The Taxonomy of Investor Value Add
What does your $ come with?
While I was interviewing for my new job at Sorenson Ventures, I spent a lot of time thinking about my raison d’être and principles as an investor. What do I deliver to the founders that choose to work with me and how? In other words, what is my value add?
As investors try to differentiate their merit beyond capital, “value add” as a term gets thrown around. In this post, I break down the sources of investor value add and how founders can match themselves to the right investors.
Sources of Investor Value Add
1. Sector (or stage) expertise
These investors have a clear line in the sand delineating where they play and where they don’t. For example, Sorenson Ventures invests in early-stage (typically seed and Series A) enterprise software and security only. AutoTech Ventures specializes in the future of mobility and transport. First Round Capital focuses on seed stage funding.
These investors tend to have a sophisticated and nuanced understanding of the opportunities and challenges in their target areas. This focus allows them to deliver advice and insights highly relevant to the founders they partner with.
Simply being an a16z portfolio company can unlock lots of doors. It can de-risk a company in the minds of potential hires and customers. Having a Marc Andreesen or Peter Thiel on the cap table sends a quality signal to the market, provides validation, and can help a founder sleep better at night.
3. Capabilities and resources
Some investors sweeten up the deal by offering access to specific capabilities or resources. Examples include:
I have seen a couple of creative examples recently, including a firm that commits 1 percent on top of every check for “founder development services” and a firm that gives its portfolio companies access to a network of thousands of PMs and “a playbook to turn them into customers”.
How do you pick the investors with the “best value add”?
1. Sector (or stage) expertise triumphs everything.
There is no universal right or wrong answer to most questions in the world. In this case, I firmly believe that sector (or stage) expertise should come first.
Yet surprisingly, Forward Partners’ More Than Money Report discovered that 47% of surveyed founders believed their investors had little to no knowledge of the sectors they are investing in.
The investor will sit on your board and have a say in the most important decisions of your company. You want someone who is thoughtful, understands the opportunities and challenges in your market, and can share with you relevant and distilled strategic insight. Otherwise, it can be an extremely frustrating experience.
The most valuable asset that sophisticated investors bring is “pattern recognition”. Even experienced founders might have only seen something once or twice. An investor has accumulated patterns across dozens or even hundreds of companies. Working with an investor with deep sector (or stage) expertise means that you will have access to the most relevant patterns and case studies.
2. Will you pick up my call when I need you?
According to Forward Partners' More Than Money Report, three-fifths of founders described their value-add experience as “negative” compared to what their investors claimed to offer. A third (33%) feel that value-add is “over promised and under delivered”.
Investors tend to be a self-promotional breed. They will show up in the fanciest Patagonia sweater to win your heart... but will they pick up your call when you need them?
Based on what I see, most founders could do way more due diligence on their investors before signing on the dotted line. The firm’s structure, investment strategy, and portfolio construction, for example, can significantly impact your experience working with the investor.
Does your investor make 30+ investments in one fund (a.k.a. spray and pray), and have a tiny team? They might not have enough resources to allocate among portfolio companies.
Are you working with a high-profile investor that already sits on 12 boards? Have realistic expectations about how much time they can devote to you.
Borrowing Fred Wilson here:
Encourage the entrepreneur to get feedback on you and your firm. Instead of references, I like to give a list of every entrepreneur I’ve ever worked with and an email address. I tell them “throw a dart at that list and talk to four or five of them randomly. you’ll hear the same thing from everyone.”
3. First-level thinking founders overvalue prestige.
Sophisticated founders know how to decouple investor value add from prestige.
There is a strong breed of VCs not as glamorous from the outside as a Sequoia, but they are a great, trustworthy, sharp group of people. They are thoughtful about whom they partner with and invest heavily into setting their portfolio companies up for success. When I am thinking about co-investors and doing introductions for my founders, these are the people that come to my mind.
Founders should think honestly about what value add would benefit them most, and pick their investors accordingly.
I read through the websites of many VCs that I know in real life and some that I don’t while preparing this post. Although capital is abundant, I still see a high heterogeneity in how different VCs define their value add.
Because investors promise different types of value add, they allocate their time differently, too. There are some who are focused on building thought leadership and brand. There are others who spend their day bending over backwards responding to fire drills in their portfolio companies.
Founders should self-select and work with investors based on what they value.
On a related note…
I am unbelievably excited to embark on a new adventure and join the all-star team at Sorenson Ventures. What especially impresses me about this team is the depth of knowledge and experience, and the relentless focus on forging a meaningful, long-term partnership with founders.
When Sorenson invests its capital, we are also investing our commitment, dedication, and energy. We are serious about our work. We spend a lot of time discussing what kind of partner we want to be and executing on these aspirations.
All investors claim that they are looking for founders working on “original” or “disruptive” ideas, but when the time comes to write a check, many sit on the sidelines. My colleagues Ken Elefant and Rob Rueckert created Sorenson Ventures to address the funding gap that many early-stage founders and startups face as they try to validate product/market fit and define scalable and repeatable growth models. I firmly share their ambition in enabling early-stage entrepreneurs working on the most innovative and disruptive ideas.
I will continue to focus on early-stage enterprise software and security in my new role. I also want to make it a priority to partner with founders who are working on disruptive ideas and/or often don’t fit the Silicon Valley mold.
Disclaimer: The views expressed herein are the author's alone and do not represent views of any organization or employer the author is currently or was previously associated with.