    So why is basic and important specific advice like Bus. Dev, (of partnership etc) rarely blogged about ?

    Do you see this sort of support as platform – or is that just what legal teams are for?

    • I feel like a VC should be able to give clear and helpful answers on this. There are going to be two types of answers: (1) generic that applies broadly and (2) specific that applies to your situation.

      I don’t know enough about the specific situation to answer from the perspective of #2, but I can give you strong opinions from #1.

      For example, using the data above (you are seed stage):

      1. Huge B2B-client asked about investment. If the investment is with no strings attached (e.g. it’d be like any other financial investor), that’s great. If it has strings attached that are specific to the B2B-client, then you need to be very careful of the strings and understand them clearly. Also, you’ll want them to be in a separate business deal, not tied to the financing, so the financing is clean. If I was an investors, I’d know a lot more and could answer from a more specific frame of reference (and – if you want to go back and forth on the specific situation via email, just send me a note at [email protected] and I’ll try to help.)

      2. Partner Y seeks exclusivity for a limited territory. My view of exclusivity is that it has a very high bar to be worth it. I often encourage entrepreneurs that the price of exclusivity is to acquire the company. However, if the partner is important enough based on your situation, a limited geography AND time is something worth considering only if you believe you are getting critical value (credibility, distribution, $) from the partner.

      • Brad – Thank you

        Great illustration of close to the metal !

        Re 1) – Thank you for the kind offer. I may take you up if this proves to be more than a casual enquiry ( if a time suck – I wont pass along to you !)

        Re 2) We have long channel relationships – Our ideal is : following specific introduction to end clients (or specific projects targeting well defined verticals in a territory) they go on a no approach list for a period of time.

        So it seems we are meeting your basic criteria – but we find ourselves very tempted to waiver in bigger cases

        3) Don’t even get me started on white-labelling 🙂

        Thanks again

        • Resist the wavering. If they really want to work with you, they will eventually fall back to a reasonable request. If they are just trying to tie you up, that will become apparent.

          • Yes – and having a quick vent helps – after all its no fun holding your breathe as you go over the top of the roller-coaster

            – So we let ourselves free-fall, screaming and smiling inside at our white-knuckled ecstasy of fear and trembling 🙂

            Poetic huh !

          • Love it.

  • Dasher

    Bare-metal VC. Even better Bling VC 🙂

    • Hah. Bling – straight from the 80s. That’s how we roll.

  • anon_fan

    Brad – Longtime fan of your posts. Thank you.
    Serious but simple question related to value-add:
    Why don’t more VCs tweet more to help their startups? Even looking just at early stage/consumer, the level of tweet support by VCs is overall low.
    Sure, VCs don’t want to be spammy, but a handful of VCs have shown you can tweet about a startup a lot in a fun/helpful way w/o being spammy.
    VCs have above average number of followers, and (early) startups are all battling the break through the noise, can use help with brand awareness, recruiting, PR, etc. Tweets are low-effort, with “high” potential downstream impact (including morale of current startup team).
    Would love to hear your thoughts on why not more such tweets? Or maybe there’s not much value there (despite so many VCs and startups on twitter :)?
    Thanks!

    • No clue. I don’t have a sense of what other VCs feel like they can / cannot tweet about. I personally get pretty bored (and often unfollow) a VC who only tweets generic stuff about companies they are investors in.

      I tweet a lot about a lot of stuff so I generally do things for companies we are investors in when they come up. I also tweet about a lot of companies we are NOT investors in when I find something interesting to me.

      I feel most people who are not immersed in Twitter and just using it to try to do “marketing” do it pretty poorly / unauthentically. I like to think of Twitter as just a very visible public way of me saying quickly what is on my mind and then engaging in rapid fire public conversations with anyone who is interested in the topic. When this includes a company I’m an investor in, that’s a fun thing.

      • anon_fan

        Yes, your tweets are great. I read you there too (no, not a stalker, but I “love to read” ;).

        Understood re the VCs who do “marketing” tweets poorly. It shows and hurts their brand. That said, even those spammy tweets have some benefit, eg, small morale boost to the mentioned startups via proof that VC still knows they exist.

        Thanks again for your thoughts. Have been spending a lot of time researching topic of VC value-add. More soon.

  • DaveJ

    > whenever someone says “I’m a (adjective) (noun)” I immediately >think they are full of shit.

    It’s hard to say anything about yourself without doing this. For example: “we are bare metal VCs. ”

    And I am an annoying pedant.

    • And I may be full of shit.

      • DaveJ

        I don’t think so – I think you need to refine your bias. My BS trigger is activated when people use this format and (a) it is clearly intended to promote themselves or to manipulate one’s impression of them; (b) it is presented without evidence or example, or sometimes based on a single example or anecdote.

  • I feel that this trend for VCs to become platforms is more a consequence of the huge size of the funds raised than actually a way to differentiate. Feels like those firms are building structure just because they have such large fees from the oversized funds.

    VCs differentiate themselves by being present and supportive of the startups they invest in.

    • That is the risk of the “large fee-based firm.” We blew this at Mobius – we probably would have done better if we had zero “platform” and just a core team of partners who made great investments and worked closely with their companies. Time will tell if this iteration of the building out a platform for a VC firm will be effective.

  • All very interesting. Thanks Brad. At Forward Partners we have a team of non-investors who work for our companies which I believe does make us ‘high value-add’, but over the two years we’ve been at it I’ve found using that as a label close to useless. That’s partly because every investor claims to be value add and partly because it’s sounds like empty self promotion (your point).

    So we’ve been on a journey to find something better and Scott’s post yesterday helped us take a step forward. Where we’re headed is to describe what we do not what we are, leaving other people to judge, and to do that in terms of benefits to the founders we back not the activities we undertake. It all looks so painfully obvious now!

  • Brad,
    Thanks for shining the light on my post as well as your bare metal approach. Knowing you and how you work, there is no doubt in my mind that the Foundry team adds huge and lasting value to the companies you invest in. I personally get significant insights, ideas and advice from you every time I see you and always look forward to the next opportunity to connect. Hopefully, we will get a chance to work on a build together before too long…
    Thanks again,
    Scott

  • What is your reaction to the opposite of your bias, in other word, when you meet someone who is self-deprecating? It’s gotta sit in the middle, doesn’t it?

    • Yup – too much the other direction is the classic br’er rabbit problem.

  • Thank you for writing such an honest post.

    We are going to be raising a large round later in the year so are effectively reading what you say from the ‘other’ side. I know that raising for what we are doing is going to be easy, raising smart money is going to be harder. At the end of the day we will only be happy to give up a part of our company to someone (a VC) who can have a big impact in our company.

    If the VC aim is a 10x return on investment then what do you bring to the table? Money from a bank is cheap but will not drive our company forward as fast as the right connection/information/approach/people.

    You are right that the value add should be assumed. It is the VC value.

  • Alex Iskold

    I think there is a huge value in just doing stuff yourself. A small thing that I did when I changed from being a CEO to being MD is not having an admin. I schedule all my meetings myself using a schedule and a tool.

    Second thing is I type all my emails. I don’t use text expander. I rarely copy and paste.

    Thirdly and most importantly, I deeply engage and give a ton of time to each founder I work with. As much as possible. To the extend I humanly can. Techstars or not.

    Now I don’t know if it will scale as I have more companies in my portfolio but I love doing stuff myself and consider it my job – engaging mentors, reporters, community, investors, companies, entrepreneurs, I think this is what great investors do.

    And lastly, the biggest thing companies need help with is recruiting. I don’t believe that we can help them with marketing, ops, branding, etc. Thats CEOs job or part of recruiting.