Today’s venture capitalists recognize that the size of an investment check isn’t the only value they bring to the table. Adding value in other ways—like offering new connections and industry insights—increasingly differentiates leading venture firms from the competition.
There are many ways that venture capitalists can add value to their portfolio companies. Vanessa Colella, Chief Innovation Officer of Citi and Head of Citi Ventures, shares that adding value extends to a number of other avenues including providing introductions, facilitating inroads and connections, and providing counsel and advice.
Turning her advice to founders, Colella suggested they seek investors who will help them scale their business and address their pain points; they’ll need partners on their journey. This sentiment is widely held and summed up by William Mougayar, an early blockchain tech investor, entrepreneur, and author. He says, “The best thing a VC can do is ask questions that help the entrepreneur solve their own problems.”
As a venture capitalist, being a strong partner to the many companies across your portfolio requires a disciplined effort on your part. The Tuck School of Business at Dartmouth College has analyzed the components of VC portfolio management, including portfolio monitoring, company analysis, and venture capital decision making. As Colella suggests, these important practices only begin once the initial investment has closed and it’s critical they’re repeated continuously until the end of the relationship. Let’s take a look at these elements of effective portfolio management in more detail.
Make data-driven decisions
VCs often need to rely on conversations with key people in their networks to gain critical intel into the performance of their portfolio companies. Ultimately, in order to determine what areas require your attention, you need to become skilled at translating performance trends—sometimes in adjacent industries—and applying them to your portfolio companies.
Some of the key data points that will enable you to become an effective translator include:
- Issues affecting other portfolio companies at a similar stage or in a similar sector
- Performance of comparable companies outside of your portfolio
- Transition periods observed in other companies. As the Tuck School of Business explains, “All businesses go through natural transitions – from R&D focused to sales and marketing focused. VCs know this period can be a natural transition point for some managers as well. Monitoring how managers respond to these situations helps to indicate whether or not a change is needed.”
- Current news and emerging trends
But how do you decide which data points you should be leveraging for your unique investment thesis?
Measure what matters
As venture investments are often early-stage, it may be challenging to acquire historical data from a potential investment, which can make it more difficult to make clear data-driven decisions. At one extreme, Fred Destin, Founder of Stride VC suggests that analysis has little value and that the focus should be on backing great people. “Back great people with some kind of edge you believe in and a good decision-making engine.”
While you may decide to adopt Fred’s strategy, you should always make an effort to do some homework, even when the company you are investigating is early-stage. One way to go about doing this is through reference checks. You can use Affinity and relationship intelligence to identify the individuals in your network—including customers, partners, and providers—to gain key feedback on a company’s performance.
Monitoring the performance of companies in your portfolio is critical to many strategic decisions, including assessing the current and prospective value of your portfolio companies. Only by monitoring your portfolio can you assess future prospects and determine any required changes to a company’s strategic investment.
You should gather information and rich insight through:
- Board membership: By providing strategic and key performance indicators (KPIs).
- Investor information: By providing interim financial statements, budgets, and audited statements.
- Informal communication: By providing insight into management performance, and an important opportunity for management to seek guidance and get feedback.
The stronger your relationships with the founders in your portfolio, the more likely rich insight will result. Of course, this works both ways, as pointed out by Harry Stebbings. He says that “monthly investor updates should not be an obligatory chore to keep investors happy.” Instead, they should be:
- A chance for you to think strategically about the future;
- A way to extract as much investor value as possible;
- A historical record of progress for future rounds
Whether it is through the deal champion or otherwise, the time dedicated to a portfolio review is key to your success.
As a venture capitalist, you can’t afford to underestimate the importance of the added value you provide your portfolio companies, beyond the size of your investment check. The real added value for your portfolio companies involves following a process to ask the right questions of your founders, monitor the data, and analyze what relevant data exists to help founders solve their unique problems.
One of the best ways to visualize your current data is with Affinity Analytics which provides real-time insights that you can turn into actionable steps. Set and manage KPIs that map directly to your goals for your portfolio companies. Reach out to our team here to learn more.