Ever asked yourself what it really means to be a value-add investor in a venture capital fund? I joined iNovia Capital almost 4 years ago and had previously thought about it, but was recently put on the spot.
iNovia manages $275M across three early-stage funds. We have many supportive Limited Partners (LPs) that have invested in our ability to identify, grow amazing technology companies and exit when the time is right.
I recently met up with one of our very engaged LPs at a dinner in San Francisco. The best part was that this was a dinner stemming from a tech conference focused on the Internet of Things. It is always encouraging seeing an LP digging in and learning about the markets we are bullish on.
During dinner this LP leaned over to me and unexpectedly asked: “So what value-add can an LP provide for a VC fund?” This question was also poised by Danielle Morrill of Mattermark and generated a bit of chatter on Twitter. A similar article by Ryan Caldbeck of Circle Up has been making the rounds. It’s something I’ve been thinking about for a while and here was my response:
1. Alignment of long-term vision.
VC firms are no different than startup companies in that they always have to be thinking about that next fundraise. Sometimes that requires taking decisions that may not benefit stakeholders in the short term, but positions everyone for a better chance of success in the long term. However, this is challenging for VC funds, as the LP base can look very different from one fund to another. Having a LP that expects performance on the current fund, but wants to support and position the firm for success in future funds is incredibly empowering.
2. Sharing best practices.
There is a lot of overhead and administration behind the scenes in a venture firm. I think that every new VC underestimates how much work this is and how much there is to learn. From reporting to our LPs, managing the logistics of dozens of portfolio companies, to managing complex exit situations, it takes a lot of experience to get a firm running smoothly. LPs can be involved with numerous VC funds and sharing best practices from other funds and the industry in general is a tremendous value-add. Like startups, learning from other’s mistakes in lieu of making your own is always extremely beneficial.
3. Technology market knowledge.
It’s not an expectation that LPs have a pulse on the latest technology trends and emerging markets. Many LPs manage very large institutional funds and VC is a small portion of their allocation. Their expertise is better served in areas other than being on top of the latest consumer Internet fad. However, having a LP that understands the nuances of technology markets and where the current opportunities lie can be valuable. Introducing a new investment focus can spook a LP, but LPS that understand the emerging market opportunities are more comfortable with the risk associated with it.
4. Keeping VCs accountable
This means digging in to quarterly reports, connecting regularly with the partners of the firm and asking tough questions about a portfolio companies performance or decisions taken in its regard. Attending the Annual General Meeting to get a better grasp of the entrepreneurs the VC firm is backing. This is no different than the approach we take with our portfolio companies – acting as a sparring partner who’s willing to do the work to stay on top of things and ask informed questions in the spirit of getting to the best decisions.
These qualities of value-add LPs come down to engagement. If we could have our pick of LPs, we would want ones that are invested in what we’re doing – the same way an entrepreneur wants to work with a VC who is invested in the their company.