Let's be honest about VC "value-add"
Sorry not sorry.
In very simple terms, a VC's job is to allocate and manage capital in high-growth startups to maximize returns for LPs. There are really 3 core functions to this job: sourcing, picking, and support — every other VC activity is some means to supplement these ends.
To avoid ambiguity, I will define these 3 functions as:
Sourcing: From the wide cosmos of startups how are you funneling deals into your inbox?
Picking: Your process of filtering deal flow and making investment decisions.
Support: Things you’re doing post-investment to help your companies succeed. This is what a lot of people simply call “value-add”.
LPs often ask emerging managers how they support their companies — there is much more room for creativity here than in sourcing and picking, which is almost always explained by some depth of pre-existing network, operational expertise and simply “picking great founders” (though unproven due to expected lack of lengthy track record). I often get asked if I help my portfolio companies with technical/product problems, as I have extensive backgrounds building the technologies I now invest in (VR/AI/robotics).
Now, while I acknowledge that VC is a sales job that is susceptible to believing in its own hubris, the idea of “value-add” in early-stage VC is kind of ridiculous. Let’s talk about it:
(I’m not addressing sourcing and picking in this write up)
Taking a step back, at their core, VCs and founders have completely orthogonal, yet symbiotic, job functions: VCs generally work horizontally in a market, where their core job is to understand and study trends in markets, build theses around these trends, and allocate capital to a portfolio of vertical bets (i.e. founders) that they believe are best positioned to capitalize on said trends. Founders apropos work vertically in the market, picking one of these market theses (not in synchronization with VCs) and going extremely deep with the purpose of creating economic value in that vertical. In practice, that means VCs preside over wider networks while founders preside over deeper technical expertise and innovation (or, that’s how it should be, at least).
This dynamic also makes a lot of sense. As VCs, we typically invest in extremely technical founders who often lack networks to bring in resources that help the company grow — it’s not their core function after all. These “resources” are almost always typically some means to capital e.g. VCs, prospective clients, and potential acquirers (read: a VCs greatest value add is actually just capital). Fortunately, our function as VCs is inherently tied to those networks (the biggest VCs in the world have unfathomably wide networks all over the business world). I believe harmonious VC/founder relationships are built around that understanding. For example, this is why VCs can be extremely powerful soundboards for founders as they think through market-related issues such as in business development or fundraising. (Tangentially, being a founder is really hard, and VCs can/should also generally be soundboards for their founders when called upon, let’s not be a*holes).
With that in mind, I don’t believe VC “value-add” actually has any meaningful impact on the success of its portfolio companies:
Revisiting my case of helping my portfolio companies with AI problems, my founders are the expert problem-solvers in this collaboration. If they need my technical support or product direction, there are likely deeply rooted problems inside the company that no VC can fix, or I simply backed a less-than-stellar team. Good-not-great teams typically don’t generate outlier returns. And no VC can turn a good technical team into a great one.
VC-provided networks are great for amplifying founders — if they’re executing well. While founders can derive a lot of value from their current investors’ networks (e.g. intros to downstream VCs for their next fundraise), these networks are fairly meaningless if they don’t have a great product or story to sell — which takes us back to execution, and the previous bullet: no extent of “value add” will make a not-great team great. No one (VCs, prospective clients, etc) is buying a bad product/company. On the flip side, if things are going extremely well for the company many of these parties will likely find their way to the company even without any “value-add” amplification (recall, a VCs job is to be on top of markets). The amplification may just accelerate the process — but it likely does not alter the trajectory the company was already on anyway. (The counterargument I’d buy here is that acceleration is essential, particularly for companies in highly competitive, zero-sum markets. The counter-counterargument would be that investing in highly competitive markets isn’t the greatest strategy for small VCs that usually truffle hunt for their investments.)
To underscore the bullets above, anecdotally (both from my experience and experiences other VCs have shared with me), rocketship teams in the early stages rarely need VC support. Portfolio support appears to be a Pareto: A VC often spends 80% of their time supporting teams in the bottom 20% of the portfolio, where we know from the power law in VC returns that the bottom 20% generate very little returns for the fund. As such, as a small VC, needing to spend an inordinate amount of very high-touch time on portfolio support is possibly a negative signal on overall portfolio health (caveat here is the large operational support provided by megafunds like a16z and Sequoia — but I’d also consider that amplification).
So to close the loop: If value add is overstated, how do VCs win deals? The aforementioned technical background can be a great lever in winning over founders (and allocations) at the picking stage, but I’ll save that for another day.
(Closing note: I know there are always exceptions, but they don’t make the rule :) )