That Much Vaunted "Value Add"

I was meeting with a limited partner yesterday. These are the people who provide the capital that venture capitalists invest. He told a funny story. Some venture capitalists who he'd been invested with for years had been in to see him and wanted to get better terms because of all the "value add" they provide to their companies. He reluctantly agreed and three years later he showed up to an annual meeting and found that the portfolio was in bad shape. So he said the the venture capitalists, " guys - now would be a good time to produce some of that much vaunted value add". That had me falling off my chair.

The fact is that the best venture capitalists do add value to their companies. It's something I strive to do every day. But it's hard to do. And it often isn't enough to make a bad investment into a good one. And I believe that most venture capitalists overstate their "value add".

So my advice to entrepreneurs is check out the venture capitalists' claims about how much they help before you sign up with them. That's what the smart limited partners have been doing for a long time.

Comments

[Yong Su Kim]

That's a funny story. However, I would be interested in your thoughts on the "value add" that a great VC provides for their portfolio companies. It's obviously going to vary depending on the portfolio company, but there should be some things that distinguish great VC's from others.

[hugh macleod]

Interesting point, Fred. As a cash-strapped, struggling entrepreneur myself I see the temptation to quasi-mythically view VCs as something other than what they are: guys providing a service, in exchange for something.

[sss]

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