Venture Capital (VC) landscape has been evolving more dramatically in the recent years, as the competition between various funds grew. The new-old trend has started surfacing, where VCs attract potential startups by showing them how much support they could offer them post-investment. Hence, venture creation for portfolio companies became the newest buzzword in the Israeli (and global) VC ecosystem. With great benefit for startup founders.
The growing competition in the investment space and the amount of money being invested in early-stage startups makes VCs work harder for their companies. They look for ways to bring significant value to their startups for two reasons. First of all, by helping their existing deals, they can get more value out of their portfolio and liquidate it quicker. Secondly, they can attract new startups thanks to their reputation as dedicated, hands-on investors that bring extraordinary value. Of course, it has always been the VC’s effort to support companies, but this job was usually performed by partners in the fund on an individual, uncoordinated basis. These days though, the trending approach is to build a process around these added services, measure activities on the fund’s level and create data-driven improvements to achieve scale. And this is where the “value creation” function comes into play.
Over the years, the general approach of many prominent VCs worldwide has been to build a robust startup services team in-house in order to increase the chances of their success. A great example is Andreessen Horowitz (a16z) that has been said to have modeled its structure on the Hollywood talent agency rather than a traditional venture capital firm. Instead of drawing salaries and general partners’ compensation, the majority of the 2% management fee was invested in a fast-growing services team, providing marketing, business development, finance and recruiting support to founders.
Andreessen Horowitz was not the first fund to invest so much in portfolio support, but it has solidified this trend in the global VC world. Following the a16z success, more traditional VC firms started hiring structured portfolio support teams, often separate from the investment staff. The main value-added roles included the marketing and business development functions, sometimes User Experience and User Interface (UX and UI) professionals, financial, legal and HR specialists.
In Israel, the majority of funds historically had small investment teams that were focused primarily on scouting and investment sides, supporting their portfolio companies in-between deals. Only the biggest funds allowed themselves to invest additional resources in portfolio-services staff. This approach started to change around the year 2015, when an increasing number of investors saw a growing competition in early-stage deals, which slowly reversed the VC-startup dynamic. This startup-friendly market resulted in the growing differentiation between various types of post-investment offering for startups.
One of the first funds to embrace the “value creation” model was Aleph VC, established in 2013 by Eden Shochat and Michael Eisenberg. The fund quickly moved forward with creating a robust community of founders and produced a mobile application called Karma that helped ecosystem grow. With time, it has also started organizing corporate-startup meetings to help Israeli companies land American B2B customers and, recently, it has launched Ampliphy. The Aleph Value Generator – a software that helps portfolio companies leverage Aleph’s global network in an automated way.
The first fund in Israel to use the term “value creation” and build a full-time team of data and business development experts to create startups’ support mechanisms at scale was Glilot, an early-stage Israeli fund focusing mainly on cyber security companies that has started its value creation effort in 2018.
“There are many components to a startup’s success, but we understood that one thing is certain — without achieving Product-Market-Fit, a company simply cannot scale and, ultimately, will not survive.” Nofar Amikam, General Partner at Glilot (Source: Glilot on Medium)
Glilot’s main mission when investing in the value creation services was to develop a structured process around the support that was already offered by venture partners and, specifically, help startups achieve the product-market fit easier – something the fund understood was the no. 1 need of their portfolio companies. Nofar Amikam, who then joined the team to lead this effort, has done a tremendous job in utilizing data science to inform these efforts and scale them. I believe that she is by far the best example of how value creation should be built, measured and adjusted based on specific goals and KPIs.
In-house value-added services are also offered by some accelerators, such as Techstars, where each batch is supported not only by the accelerator’s management and mentors, but also specialized group of associates – experts in technology, fundraising, business development and graphic design. Similar to service teams in VC funds, their role is to add an additional set of hands to work on mission-critical parts of the business.
Eventually, many funds started presenting themselves to the world as value-add investors, increasingly making it an industry standard (though many funds still have a long way to go). This is when some VCs started introducing more unique approach to value creation.
Scott Maxwell from OpenView Partners shared in a blogpost that “delivering real value as a VC (and creating differentiation in the process) isn’t as simple as choosing the fastest, biggest, or strongest car, or re-branding value-add as something that sounds new and fresh. Doing that might drum up attention initially, but unless the VC’s value creation strategy is explicitly designed to handle the specific needs and opportunities of a specific type of company, then it will fail to deliver real results.”
He advises VCs to explore these questions when building the fund’s unique value proposition:
- Find a focal point within a specific investment sector and stage.
- Identify the opportunities within that focal point.
- Build a team capable of delivering on those opportunities.
- Rinse and repeat for other investment segments.
(Source: Scott Maxwell, OpenView Partners).
For Scott and his team, the value offered to their portfolio companies focuses on: helping to hire better talent, acquire more customers and develop greater operational expertise.
One of the most recent Israeli examples includes F2 Capital, an early-stage fund focusing on a variety of verticals such as IoT, vertical SaaS, big data and more. F2 has recently announced adding the startup psychologist, Noa Matz, as an Operating Partner. The new partner’s role is twofold. On the one hand, Noa’s expertise can help other founders assess potential investment in a specific team, backed by science rather than gut feeling. On the other hand, startups are able to work with Noa post-investment, where she offers them mental and emotional support (e.g. what she describes as the “ventilation sessions”) and helps the teams to hire better employees or improve relationships with investors and customers. This a great example of how VCs are reinventing themselves by offering differentiated services to their companies based on what they feel is needed or what their startups request the most at their stage, in their industry and depending on their business model.
Many VC industry insiders believe that value creation roles are going to become the standard of every mid- to large investment fund in Israel. Only last month, Vertex Israel has announced hiring their first Director of Value Creation and many other investment firms are starting to explore this option as well. Increasingly, more and more VCs realize that they need a structured portfolio support process to deliver on their promise.
“I hope that in five years’ time the value creation position in a VC will be a given. In order to liquidate the portfolio quickly, you need to provide as much value as possible to the portfolio companies. (…) You really should build a structured platform for portfolio support if you want to be successful.” Nofar Amikam, General Partner at Glilot (Source: The Connectors podcast)
At the same time, Andreessen Horowitz, which is in many ways a trendsetter in the global VC industry, has reinvented itself yet again in 2019 by not only raising a much bigger fund of $2 billion in order to invest in later-stage companies with a unicorn status, but they also registered the entire company – over 150 people – as a financial advisor, renouncing their status as a VC partnership altogether. Alex Konrad of Forbes wrote about the move: “By renouncing its venture capital status, it’ll be able to go deeper on riskier bets: If the firm wants to put $1 billion into cryptocurrency or tokens, or buy unlimited shares in public companies or from other investors, it can. And in doing so, the thinking goes, it’ll again make other firms feel like they have one hand tied behind their back.” It will be interesting to see whether in a few years’ time, we will see similar examples in the Israeli – and global – VC landscape.
- The Connectors Podcast: interview with Nofar Amikam, General Partner at Glilot: LINK
- The Forbes article about Andreessen Horowitz Venture Capital model: LINK
- The Future Farm Podcast: interview with Noa Matz, Operating Partner at F2 Venture Capital: LINK
- A Practical Guide to Product-Market-Fit by Glilot: LINK
- VC 3.0: The Next Generation of Venture Capital by Glilot: LINK
- The Truth about VC Value-Add by Open View Partners: LINK