Last month, I spoke with a veteran entrepreneur about some advice he had given a first-timer about whether to take money from an investor. The younger asked, “What value do they add beyond money? What kind of technical assistance, etc.?” The older–who has received at best intermittent support from us at First Light–replied “Just take the money. The investors you’re talking to are good people, and they’ll treat you well. Their job is investing, not building your company. That’s your job. Plus, you don’t want them or anyone else in your hair all the time while you’re trying to run a company.”
Over the last two months, we at First Light have been working to codify the support we offer entrepreneurs at the same time that the chatter around “adding value” has picked up among social VCs in India. In the VC community in the US, the catch-phrase for this non-financial support is value-added investing. Among incubators and NGOs, one struggles to untangle what people mean by technical assistance, business development assistance, or capacity building.
Everybody’s doing it, or at least saying that they’re doing it. Grassroots’ new fund has a pot of money specifically dedicated to technical assistance, and in one social investor’s recent PPM I saw an entire page dedicated to the fund’s portfolio support plan. At the end of this month, East Angels plans to hold a Bizarro pitch session in which VCs will pitch to entrepreneurs. Part of the original hypothesis behind our own Accelerator is that Shell Foundation support will allow us to provide more hands-on time than a typical spray-and-pray seed fund. But the data suggest that a VC’s “value add” doesn’t matter that much in most cases, despite what VCs claim.
But some pesky data and a handful of honest entrepreneurs aren’t going to stop investors, their analysts, and incubators from justifying our existence by the assistance we provide to entrepreneurs. So how is a savvy entrepreneur to see through the smoke to determine whether an investor wil actually be helpful? A few (humble!) suggestions:
Look for character. Your investor is going to be around for a long, long time. Are they trustworthy? How do they handle conflict? Will you be able to maintain mutual respect even when you violently disagree?
Look for the right attitude toward your business. In an IVCA meeting last month, Multiples CEO Renuka Ramnath shared with a roomful of VCs that she approached each entrepreneur as someone who was already on track to building a successful company. She viewed her role as adding an extra shove, not fixing what was broken (for you nonprofiteers out there, consider the overlap between this approach and Asset-Based Community Development). As a result, Ramnath is able to thread the needle between being uninvolved and overinvolved in her portfolio companies.
Test VCs’ claims. If an investor says that they’ll be able to offer connections, check whether they’re connected to the people that matter: Potential customers, potential hires, potential next-round funders, and the rest. If they claim to be area experts, check their resumes. If they promise to be able to help raise funds, ask to be connected to entrepreneurs they’ve helped raise funds in the past. If they promise to provide strategic advice, ask them for it on the spot to see whether you’re impressed.
Trust your gut. Because your gut is probably right.