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Why Reputation Matters in Venture Capital—And What to Do About It
Today's venture capital industry is notably different than yesterday's. In decades past, companies looked to venture capitalists, first and foremost, as a means of capital injection. Now, more than ever before, companies look to venture capitalists for other resources. Increasingly, they base their decision on a venture capitalist’s reputation.
Venture capital success is influenced by reputation. The stronger an investor’s relationship, the more likely he or she is to gain the favor of promising investment-seeking companies. According to research published in the Journal of Financial Economics, firms backed by more reputable venture capitalists are more likely to see a successful exit. The delta is significant. One study revealed that offers by venture capitalists with a strong reputation were three times more likely to be accepted. As well, investors with strong relationships gained a 10-14% discount when acquiring startup equity.
Yet despite the enormous importance of reputation, the minority of investors actually have a strong reputation. According to one study, only 22% of entrepreneurs believe that venture capital investors have a good reputation.
When raising capital, less than half of startups accept the best financial offer, according to a study spearheaded by Wharton management professor David Hsu. By offering value-added resources such as recruitment help, marketing assistance, and skill-building opportunities, venture capitalists can gain an advantage.
The power of network
Perhaps the most valuable value-added resource in an investor’s toolkit is his or her network.
The strength of a venture capitalists network goes a long way in an investor’s ability to deliver sustainable growth. Despite common belief, sustainable growth is hard to come by—only 19% of entrepreneurs believe venture capital delivers sustainable growth.
It can be difficult to accurately assess the strength of a venture capitalist’s network. it’s easy for an investor to “blow smoke” and drop names. Using Affinity, companies and others can sift through the noise and accurately assess the strength of a prospective investor’s network. Thanks to artificial intelligence technology, they can immediately gauge how strongly an investor is connected to potential customers, suppliers, partners, and others.
Relationship intelligence platforms can also move waters in helping venture capitalists boost their reputation. Using Affinity, venture capitalists can assure that they are keeping tabs on communications with current and prospective portfolio companies and other companies. Affinity will automatically alert venture capitalists when relationships are at risk so that investors can assure that they are proactively maintaining and building strong relationships. Investors can even set up Smart Triggers for their most important relationships so that critical relationships with entrepreneurs and limited partners never go cold. Watch the video below to see Smart Triggers in action.
Venture capitalists are facing more competition than ever before. No longer is it sufficient to write a larger check. Reputation matters. While a venture capitalist can boost his or her reputation by having a strong track record of portfolio growth, this track record can take years to develop and involves a lot of chance. By boosting their network, venture capitalists are able to immediately offer the most valuable resource to current and prospective portfolio companies—inroads to individuals who can boost their chances of success.