Over the past few years, there has been a lot discussion of venture capital platforms within the entrepreneurial ecosystem. Opinions exist across the spectrum on the subject. Some folks believe that venture capital value-add is nothing more than marketing mantra. Others stand by venture capital contributions with firm conviction. As is the case with most issues that solicit such wide ranging opinions, the truth lies somewhere in the middle.
Some venture capital value-add platforms are effective and others aren’t. The key for entrepreneurs is being able to see through the hype and discern the difference. In addition, when evaluating venture capital firms for an investment, entrepreneurs would be wise to understand the value-add services being offered and how they relate to the stage and specific needs of their own company.
At Sapphire Ventures, we spend a great deal of time evaluating how VCs can deliver more than board guidance and investment dollars to help support companies through their journey. Part of the impetus for this focus is that over the cumulative 68 years of investment experience that our partners have amassed, we’ve seen the impact that a handful of venture capital funds have had on the performance of certain companies. Another part of the impetus for this focus is that we want to make sure any program we put in place delivers the most possible value to entrepreneurs per dollar spent. Anything less and we wouldn’t be delivering on our promise to help our companies scale most effectively.
The conclusion we’ve come to is that great venture capital platforms do three things well –
- They Understand their Companies’ Problems
- They Build From their Competitive Advantage
- They Drive Scale
Understanding Company Problems
All VCs are not the same. If you invest in seed stage businesses in the Southeast, the entrepreneur you work with has very different needs than the expansion stage CEO in Silicon Valley. For VCs trying to build world class platforms, part of the key is targeting the needs of your customer — the entrepreneur that accepts your checks.
Consider Sapphire. We invest out of a $650 million growth-stage investment vehicle, primarily in enterprise software. Every entrepreneur we work with has a proven product, business model, and customer base. Typically, our entrepreneurs arrive at our doorstep with the support of great early-stage investors as well. Those early-stage investors have helped address basic product issues, helped them deal with many hiring challenges, and taught them how to manage against board governance and finance needs. As such, by the time we start working with them, the scope of unaddressed problems has changed dramatically. Instead of trying to hunt down a law firm, our companies are thinking about securing complex lines of credit, striking strong partnerships with large technology companies, winning marquee Fortune 500 customers, or determining how to break into new countries.
Because not all entrepreneurs and investors have experience with these types of issues, our Portfolio Growth team at Sapphire was built with folks who have deep enterprise technology and experience scaling businesses. We match experience to the types of problems companies at our focus stage face, just like Google Ventures does with its design team and Kleiner does with its fellows program.
Without that focus — understanding what makes your portfolio unique — VC platforms can be all too generic.
Building Off of Competitive Advantage
Every venture capital tries to add value to its underlying portfolio. Sometimes the value add relies on a formal platform. Sometimes it doesn’t. But you can be certain when an investor like Ron Conway places a call into his famous rolodex of contacts, he’s certainly adding value. So despite the conversation today, it’s our belief that the question isn’t whether VCs should try to add value, they all do in different ways. Instead, the question is what that value add should look like.
At Sapphire, we think entrepreneurs should seek out firms that have value-added platforms that play to the firm’s core strength. With Andreessen’s volume of marketing activity and partner fame, they serve as an enviable marketing engine for any young company. At First Round, the volume of investment helps build an early-stage community. At Sapphire, we’re different. We have 20 years of focused investment activity in growth-stage enterprise technology. That offers us the opportunity to deliver the same connections and board guidance as many VCs. But we also have a unique relationship with the enterprise ecosystem, leveraging SAP and unparalleled ecosystem partners (Fortune 1000 CxOs, system integrators like IBM and Accenture, and a world of partners). So, while we don’t try and build out at-scale recruiting engines or offer design consulting services, we do focus on the things that we can do better than anyone else — help connect young businesses with large enterprise customers and IT partners.
Every dollar we spend building off our competitive advantage is going to go farther than a dollar spent on something else. If you’re looking at taking money from a firm that offers a value-add platform, one of the easiest ways to discern whether or not they’re really driving value or just marketing is to ask them why they deliver the services they deliver.
The last thing any entrepreneur should keep in mind is that the most interesting platforms are ones that scale. As an entrepreneur, you want to look for venture capital platforms that scale. In the courtship process, it’s easy for VCs to bend over backwards in one-off ways to satisfy prospective investments. But making the investment is just inning one of a nine-inning relationship. You need to know that you’ll be able to continuously gain benefit from your new venture capital platform throughout the course of that relationship.
At Sapphire, we’ve built benchmarking tools that help our companies understand their performance relative to peers. We’ve created a CIO advisory board that drives continued engagement and feedback for our portfolio. And we’ve built a program that delivers continuous opportunities to engage with global IT leaders. Every one of these services scale across the entire portfolio, meaning even when no one is thinking about it directly, our market development team is helping to support our portfolio.
While we also engage regularly to support our CEOs in a more bespoke fashion, we’re firm believers that great VC platforms all have some amount of scalable architecture. It’s something you should look for every time you meet with a VC. Don’t just ask them what they can do for you. Try to get a sense of how they do that programmatically. It’s one thing to have a bunch of smart people occasionally scrambling to support your business. It’s another thing entirely to support portfolio companies in a scalable, consistent fashion.
When all three of these things are at work, venture capital platforms move from the realm of promise to production. As entrepreneurs, you should be looking for all three.
In the coming months, we’ll share more about our market development efforts and specific lessons we’ve learned about building and delivering unique value to entrepreneurs. Stay tuned!
The information set forth herein is not intended to constitute investment advice and under no circumstances should any information provided herein be used or considered as an offer to sell or a solicitation of an offer to buy an interest in any investment fund managed by Sapphire Ventures. Sapphire Ventures does not solicit or make its services available to the public and none of the funds are currently open to new investors. Past performance is not indicative of future performance.
The portfolio companies referred to above do not necessarily represent all of the investments made or recommended by Sapphire Ventures, and were not selected based on the return on Sapphire Ventures’ investment in them. It should not be assumed that the specific investments identified and discussed herein were or will be profitable. Not all investments made by Sapphire Ventures will be profitable or will equal the performance of the companies identified above.