Venture capital is often referred to as an apprenticeship business because so much important learning comes from day-to-day experiences. Yet, as an article published by the Business Development Bank of Canada (BDC) explains, you can shortcut the learning process by learning from experts: “Your learning curve can be shorter—and your results better—if you learn from pros who’ve already mastered key … ... read more
What’s Your “Special Sauce”? Differentiation Matters in Venture Capital
Many people believe that when entrepreneurs set out to raise capital, they focus on finding the investment firm that will write them the biggest check. This preconception is far from reality. According to a study spearheaded by Wharton management professor David Hsu, when raising capital, less than half of startups accept the best financial offer.
In fact, there’s such a thing as too much capital. A report by Exitround found that companies that raised $2-3M were more likely to see an exit valuation in excess of $10M as compared to startups that raised $3-10M.
Capital alone doesn’t create venture capital success stories. To establish a competitive foothold in the market, investors must differentiate themselves by other means. There are three key ingredients that should form the foundation of a venture capitalist’s “secret sauce”:
1. Value-Added Resources
Not all venture capital firms are created equal. To differentiate, firms must offer their portfolio companies more than dollars. The most powerful value-add resource is often a firm’s network.
Connections to recruiters, for example, can afford portfolio companies critical access to new talent when hiring. Connections to business leaders and serial entrepreneurs can provide mentorship opportunities. Connections to Fortune 500 executives can offer potential sources of revenue and partnership opportunities.
Using Affinity, venture capitalists can easily discover and tap into these valuable connections. With Affinity’s Alliances platform, investors can give portfolio companies unprecedented access to their networks and insight into where critical connections lie and how strong they are.
Many venture capital firms have internal operations teams that include recruiters, PR/marketing professionals, lawyers, etc. This reduces the need to hire expensive external professional firms. Flybridge Capital Partners, for example, has a dedicated marketing professional on staff to assist portfolio companies when creating marketing collateral (before they hire a marketing team).
In addition to network connections, venture capitalists should strive to offer portfolio companies other resources. The sky’s the limit. Firms such as First Round Capital provide board pack templates and the like, helping portfolio companies avoid reinventing the wheel.
Venture Capital is a reputation-driven market. A study published in the Journal of Financial Economics found that companies backed by more reputable venture capitalists are more likely to see a successful exit.
Reputation can matter even more than capital. In one study, offers solicited from venture capitalists with a strong reputation were three times more likely to be accepted. Moreover, high-reputation investors gained a 10-14% discount when acquiring startup equity.
Entrepreneurs are increasingly leveraging platforms such as TheFunded.com (which allows entrepreneurs to research, rate, and review venture capitalists) to assess reputation. By automatically capturing and recording all interactions with portfolio companies, Affinity helps venture capitalists avoid “dropping the ball” and ensure they foster strong relationships.
3. Content Marketing Strategy
More so than ever before, venture capital firms are attempting to differentiate themselves by developing a content marketing strategy. Content marketing can prove very effective in helping a firm increase its awareness in the industry and build its brand.
First Round Capital, for example, has created its own rendition of Harvard Business Review with its “First Round Review". Consider also Andreessen Horowitz, which has developed its a16z Podcast to bring together thought leaders to discuss trends in tech.
In order to differentiate, venture capital firms must not only create content that grabs people’s attention, they must create content that embodies a particular point of view. Some firms focus content on management advice, while others focus on the future of certain technologies or markets. The key is to create content that empowers your audience to associate your firm with a specific element of differentiation.
To differentiate in the market, venture firms must be vocal about the value-added resources they provide, maintain strong reputations, and develop a unique content marketing strategy that espouses a specific perspective.