How can venture capital firms generate value for a portfolio company?

  • September 27, 2022

Contrary to popular belief, venture capital is not a game of averages or compounding returns. If you want to achieve high returns on your VC fund, you need to hit home runs with a few of your investments. 

A few big winners will generate the bulk of a VC fund’s returns, compensating for the bets that failed to scale. A good rule of thumb to keep in mind here is the famous 80/20 rule - the top 20% of your firm’s portfolio companies will generate close to 80% of your profits. 

However, startups cannot generate exponential returns for their firm in a silo. It takes a village to run a business, and investors form part of the support network entrepreneurs can count on. Moreover, with increasing competition in the venture capital industry, strong founders can have their pick of investors. 

VC firms like yours cannot expect to attract the best companies if they simply offer funds; you need to generate value for your portfolio companies. This, in turn, will help drive growth and increase startup valuations - a win-win for your startups and you. 

But, how exactly can you do this? What value should you be providing to your startups? Here are the top four areas in which you can help your startups:

Sales & Business Development 

According to CB Insights’ Research findings, 20% of startups fail simply because competitors outcompete them. Private equity firms can help startups gain traction by leveraging their networks that typically include thousands of industry experts who can help companies enter new markets, find cost-effective vendors, and close high-impact deals. 

Your VC firm’s ‘relationship capital’ is its distinguishing factor and can add significant value to its investees. Startups that find a match between their industry of operation and the industry verticals of your VC firm can take advantage of these strategic relationships to beat the competition. For example, a fintech startup will find the most value in accepting funding from a VC firm that has previously funded fintech operators and has built a network in this industry. 

Recruiting the Right Early Hires

No business can succeed without a great team. Outsourcing recruitment to HR agencies can be costly in the initial stages of operation, and besides, the best recruits often come through solid referrals. Your firm can generate tremendous value for its portfolio companies by referring high-performing individuals in your network to join or advise these startups. 

You can help portfolio companies quickly find exceptional hires without taking the founders’ time and focus away from business development. Your network can also offer strategic advisors and potential board members to fill in critical knowledge gaps and act as industry experts to guide startups through potential pitfalls.

However, you should be wary of pushing your referrals too hard, as it might hinder your relationships with companies. Ultimately, it is the founders’ prerogative to decide which of the referred individuals will work best for their teams. As a VC, it’s best for you to communicate that the referrals are just recommendations and not a precondition for subsequent funding rounds. 

Brainstorming Solutions and Strategies for Growth

The most sought-after VCs are the ones who help underperforming investees out of a rut by brainstorming strategies and solutions for the problems they face instead of losing faith and interest in their future. Choosing to be a kind mentor can help you become a resource for entrepreneurs experiencing frustration and disappointment during their startup journey.

Many VCs are former entrepreneurs who can guide startups through business hiccups with the benefit of their own experiences growing companies. This can turn the tide for startups that might fail. The strategy is aligned with your VC firm’s financial interests. Nurtured and encouraged companies often perform well. 

Investor Introductions 

As companies grow, it will become impossible for your firm to finance ever-increasing subsequent rounds of funding solely. Therefore, you are also advised to spread your capital across several early-stage bets rather than risk concentrating your dollars in just a few growth-stage companies, no matter how attractive their return potential is.

This is where your firm’s network will play a crucial role. VCs typically have an extensive network and a keen sense of what growth-stage investors look for while evaluating companies. As a result, as their portfolio companies seek additional funding, VCs can make strategic investor introductions from within their network and help founders effectively navigate fundraising for these subsequent rounds of capital.

Offering startups access to your firm’s network can significantly reduce their time on fundraising. You can also help alleviate the frustration that often goes hand-in-hand with the fundraising process by acting as a coach and mentor to founders. Your firm can distinguish itself from the competition and generate tremendous value for your portfolio companies by building a reputation for stellar investor introductions.

While all VC firms may not be able to lead subsequent funding rounds and may rope in other lead investors, they need to reserve some capital for follow-on rounds in their portfolio companies seeking growth-stage capital. But, again, this serves as a signal to subsequent investors that your firm still believes in the startup’s story and potential for growth. 

Effective Communication is Key

Astute entrepreneurs are keen to partner with investors who can drive their startup's value beyond just financing. As a result, VC firms that provide networking opportunities, spend time in the trenches with founders, and help their portfolio companies get on a growth flywheel are most likely to be sought after by high-potential startups.

While a significant part of your VC firm’s job is seeking new investment opportunities, another equally important role is guiding and supporting its portfolio companies. Your firm must build solid relationships with its portfolio companies.

Zapflow offers a systematic and consistent way to monitor portfolio companies and gather qualitative and quantitative data. Seamless access to structured data allows your firm to spot red flags, make timely interventions with underperforming companies, and report to your LPs.

Book a Zapflow demo to understand how we can help your investment team get more done with less effort. 

Get in touch today!
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