The debate goes on: does venture capital add value? In the cloud/lean startup stage many B2C businesses arguably don’t need venture backing anymore. When I talk to business owners, this theme arises quite often, so I I am expounding on it in a blog post.
For better or for worse, there are some entrepreneurs I talk to who are normally opposed to venture capital. Top-of-mind worries I’ve heard about have been the reduction of founder’s equity and disruption because of lengthy due diligence processes. (One business owner had to go through a six-month due diligence process with another VC firm. Ouch! As a matter of record, our average procedure lasts 6-8 weeks.)
For the data-oriented: my pal Furqan Nazeeri (who maintains the popular @altgate blog) posted a stellar paper on this very topic. The Harvard Business School research suggests that great VC firms are like excellent stock pickers, supporting serial entrepreneurs and individuals who are most likely to be successful.
Conversely, you have cases where raising venture capital plainly adds up. HubSpot, a leading online marketer, lately acquired $32M in backing from Sequoia Partners, Google Ventures and Salesforce.com. The co-founders describe why this makes sense for them in a really superbly written post. In a word, for B2B SaaS companies, client acquisition expenses are paid up-front. Even if your unit economics are lucrative, it’ll take considerable cash to move from being a great company to becoming an industry leader. And, as the authors indicate, in the age of the Internet, being #1 means everything. (Though if you’re late to the party, don’t give up. As the venerable Al Ries & Jack Trout point out, if the #1 spot is occupied, you can still differentiate yourself and be #1 in a related but somewhat different category.)
Whether or not to work with VCs is a personal and a tactical decision. Debatably, good VCs aid in greatly reducing the risk associated with new ventures. Seeing that most ventures fail, the contention goes, it’s probably a good idea to obtain all the help you can get, even if it means giving up some equity along the way (the idea being that some equity in a huge company is worth much more than a lot of equity in a tiny company). Even the HBS researchers show that serial entrepreneurs raise venture money in “21 months when compared to 37 months for first-time entrepreneurs.”
Apart from the money and the involvement, there are other advantages as well. For OpenView, we have a full-time internal consulting team (called OpenView Labs) that we bring on to speed up our portfolio firms’ growth. As a former management consultant, I believe the value-add here is considerable, which was one of the factors why I joined this firm. But just how this helps will have to wait for another post…
Aki Balogh finds the best companies to add to OpenView’s portfolio.